<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 24, 1998.
REGISTRATION NO. 333-62325
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------
RSL COMMUNICATIONS, LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
BERMUDA 4813 N/A
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION CODE NUMBER)
ORGANIZATION)
</TABLE>
----------------------
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:
<TABLE>
<S> <C>
GEORGE E.B. MAGUIRE, ESQ. WILLIAM P. ROGERS, JR., ESQ.
DEBEVOISE & PLIMPTON CRAVATH, SWAINE & MOORE
875 THIRD AVENUE WORLDWIDE PLAZA
NEW YORK, NY 10022 825 EIGHTH AVENUE
NEW YORK, NY 10019
</TABLE>
----------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES TO BE AGGREGATE OFFERING AMOUNT OF
REGISTERED PRICE(1) REGISTRATION FEE(2)
<S> <C> <C>
Class A Common Shares, $.00457 par
value................................... $253,000,000 $74,635
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933.
(2) A registration fee of $74,635 has previously been paid.
----------------------
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 this Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 Class A Common Stock (the
"U.S. Prospectus") and one to be used in connection with a concurrent
international offering of shares of Class A 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."
<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 NOVEMBER 24, 1998
[LOGO] 7,000,000 SHARES
RSL COMMUNICATIONS, LTD.
CLASS A COMMON SHARES
(PAR VALUE $.00457 PER SHARE)
----------------------
Of the 7,000,000 Class A common shares, par value $.00457 per share (the
"Class A Common Stock"), of RSL Communications, Ltd. (the "Issuer") offered
hereby, 5,250,000 shares are being offered in the United States (the "U.S.
Offering") and 1,750,000 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 public offering price per share
and the underwriting discount per share will be identical for both Offerings.
See "Underwriting."
The 7,000,000 shares of Class A Common Stock offered are being sold by the
Issuer. The Selling Shareholders will only sell shares pursuant to the
Underwriters' over-allotment options described herein. See "Principal and
Selling Shareholders." The Issuer will not receive any of the proceeds from the
sale of shares being sold by the Selling Shareholders. Upon consummation of the
Offerings, officers, directors and other affiliates of the Issuer will
beneficially own shares having approximately 92.4% of the voting power of the
Issuer's outstanding Common Stock (as defined below) (approximately 91.9% of the
voting power of the Issuer's Common Stock if the over-allotment options are
exercised in full). See "Principal and Selling Shareholders."
The Class A Common Stock is listed on the Nasdaq Stock Market's National
Market (the "Nasdaq National Market") under the symbol "RSLCF." Application will
be made to the Nasdaq National Market to list the shares of Class A Common Stock
offered herein (the "Shares") upon notice of issuance. The last reported sale
price of a share of Class A Common Stock on the Nasdaq National Market on
November 20, 1998 was $25 1/4.
As of the date of this Prospectus, the Issuer 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. See "Description of Capital
Stock."
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE CLASS A COMMON STOCK.
----------------------
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.
----------------------
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE DISCOUNT(1) THE ISSUER(2)
-------------- ------------ -------------
Per Share................ $ $ $
Total(3)................. $ $ $
- ------------------
(1) The Issuer and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting estimated expenses of $3,000,000 payable by the Issuer.
(3) The Selling Shareholders and the Issuer have granted the U.S. Underwriters
an option for 30 days to purchase up to an additional 397,916 shares and
389,584 shares, respectively, at the initial public offering price per
share, less the underwriting discount, solely to cover any over-allotments.
Additionally, the Selling Shareholders and the Issuer have granted the
International Underwriters a similar option with respect to an additional
132,639 shares and 129,861 shares, respectively, as part of the concurrent
International Offering. See "Principal and Selling Shareholders." The Issuer
will not receive any of the proceeds from the sale of the shares of Class A
Common Stock by the Selling Shareholders. If such options are exercised in
full, the total initial public offering price, underwriting discount,
proceeds to the Issuer and proceeds to the Selling Shareholders 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 the shares
will be ready for delivery in New York, New York on or about ,
1998, against payment therefor in immediately available funds.
GOLDMAN, SACHS & CO.
LEHMAN BROTHERS
MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
WARBURG DILLON READ LLC
----------------------
The date of this Prospectus is , 1998.
<PAGE>
FOOTNOTES TO FOREGOING MAPS
+ The Company is negotiating or plans to negotiate to purchase ownership
interests in the identified undersea fiber optic cables.
* The Company intends to lease international circuits in the identified
markets indicated on the map of the RSL COM Pan-European Network. All leased
international circuits shown on the map of the RSL COM Global Network are in
operation pursuant to current leases.
** 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.
There can be no assurances that the Company will complete any purchase of
undersea fiber optic cables, any negotiation of a lease for internatinal
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."
There are restrictions on the offer and sale of the Class A Common Stock in
the United Kingdom. All applicable provisions of the Financial Services Act 1986
and the Public Offers of Securities Regulations 1995 with respect to anything
done in relation to the Class A Common Stock in, from or otherwise involving the
United Kingdom must be complied with. See "Underwriting."
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A COMMON
STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKETS OR OTHERWISE.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
AVAILABLE INFORMATION
The Issuer is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy and information statements and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy and information statements and other information can be inspected and
copied at prescribed rates at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 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. The Commission also maintains a World Wide Web
("Web") site at http://www.sec.gov which contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission.
The Issuer has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the shares of Class A Common Stock
offered hereby. 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 Issuer and the Class A
Common Stock offered hereby, reference is made to the Registration Statement,
including the schedules and 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
3
<PAGE>
involved, and each such statement shall be deemed qualified in its entirety by
such reference. The Registration Statement and the schedules and exhibits may be
inspected and copied at the public reference facilities maintained by the
Commission at the addresses and in the manner set forth in the preceding
paragraph.
The Class A Common Stock is listed on the Nasdaq National Market under the
symbol "RSLCF." Reports, proxy and information statements and other information
concerning the Company can also be inspected at the National Association of
Securities Dealers, Inc. at 1735 17th Street, N.W., Washington, D.C. 20006.
------------------------
The consolidated financial statements of the Company (as herein defined)
(the "Consolidated Financial Statements") and the notes thereto appearing
elsewhere in this Prospectus are presented in accordance with United States
generally accepted accounting principles ("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 RATE AS OF RATE AS OF
DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, NOVEMBER 20,
CURRENCY 1995 1996 1997 1997 1998 1998
- --------------------- ------------ ------------ ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Austrian Schilling... (1) (1) 12.63 12.43 11.76 11.88
Australian Dollar.... (1) 1.26 1.54 1.38 1.69 1.55
Belgian Franc........ (1) (1) (1) (1) 34.49 34.84
British Pound........ 0.65 0.58 0.61 0.62 0.59 0.60
Danish Krone......... (1) (1) 6.85 6.72 6.36 6.420
Dutch Guilder........ (1) 1.74 2.03 1.99 1.89 1.90
Finnish Markka....... 4.37 4.60 5.45 5.29 5.09 5.13
French Franc......... 4.95 5.19 6.01 5.93 5.60 5.66
German Mark.......... 1.44 1.54 1.80 1.77 1.67 1.69
Italian Lira......... (1) (1) 1,770 (1) 1,652 1,672
Spanish Peseta....... (1) (1) 152.3 (1) 142.1 143.6
Swedish Krona........ 6.64 6.89 7.94 7.58 7.83 8.08
Swiss Franc.......... (1) (1) 1.46 (1) 1.38 1.39
Venezuelan Bolivar... (1) (1) 504.3 (1) 573.4 569.5
</TABLE>
- ------------------
(1) The Company had no business activity in these countries during the periods
indicated.
4
<PAGE>
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 otherwise indicated, all
information contained in this Prospectus assumes no exercise of the
Underwriters' over-allotment options. In addition, unless the context otherwise
requires, the term "Company" means RSL Communications, Ltd., a Bermuda
corporation, its predecessors and all of its subsidiaries. Industry data used
throughout this Prospectus were obtained from industry publications and have 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."
THE COMPANY
The Company provides a broad array of telecommunications services, with an
emphasis on international long distance voice services, to small and
medium-sized businesses in key markets. The Company's services include
international and national fixed and wireless, calling card, fax, data,
Internet, private line and other value-added telecommunications services. Since
starting operations in the United States in 1995, the Company has grown rapidly
through acquisitions, strategic investments, joint ventures, alliances, and the
start-up of its own operations in key markets. The Company generates revenue in
19 countries in which approximately 70% of all international long distance
telecommunications minutes originated in 1997.
The Company was formed to capitalize on the growth, deregulation and
profitability of the international long distance switched telecommunications
market. The Company currently has significantly less than a 1% share of this
market, which as a whole generated an estimated $65.9 billion in revenue and
81.8 billion minutes in 1997. International long distance minutes are projected
to grow between approximately 12% and 18% per annum through the year 2001.
The Company is building a low-cost, facilities-based global network
designed to provide high quality telecommunications services and developing a
wide range of marketing and distribution channels to expand its customer base.
The core of the Company's operations is "RSL-NET," its integrated digital
telecommunications network. The Company's independent local operations in each
country ("Local Operators") market its services through (a) direct sales forces,
(b) strategic marketing alliances, (c) networks of independent agents and
distributors and (d) telemarketing organizations.
RISK FACTORS
See "Risk Factors" beginning on page 10 for a discussion of certain risks
that should be considered in connection with an investment in the Class A Common
Stock offered hereby, including risks relating to the Company's needs for
additional capital, historical and future net operating losses and negative
EBITDA (as defined), substantial indebtedness, the rapidly changing industry,
increasing pricing pressures, government regulatory restrictions and shares
eligible for future sale.
COMPANY STRATEGY
The key elements of the Company's strategy for capitalizing on
opportunities in the long distance market are as follows:
o Focus on International Long Distance Services.
o Identify and Enter Key Markets Ahead of Full Deregulation.
o Target Small and Medium-Sized Businesses as Potential Customers.
o Build a Cost Competitive Global Network.
5
<PAGE>
o Expand Marketing and Distribution Channels.
o Pursue Strategic Acquisitions and Alliances.
o Leverage Expertise of Management Team.
o Expand Internet-Based Telephony and On-Line Service Offerings.
See "Business--Company Strategy".
RECENT DEVELOPMENTS
On November 9, 1998, the Company, through its wholly owned subsidiary RSL
Communications PLC ("RSL PLC"), issued $100 million aggregate principal amount
at maturity of 12% Senior Notes due 2008 (the "New Notes") in an offering exempt
from registration under the Securities Act (the "New Notes Offering"). The net
proceeds to the Company were approximately $90.5 million after deducting the
underwriting discount and estimated expenses. See "Description of Certain
Indebtedness--New Notes." In light of current favorable market conditions, the
Company may seek to raise additional debt financing promptly following the
Offerings. See "Use of Proceeds."
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).
6
<PAGE>
THE OFFERINGS
<TABLE>
<S> <C>
Class A Common Stock offered by
the Company(1)
U.S. Offering........................ 5,250,000 shares
International Offering............... 1,750,000 shares
Total................................... 7,000,000 shares
Common Stock outstanding after the
Offerings:
Class A Common Stock(2)................. 25,484,529 shares
Class B Common Stock(3)................. 26,328,590 shares
Total................................ 51,813,119 shares
Use of Proceeds........................... The Company intends to use the net proceeds from the Offerings for
(i) the expansion and development of the Company's infrastructure,
such as the replacement of leased transmission facilities with
owned transmission facilities, and the purchase of IRUs (as
defined herein) and interests in inter-city fiber routes in
European countries, as well as the installation of additional
national and international gateway switches, and (ii) the funding
of the Company's operating losses. In addition, in the ordinary
course of its business, the Company continuously reviews
acquisition opportunities in the telecommunications industry as
they arise. Although it is not currently party to any agreement or
binding understanding with respect to a transaction, it may use
proceeds from the Offerings partially to fund suitable acquisition
opportunities that arise. The Company will not receive any
proceeds from the sale of shares by the Selling Shareholders.
Voting Rights............................. 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.
Nasdaq National Market symbol............. RSLCF
</TABLE>
- ------------------
(1) The Selling Shareholders are not offering any of the 7,000,000 shares of
Class A Common Stock in the Offerings, but have granted to the Underwriters
certain over-allotment options described in this Prospectus. See
"Underwriting." The table assumes the Underwriters' over-allotment options
granted by the Selling Shareholders and the Company 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 by the Selling
Shareholders and the Company will be 530,555 and 7,519,445, respectively.
The Selling Shareholders are set forth in "Principal and Selling
Shareholders." No other shareholders are selling Shares in the Offerings.
(2) Does not include (i) 1,492,625 shares of Class A Common Stock issuable upon
the exercise of outstanding stock options, (ii) 26,328,590 shares of
Class A Common Stock issuable upon the conversion of the shares of Class B
Common Stock, (iii) 459,900 shares of Class A Common Stock issuable upon the
conversion of shares of Class B Common Stock issuable upon exercise of the
Lauder Warrants (as defined herein), (iv) 917,729 shares of Class A Common
Stock issuable upon exercise of unexercised Warrants (as defined herein),
(v) 109,500 shares of restricted stock granted pursuant to the Company's
1997 Stock Incentive Plan or (vi) shares of Class A Common Stock issuable
upon exercise of Roll-Up Rights (as defined herein) or Incentive Units (as
defined herein) or in the Telegate Exchange (as defined herein). See "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. Does not include
459,900 shares of Class B Common Stock issuable upon exercise of the Lauder
Warrants.
7
<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,
1997 and for the nine month periods ended September 30, 1997 and 1998, 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,
International Telecommunications Group, Ltd. The Company's Consolidated
Financial Statements as of December 31, 1997, 1996 and 1995 and for the years
ended December 31, 1997, 1996 and 1995 have been audited by Deloitte & Touche
LLP as stated in their report appearing herein.
In the opinion of management, the unaudited Condensed Consolidated
Financial Statements as of September 30, 1998 and 1997 and for the nine month
periods ended September 30, 1998 and 1997 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 nine months ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the full year. In
addition, the Company has experienced rapid growth over the periods set forth
below, which growth may not necessarily continue at such rate. Accordingly, the
financial and operating results set forth below may not be indicative of future
performance.
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 notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, NINE MONTHS ENDED
------------------------------------------------- SEPTEMBER 30,
PREDECESSOR ----------------------
1994 1995(1) 1996 1997 1997 1998
----------- -------- --------- --------- --------- ---------
($ IN THOUSANDS, EXCEPT LOSS PER SHARE)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues...................................... $ 4,702 $ 18,617 $ 113,257 $ 300,796 $ 192,604 $ 564,118
Operating costs and expenses:
Costs of services (exclusive of depreciation
and amortization shown separately
below).................................... (4,923) (17,510) (98,461) (265,321) (171,203) (462,181)
Selling, general and administrative
expense................................... (2,395) (9,639) (38,893) (94,712) (62,085) (147,494)
Depreciation and amortization............... (240) (849) (6,655) (21,819) (14,367) (43,282)
------- -------- --------- --------- --------- ---------
(7,558) (27,998) (144,009) (381,852) (247,655) (652,957)
------- -------- --------- --------- --------- ---------
Loss from operations.......................... (2,856) (9,381) (30,752) (81,056) (55,051) (88,839)
Interest income............................... -- 173 3,976 13,826 9,947 13,239
Interest expense.............................. (225) (194) (11,359) (39,373) (28,910) (51,646)
Other income (expense)........................ -- -- 470 6,595(2) 6,572(2) 445
Foreign exchange loss......................... -- -- -- -- -- (10,621)
Minority interest............................. -- -- (180) 210 (212) 4,322
Income taxes.................................. -- -- (395) (401) (405) (726)
Loss in equity interest of unconsolidated
subsidiaries................................ -- -- -- -- -- (1,625)
------- -------- --------- --------- --------- ---------
Loss before extraordinary item................ (3,081) (9,402) (38,240) (100,199) (68,059) (135,451)
Extraordinary item(3)......................... -- -- -- -- -- (20,800)
------- -------- --------- --------- --------- ---------
Net loss after extraordinary item............. $(3,081) $ (9,402) $ (38,240) $(100,199) $ (68,059) $(156,251)
------- -------- --------- --------- --------- ---------
------- -------- --------- --------- --------- ---------
Loss per share before extraordinary
item(3)(4).................................. $(15.41) $ (1.67) $ (5.13) $ (5.27) $ (2.16) $ (3.17)
Loss per share after extraordinary
item(3)(4).................................. $(15.41) $ (1.67) $ (5.13) $ (5.27) $ (2.16) $ (3.66)
Weighted average number of shares of Common
Stock outstanding(4)........................ 200 5,641 7,448 19,008 31,541 42,740
OTHER FINANCIAL DATA:
EBITDA(5) (as defined)........................ $(2,616) $ (8,532) $ (23,807) $ (52,432) $ (34,324) $ (40,790)
Capital expenditures(6)....................... 1,126 6,074 23,880 49,417 26,835 104,868
Cash (used in) provided by operating
activities.................................. (1,987) 3,554 (10,475) (91,812) (60,443) (116,367)
Cash (used in) provided by investing
activities.................................. (478) (16,537) (225,000) (18,821) 25,305 (312,772)
Cash (used in) provided by financing
activities.................................. 2,888 18,143 335,031 152,035 (14,976) 367,011
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
----------------------------
ACTUAL AS ADJUSTED(7)
---------- --------------
($ IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................................ $ 82,196 $ 335,830
Restricted marketable securities(8).................................................. 30,579 30,579
Total assets......................................................................... 1,167,049 1,424,683
Short-term debt, current portion of long-term debt, and current portion of capital
lease obligations(9)............................................................... 17,700 17,700
Long-term debt and capital lease obligations(9)...................................... 718,767 813,256
Shareholders' equity................................................................. 18,019 181,164
</TABLE>
- ------------------
(1) Effective with the acquisition of a majority equity interest in RSL COM
North America, Inc. (formerly known as International Telecommunications
Group, Ltd.) ("RSL North America"), in September 1995, the Company began to
consolidate RSL North America's operations. From March 1995 (the date of
the Company's initial investment) to September 1995, the Company accounted
for its investment in RSL North America 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) Extraordinary item represents primarily the premium paid to retire
approximately $127.5 million of the original $300.0 million of the
Company's 1996 Notes (as defined herein).
(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, and has been retroactively restated to reflect the
2.19-for-one stock split. Shares issuable pursuant to outstanding stock
options, unexercised Warrants, the Lauder Warrants, Roll-Up Rights or
Incentive Units or in the Telegate Exchange are not included in the loss
per share calculation as their effect is anti-dilutive.
(5) EBITDA (as defined) consists of loss before interest, loss in equity
interest of unconsolidated subsidiaries, income taxes, extraordinary item,
depreciation and amortization and foreign exchange loss. EBITDA (as
defined) 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 (as defined) 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.
(6) Capital expenditures include assets acquired through capital lease
financing and other debt.
(7) Adjusted to give effect to the Offerings (assuming net proceeds of
approximately $163.1 million) and the New Notes Offering (the net proceeds
of which were approximately $90.5 million) and the application of the
estimated net proceeds therefrom received by the Company. See "Use of
Proceeds" and "Capitalization."
(8) The restricted marketable securities consist of U.S. government securities
pledged to secure the payment of interest on the principal amount of the
1996 Notes. See "Description of Certain Indebtedness--1996 Notes."
(9) As of September 30, 1998, the Company had approximately $3.4 million of
available (undrawn) borrowing capacity under its current bank and vendor
facilities.
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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 other matters described in this Prospectus before
purchasing shares of Class A Common Stock. The Prospectus 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, regulatory environments in which the
Company operates or plans to operate, trends affecting the Company's financial
condition or results of operations, the impact of competition, the start-up of
certain operations and acquisition opportunities. 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 ("Cautionary
Statements"), including, without limitation, information contained in this
section of this Prospectus and information under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business,"
identifies important factors that could cause such differences. All subsequent
written and oral forward-looking statements attributable to the Company or
persons acting on its behalf are expressly qualified in their entirety by the
Cautionary Statements.
SHORT OPERATING HISTORY
The Company has acquired all of its operations since 1995 and, therefore,
has limited experience in conducting those operations. The Company's principal
operations commenced on various dates during 1990 through 1997 and, therefore,
have limited operating histories. In addition, the Company invests in start-up
operations in markets where it has no existing operations. Furthermore, in many
markets, the Company plans to offer services that have been provided only by
existing government-owned post, telegraph and telephone monopolies ("PTTs"). The
Company may face difficulties in establishing or expanding such businesses.
Since its inception, the Company has generated net losses of $9.4 million, $38.2
million and $100.2 million in 1995, 1996 and 1997, respectively. See "--Risks
Associated with Anticipated Growth and Acquisitions."
ENTRANCE INTO NEWLY OPENING MARKETS
The Company's prospects must be considered in light of the risks, expenses,
problems and delays inherent in establishing a new business. As a new entrant in
its markets, the Company may need to discount services to 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") in fiber optic cable systems,
switches and leased capacity). The fixed costs and expenses incurred under these
circumstances have resulted, and may continue to 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 (AS DEFINED)
The Company must continue to expand its operations and meet increasing
demands for service quality, availability of value added services and
competitive pricing to establish and maintain a competitive position in its
markets. The Company has generated net losses of $304.2 million from its
inception through September 30, 1998. The Company has also incurred negative
EBITDA (as defined) since its inception. Due to its need to expand its
operations, develop RSL-NET and build its customer base and marketing
operations, the Company expects to incur significant net losses through 2001,
significant negative cash flow from operating activities through 2000 and
negative EBITDA (as defined) through 1998. These are forward-looking statements,
however, and there can be no assurances that the Company's significant net
losses, negative cash flow from operating activities and negative EBITDA will
not continue beyond the years indicated.
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NEED FOR ADDITIONAL CAPITAL
When market conditions are favorable, the Company plans to raise
substantial additional capital to fund its capital expenditures, acquisitions,
strategic alliances, start-up operations and anticipated substantial net losses.
In light of current favorable market conditions, the Company may seek to raise
additional debt financing promptly following the Offerings. In 1997, the Company
made capital expenditures of approximately $49.4 million. The Company expects
that it will have made capital expenditures of at least $115 million in 1998.
The Company intends to increase its capital expenditures in 1999. The Company
has also experienced a consistently increasing working capital deficit. If
market conditions for future capital-raising transactions are not favorable, the
Company believes that the net proceeds from the Offerings, together with the
remaining net proceeds of prior securities offerings and other sources of
liquidity available to the Company, will be sufficient to fund a reduced capital
expenditure and expansion plan for its existing operations, as well as
continuing net losses, for approximately 9 to 12 months. The Company may be
required to seek additional capital regardless of market conditions if (i) the
Company's plans or assumptions change or prove to be inaccurate, (ii) the
Company identifies additional required or desirable infrastructure investments
or acquisitions, (iii) the Company experiences unanticipated costs or
competitive pressures or (iv) the net proceeds from the Offerings, together with
the remaining net proceeds from prior securities offerings and other sources of
available liquidity otherwise prove to be insufficient. There can be no
assurance that the Company will be able to raise additional capital on
satisfactory terms or at all. The failure to obtain additional capital on
acceptable terms could materially adversely affect the Company's business,
results of operations and financial condition and its ability to compete.
SUBSTANTIAL INDEBTEDNESS
As of September 30, 1998, the Company had consolidated indebtedness of
$712.0 million and shareholders' equity of $18.0 million. Upon the closing of
the New Notes Offering on November 9, 1998, the Company incurred $94.5 million
(net of unamortized discount of $5.5 million) of additional long term
indebtedness under the New Notes. The Company expects to incur substantial
amounts of additional indebtedness resulting in substantial and increasing
interest expense that will likely exceed its EBITDA (as defined). If the Company
is unable to generate sufficient EBITDA (as defined) or is otherwise unable to
obtain funds necessary to make required payments, or if the Company fails to
comply with the material terms of its indebtedness, it would be in default and
the holders of such indebtedness would be entitled to accelerate the maturity of
such indebtedness.
The trust indentures governing the Company's outstanding debt securities
contain certain restrictive covenants which impose limitations on the ability of
the Company and certain of its subsidiaries 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. See
"Description of Certain Indebtedness--1996 Notes," "--U.S. Dollar Notes," "--DM
Notes" and "--New Notes."
In addition, the Company has obtained initial commitments for up to
$35 million of revolving credit, subject to the negotiation and execution of
final documentation (the "New Credit Facility"). See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
The Company's level of indebtedness could adversely affect the value of its
Class A Common Stock because: (i) 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; (ii) 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 its indebtedness and will not be available for the Company's business;
(iii) the Company's indebtedness could limit its flexibility in planning for, or
reacting to changes in, its business; (iv) the Company is more highly leveraged
than certain of its competitors, which may place it at a competitive
disadvantage; and (v) the Company's high degree of leverage could make it more
vulnerable in the event of a downturn in its business.
11
<PAGE>
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 pursue further
expansion of its existing operations, through acquisitions, joint ventures and
strategic alliances and the establishment of new operations. The Company's
ability to manage its 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 and
significantly expand its internal management, technical and accounting systems.
The Company's growth will also depend on its ability to purchase MIUs, IRUs and
other capacity, which may be adversely affected by competition and regulatory
restrictions on ownership. The Company's rapid growth strains its financial,
management and operational resources, including its ability to identify
acquisition targets and joint venture partners, negotiate acquisition and joint
venture agreements and maintain satisfactory relations 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, be
limited to acquiring only 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 or
are incurring losses. In such cases, there can be no assurance that such
operational or managerial problems or losses will not cause the Company
significant problems or consume substantial monetary, management and other
resources of the Company.
RISKS ASSOCIATED WITH INTEGRATION WITH NEW OPERATIONS
The Company's new businesses must be integrated with its existing
operations. For acquired businesses, this entails integration of switching,
transmission, technical, sales, customer service, 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. Additionally, acquired businesses may offer product
lines that the Company has limited experience in providing, such as, in the case
of the recent Motorola Tel.co acquisition (described in "Business--Company
Operations--Europe"), wireless resale. Furthermore, acquired businesses
generally suffer from employee and customer attrition and turnover at higher
rates, beginning when employees and customers learn of a proposed transaction
and ending some time after the transaction has been completed. The Company has
experienced high levels of customer attrition and turnover in certain acquired
businesses in the United States, Australia, France and Germany. In connection
with the recent Motorola Tel.co acquisition, the Company expects to experience
higher levels of customer attrition than previously experienced by the Company's
European operations. In countries where the Company expands by establishing a
new business, it must 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 already operates businesses in many countries and intends to
expand into additional countries and regions, including countries and regions
within Europe, Asia/Pacific Rim and Latin America, it must manage the problems
associated with integrating a culturally and linguistically diverse workforce.
12
<PAGE>
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 the Company will be able to compete effectively or adjust its contemplated
plan of development to meet these 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.
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
necessary 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 meeting
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.
INCREASING PRICING PRESSURES
Existing excess international transmission capacity minimizes the marginal
cost of carrying an additional international call for carriers. 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. This system of pricing, if it were to become prevalent in the
Company's markets, would likely have a material adverse effect on the Company's
prospects, financial condition and results of operations 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, thus,
may be obligated to pay for transmission capacity without adequate corresponding
revenues. Conversely, the Company may underestimate its need for leased capacity
and, thus, may be required to obtain transmission capacity through more
expensive means. In the past, the Company has overestimated and underestimated
its need for leased capacity and as a result has transported traffic at a higher
cost, and has 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." A failure to
accurately project needs for leased capacity in the future may have a material
adverse effect on the Company's business and profitability.
DEPENDENCE ON OTHER CARRIERS
The Company does not own any local exchange transmission facilities and
owns only limited intra-national transmission facilities. All of the telephone
calls made by the Company's customers are connected at least in part through
transmission facilities that the Company leases. In many of the foreign
jurisdictions in which the Company conducts or plans to conduct business, the
primary provider of significant intra-national transmission facilities is the
PTT. Accordingly, prior to full deregulation, the Company may be required to
lease transmission capacity at artificially high rates from a provider that
occupies a monopoly or near monopoly position. Such rates may prevent the
Company from generating gross profit on the related calls. In addition, PTTs may
not be required by law to allow the Company to
13
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lease necessary transmission lines or, if applicable law requires PTTs to lease
transmission lines to the Company, the Company may encounter delays in
commencing operations and negotiating leases and interconnection agreements.
Additionally, disputes may result with respect to pricing terms and billing. See
"--Government Regulatory Restrictions."
In the U.S., the providers of local exchange transmission facilities are
generally the incumbent local exchange carriers ("LECs"), including the regional
Bell operating companies ("RBOCs"). The permitted pricing of local exchange
facilities that the Company leases in the U.S. are subject to uncertainties.
The U.S. Court of Appeals for the Eighth Circuit has held that the United
States Federal Communications Commission (the "FCC") does not have jurisdiction
to create national rules for the pricing of such facilities, but rather, that
such jurisdiction rests with each of the individual states. As of the date of
this Prospectus, this case is before the U.S. Supreme Court and, if the lower
court decision is upheld, the need to address different pricing regimes in
different states could make it more burdensome or expensive for the Company to
enter a local exchange market.
Many of the international telephone calls made by the Company's customers
are transported through transmission facilities that the Company leases from its
competitors, including American Telephone & Telegraph, Inc. ("AT&T"), Teleglobe
Canada, Inc. ("Teleglobe"), British Telecommunications PLC ("British Telecom"),
France Telecom S.A. ("France Telecom"), Deutsche Telekom AG ("Deutsche
Telekom"), Cable and Wireless Communications PLC ("C&W"), MCI WorldCom, Inc.
("MCI WorldCom") and Sprint Corporation ("Sprint"). To the extent the Company
provides local exchange services in the U.S., it will be required to lease
facilities from LECs that will be competitors of the Company, such as the RBOCs.
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 excess
transmission capacity is present, as was the case for many years in the U.S.,
lease rates have declined and short term leases have been advantageous.
Recently, capacity has been somewhat constrained in the U.S. 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 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., European and Australian operations. The Company intends to
integrate and operate the information services for all of its Local Operators
from its respective regional headquarters. A failure of any of the Company's
current systems, the failure of the Company to efficiently implement or
integrate new systems, 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 results of operations.
YEAR 2000 TECHNOLOGY RISKS
The Company is reviewing its computer systems and operations to identify
and determine the extent to which any systems will be vulnerable to potential
errors and failures as a result of the "Year 2000" problem. The Year 2000
problem is the result of the use by computer programs of two digits, rather than
four digits, to define the applicable year. Any of the Company's programs that
have time-
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<PAGE>
sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a major system failure or
miscalculations, causing disruptions of operations including, among other
things, a temporary inability to process transactions, billing and customer
service or to engage in similar normal business activities.
The Company is assessing and upgrading its computer system in an effort to
prevent major system failures which could result upon the transition from 1999
to the year 2000. There can be no assurance that any such upgrades will be
successfully implemented or that additional steps will not be necessary. A
failure of the Company's computer systems or the failure of the Company's
vendors or customers to effectively upgrade their software and systems for
transition to the year 2000 could have a material adverse effect on the
Company's business and financial condition or results of operations.
Even if the Company's assessment is completed without identifying any
additional material non-compliant systems operated by, or in the control of, the
Company or of third parties, the most reasonably likely worst case scenario
would be a systems failure beyond the control of the Company to remedy. Such a
failure could materially prevent the Company from operating its business. The
Company believes that such a failure would likely lead to lost revenues,
increased operating costs, loss of customers or other business interruptions of
a material nature, in addition to potential claims of, among other things,
mismanagement, misrepresentation or breach of contract. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Year
2000 Technology Risks," "Business--U.S. Operations" and "--European
Operations--General."
COMPETITION
The provision of telecommunications services is extremely competitive.
Prices for long distance calls are decreasing substantially in most of the
Company's markets. In addition, all of the Company's markets have deregulated or
are in the process of deregulating telephone services. Customers in most of
these deregulating markets are not familiar with obtaining services from
competitors to the PTTs and incumbent LECs and may be reluctant to use new
providers. 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 must compete with a variety of other telecommunications
providers in each of its markets, including (i) the PTTs and other dominant
carriers, (ii) alliances such as AT&T's alliance with British Telecom and AT&T's
alliance with Unisource (itself an alliance among PTT Telecom Netherlands, Telia
AB and Swiss Telecom PTT) and the corresponding alliance with WorldPartners, and
Sprint's alliance with Deutsche Telekom and France Telecom, known as "Global
One," (iii) international fixed wire and wireless resellers, (iv) companies such
as GTE and MCI WorldCom offering local exchange service in conjunction with
domestic long distance and international long distance services, (v) LECs such
as the RBOCs, and (vi) other companies with business plans similar to that of
the Company. The Company anticipates increased competition as worldwide
deregulation 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 devote additional resources to
international long distance voice telecommunication services to the Company's
key markets, including its target customer base of small and medium-sized
businesses, there could be a material adverse effect on the Company's business.
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 discount its services from 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. In certain
deregulated markets severe price competition has occurred, and there can be no
assurance that, as deregulation progresses in other markets, the Company will
not encounter severe price competition in those markets. 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
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Company currently offers or can offer due to regulatory restrictions.
See "Business--Industry Overview" and "--European Operations--General."
Recent and pending deregulation in each of the Company's markets may
encourage new entrants. For example, as a result of the enactment of the
Telecommunications Act of 1996 and regulatory initiatives taken by the FCC, the
RBOCs may provide international telecommunications services, are allowed as
"non-dominant" carriers to offer domestic long distance service through an
affiliate outside their service areas and are also allowed to provide long
distance service within their service areas, provided certain competition
related conditions are met. AT&T, MCI WorldCom 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. The U.S.
District Court for the Northern District of Texas recently ruled that
restrictions placed by the Telecommunications Act of 1996 on the ability of
RBOCs to provide long distance service within their respective service areas
was unconstitutional. Certain RBOCs have filed applications with the FCC
seeking authority to provide long distance service within their respective
service areas. An appellate decision affirming the decision by the District
Court, or the grant by the FCC of the pending RBOC applications, would enable
the RBOCs to compete more effectively against the Company.
In November 1997, the FCC revised its rules to implement commitments made
by the U.S. under the Basic Telecommunications Agreement (the "GBT Agreement")
of the World Trade Organization (the "WTO") executed in February 1997. The FCC
established an open entry standard for applicants from World Trade Organization
member countries seeking authority to provide international telecommunications
service in the United States and adopted a rebuttable presumption that the U.S.
affiliates of a foreign carrier with less than 50% market share in their home
market should be treated as non-dominant. In addition, 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 (including pricing constraints) on AT&T and affiliates of
foreign carriers. As a result, the Company expects to encounter additional
regional competitors and increased competition. Moreover, the Company believes
that competition in foreign markets will increase and become increasingly
similar to the competitive environment in the U.S.
The PTTs and incumbent LECs generally have certain competitive advantages
over the Company due to their control over and connection to intra-national and
local exchange transmission facilities, their ability to delay access to lines
and the reluctance of some regulators to adopt policies and grant approvals that
would increase competition. The Local Operator in such a jurisdiction would be
adversely affected to the extent that the PTT or incumbent LEC in any
jurisdiction uses its competitive advantages to their fullest extent.
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
IP telephony services. Furthermore, there can be no assurance that changes in
current or future laws or regulations or future judicial intervention in the
U.S. or in any other country would not have a material adverse effect on the
Company or that FCC or other regulatory intervention would not have a material
adverse effect on the Company. In addition, the Company's European strategy is
based in large part upon the ongoing liberalization of the European Union ("EU")
and deregulation of other foreign markets based on European Commission ("EC")
directives and the GBT Agreement. Several EU member states ("Member States")
have already experienced delays in deregulation. Further, even if a national
legislature of a Member State implements the relevant directives within the time
frame established by the EC, there may be significant resistance to the
implementation of such measures from PTTs, regulators, trade unions and other
sources. The telecommunications services provided by the Company in various
Member States are subject to and affected by regulations and license conditions
enforced by the National Regulatory Authority ("NRA"). The NRA has imposed
mandatory rate reductions on the dominant
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operator in the U.K., British Telecom, and is expected to continue to do so
for the foreseeable future. This may have the effect of reducing the prices
the Company can charge its U.K. customers.
There can also be no assurance that government in other foreign markets
will implement deregulation or, where implemented, that deregulation will
proceed on schedule. In addition, even if other foreign markets act to
deregulate their telecommunications markets on the current schedule, the
national governments of such foreign markets must pass legislation or other
national measures to deregulate the markets within the countries. The national
governments may not pass such legislation or other national measures in the
form required, if at all, or may pass such legislation or measures only after
a significant delay. 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.
The Internet protocol ("IP") 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.
In the United States, the FCC has advised Congress that it may, in the future,
regulate IP telephony services as basic telecommunications services. The
regulation of Delta Three's activities may have a material adverse effect on the
financial condition and results of operations of Delta Three and the Company.
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 material adverse effect on the Company.
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.
CONTROLLING SHAREHOLDER
Ronald S. Lauder, Chairman of the Board of Directors of the Company,
beneficially owns, in the aggregate, approximately 59.8% (58.4% after giving
effect to the Offerings, assuming the Underwriters' over-allotment options are
exercised in full) of the voting power and approximately 37.8% (32.3% after
giving effect to the Offerings, assuming the Underwriters' over-allotment
options are exercised in full) of the outstanding capital stock of the Company.
As a result, Mr. Lauder has majority voting control of the Company, the ability
to approve certain fundamental corporate transactions and to elect all members
of the Company's Board of Directors. Mr. Lauder together with certain other
executive officers and directors of the Company, companies and partnerships they
control and members of their immediate families, in the aggregate, control
approximately 94.6% (92.1% after giving effect to the Offerings, assuming the
Underwriters' over-allotment options are exercised in full) of the voting power
and approximately 66.4% (56.4% after giving effect to the Offerings, assuming
the Underwriters' over-allotment options are exercised in full) of the
outstanding capital stock of the Company.
NEGATIVE EFFECTS OF ANTI-TAKEOVER PROVISIONS
The concentration of ownership in the Issuer may have the effect of
delaying, deferring or preventing a change of control of the Issuer, a
transaction which might otherwise be beneficial to shareholders. In addition,
the Issuer's Memorandum of Association and By-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 and Selling Shareholders" and "Description of Capital
Stock--Anti-Takeover Protections."
17
<PAGE>
EFFECTS OF INCORPORATION UNDER BERMUDA CORPORATE LAW
The Company is a Bermuda company and, accordingly, is governed by The
Companies Act 1981 of Bermuda. The Companies Act 1981 of Bermuda differs in
certain respects from laws generally applicable to United States corporations
and shareholders. These differences include less restrictive limitations on
transactions entered into by the Company in which any of its directors have an
interest and greater restrictions on the rights of the Company's shareholders to
dissent from and obtain remedies in connection with mergers, takeovers and other
combination transactions, to pursue legal challenges to corporate actions and
to inspect corporate records. See "Description of Capital Stock--Differences
in Corporate Law."
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Class A Common Stock may be extremely volatile.
Factors such as adverse regulatory changes, additional debt and equity
financings, 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
After completion of the Offerings, there will be a significant number of
shares of Class A Common Stock outstanding or issuable upon conversion of shares
of Class B Common Stock or upon exercise of outstanding options or other rights
to acquire shares of Class A Common Stock. Some of which shares of Class A
Common Stock will be freely tradeable without restriction or further
registration under the Securities Act and some of which will be "restricted
securities" (as that term is defined in Rule 144) and subject to the volume and
other resale limitations of Rule 144, as well as a "lock up" period ending 90
days after the consummation of the Offerings, to which the Company's executive
officers and directors and certain other shareholders are subject pursuant to
the Underwriting Agreements. See "Management--Stock Option and Compensation
Plans," "--Compensation of Directors--Directors' Plan," "Certain Relationships
and Related Transactions," "Description of Capital Stock--Warrants," "Certain
Rights to Acquire Class A Common Stock" and "Shares Eligible for Future Sale."
Sales of substantial amounts of Class A Common Stock in the public market,
and the availability of shares for future sale (including shares issuable upon
conversion of shares of Class B Common Stock or upon exercise of outstanding
options or other rights to acquire shares of Class A Common Stock) could
adversely affect the prevailing market price of the Class A Common Stock and
could impair the Company's future ability to raise capital through an offering
of its equity securities.
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 trust indentures governing its
outstanding debt securities contain restrictions on the Company's ability to
declare and pay dividends on each class of the Common Stock. See "Description of
Certain Indebtedness" and "Dividend Policy."
ENFORCEMENT OF JUDGMENTS AND SERVICE OF PROCESS
The Company is incorporated in Bermuda, and certain of its officers and
directors are resident outside the United States. All or a substantial portion
of the assets of such persons are or may be located outside the United States.
Consequently, it may not be possible to effect service of process within the
United States upon such persons or to enforce against them judgments obtained in
United States courts, including judgments predicated upon the civil liability
provisions of the federal securities laws of the United States. See "Service of
Process and Enforcement of Liabilities."
18
<PAGE>
DEVALUATION AND CURRENCY RISKS
Most of the Company's revenues, costs, assets and liabilities are
denominated in local currencies. 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 risks but may in the future commence such
hedging against specific foreign currency transaction risks including currency
exchange risks relating to the DM Notes (as defined herein). There can be no
assurance that the Company will be able to hedge all its exchange rate
exposure economically, and there can be no assurance that exchange rate
fluctuations will not have a material adverse effect on the ability of the
Company to meet its obligations. 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.
Under the treaty on the European Economic and Monetary Union (the
"Treaty"), on or before January 1, 1999, and subject to the fulfillment of
certain conditions, the "Euro" may replace all or some of the currencies of the
member states of the EU, including some countries in which the Company operates.
The Company is modifying its computer systems and programs to prepare for the
upcoming replacement of certain European currencies with the Euro. Costs
associated with the modifications necessary to prepare for the Euro are being
expensed by the Company during the period in which they are incurred. Such costs
may involve significant expenditures and, if not implemented in a timely manner,
could have a material adverse effect on the Company.
FOREIGN PERSONAL HOLDING COMPANY AND PASSIVE FOREIGN INVESTMENT COMPANY RULES
The Issuer will seek to manage its affairs and the affairs of its
subsidiaries so that neither the Issuer 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, to
the extent such management of its affairs is consistent with its other business
goals. If the Issuer 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 Issuer or of its foreign corporate
subsidiaries would be included in the income of a U.S. shareholder of the Issuer
as a dividend on a pro rata basis. If the Issuer were a PFIC, then each U.S.
holder of Class A Common Stock would, upon certain distributions by the Issuer,
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 Issuer's ordinary earnings and net
capital gain would be required to be included in such U.S. shareholder's income
each year. Also, 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 Issuer intends to manage its
affairs and the affairs of its corporate subsidiaries so as to avoid PFIC status
or, once profitable, FPHC status, to the extent such management of its affairs
is consistent with its other business goals, there can be no assurance that the
Issuer will be successful in this endeavor. See "Certain United States Federal
Income Tax Considerations."
19
<PAGE>
USE OF PROCEEDS
The net proceeds to the Issuer from the Offerings are estimated to be
approximately $163.1 million, assuming an initial public offering price of
$25 1/4 per share and after deducting the underwriting discount and estimated
expenses of the Offerings. Of the net proceeds, the Company intends to use
(i) approximately $75 million for the expansion and development of the Company's
infrastructure, such as the replacement of leased transmission facilities with
owned transmission facilities and the purchase of IRUs and interests in
inter-city fiber routes in European countries, as well as the installation of
additional national and international gateway switches and (ii) approximately
$88.1 million for the funding of the Company's operating losses. In addition, in
the ordinary course of its business, the Company continually reviews acquisition
opportunities in the telecommunications industry as they arise. Although it is
not currently party to any agreement or binding understanding with respect to a
transaction, it may use proceeds from the Offerings partially to fund suitable
acquisition opportunities that arise. Historically, the Company has acquired
telecommunications carriers with established customer bases, compatible
operations and experience with additional or emerging telecommunications
products and services. See "Risk Factors--Risks Associated with Anticipated
Growth and Acquisitions." The Issuer will not receive any of the proceeds from
the sale of the Shares by the Selling Shareholders.
When market conditions are favorable, the Company plans to raise
substantial additional capital to fund its capital expenditures, acquisitions,
strategic alliances, start-up operations and anticipated substantial net losses.
In light of current favorable market conditions, the Company may seek to raise
additional debt financing promptly following the Offerings.
PRICE RANGE OF CLASS A COMMON STOCK
The Class A Common Stock has been quoted on the Nasdaq National Market
under the symbol "RSLCF" since October 1, 1997. Prior to that date, there was no
trading market for the Class A Common Stock. At September 30, 1998, there were
approximately 102 holders of record of the Class A Common Stock, and the Issuer
believes that there were approximately 3,000 beneficial owners of the Class A
Common Stock. At September 30, 1998, there were approximately 17 holders of
record of the Class B Common Stock and the Issuer believes that there were
approximately 10 beneficial owners of the Class B Common Stock. The following
table lists, for the periods indicated, the high and low sales prices of the
Class A Common Stock as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
PRICE OF CLASS A
COMMON STOCK
----------------
HIGH LOW
<S> <C> <C>
1997 Fourth Quarter (from October 1, 1997)................................................... $35 1/4 $21 1/8
1998 First Quarter........................................................................... 27 1/2 17
1998 Second Quarter.......................................................................... 30 21 7/8
1998 Third Quarter........................................................................... 44 1/2 21 1/2
1998 Fourth Quarter (through November 20, 1998).............................................. 26 1/2 15 1/16
</TABLE>
On November 20, 1998 the last reported sales price for the Class A Common
Stock on the Nasdaq National Market was $25 1/4 per share.
The Class B Common Stock has no established public trading market.
DIVIDEND POLICY
The Issuer 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 indentures contain restrictions on the Issuer's ability to
declare and pay dividends on the Common Stock. See "Description of Certain
Indebtedness." The declaration and payment of dividends by the Issuer 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
20
<PAGE>
operations, capital requirements, restrictions in the Company's loan agreements
and indentures, if any, and any such other factors as the Board of Directors may
deem relevant.
DILUTION
As of September 30, 1998, the net tangible book value of the outstanding
shares of Class A Common Stock and Class B Common Stock was $(498.8) million.
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
7,000,000 shares of Class A Common Stock offered by the Company in the Offerings
had been sold at September 30, 1998, assuming an initial public offering price
of $25 1/4 per share.
<TABLE>
<S> <C> <C>
Initial public offering price per share........................................... $ 25.25
Net tangible book value per share before the Offerings(1)....................... $(11.17)
Increase per share attributable to the Offerings................................ 4.67
-------
Net tangible book value per share after the Offerings(1).......................... (6.50)
-------
Dilution of net tangible book value per share to new investors.................... $ 31.75
-------
-------
</TABLE>
- ------------------
(1) Includes (i) 1,492,625 shares of Class A Common Stock issuable upon exercise
of outstanding stock options, (ii) 917,729 shares of Class A Common Stock
issuable upon the exercise of the Warrants, (iii) 459,000 shares of Class B
Common Stock issuable on exercise of the Lauder Warrants and (iv) 109,500
shares of restricted stock granted pursuant to the Company's 1997 Stock
Incentive Plan. Excludes shares of Class A Common Stock issuable upon
exercise of Roll-Up Rights or Incentive Units or in the Telegate Exchange.
The following table summarizes, as of September 30, 1998, the differences
between the existing shareholders and the new investors with respect to the
number of shares of Class A Common Stock to be purchased from the Company in the
Offerings, the total consideration paid therefor and the average price per share
of Common Stock (including Class B Common Stock) paid by the existing
shareholders and the new investors.
<TABLE>
<CAPTION>
SHARES TOTAL
PURCHASED(1) CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders................. 47,636,689 87.19% $328,646,565 65.03% $ 6.90
New investors......................... 7,000,000 12.81 176,750,000 34.97 25.25
---------- ----- ------------ -----
Total................................. 54,636,689 100.0 $505,396,565 100.0
---------- ----- ------------ -----
---------- ----- ------------ -----
</TABLE>
- ------------------
(1) Includes (i) 1,492,625 shares of Class A Common Stock issuable upon exercise
of outstanding stock options, (ii) 917,729 shares of Class A Common Stock
issuable upon the exercise of the unexercised Warrants, (iii) 459,900 shares
of Class B Common Stock issuable on exercise of the Lauder Warrants and (iv)
109,500 shares of restricted stock granted pursuant to the Company's 1997
Stock Incentive Plan. Excludes shares of Class A Common Stock issuable upon
exercise of Roll-Up Rights or Incentive Units or in the Telegate Exchange.
21
<PAGE>
CAPITALIZATION
The following table sets forth the unaudited consolidated cash and cash
equivalents, marketable securities, restricted marketable securities and
capitalization of the Company as of September 30, 1998 and as adjusted to give
effect to (i) the New Notes Offering and the application of the net proceeds
therefrom received by the Company and (ii) and the Offerings (assuming a public
offering price of $25 1/4 per share) and the application of the estimated net
proceeds therefrom received by the Company. In light of current favorable market
conditions, the Company may seek to raise additional debt financing promptly
following the Offerings. The table should be read in conjunction with the
Consolidated Financial Statements and notes thereto and the other information
included elsewhere in this Prospectus. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998
-----------------------------------------
AS ADJUSTED
FOR THE
AS ADJUSTED NEW NOTES
FOR THE OFFERING
NEW NOTES AND THE
ACTUAL OFFERING OFFERINGS
----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
-----------------------------------------
<S> <C> <C> <C>
Cash and cash equivalents......................... $ 82,196 $ 172,685 (1) $ 335,830 (1)(2)
--------- --------- -----------
--------- --------- -----------
Restricted marketable securities(3)............... $ 30,579 $ 30,579 $ 30,579
--------- --------- -----------
--------- --------- -----------
Short-term debt and current portion of long-term
debt and current portion of capital lease
obligations..................................... $ 17,700 $ 17,700 $ 17,700
Long-term debt and capital lease obligations:
Capital leases.................................. 21,211 21,211 21,211
12 1/4% Senior Notes due 2006 (net of
unamortized discount of $1.8 million)......... 170,667 170,667 170,667
9 1/8% Senior Notes due 2008.................... 200,000 200,000 200,000
10 1/8% Senior Discount Notes due 2008.......... 212,131 212,131 212,131
10% Senior Discount Notes due 2008.............. 114,758 114,758 114,758
12% Senior Notes due 2008 (net of unamortized
discount of $5.5 million)..................... -- 94,489 94,489
--------- --------- -----------
Total long-term debt, short-term debt and
capital lease obligations(4)................ 736,467 830,956 830,956
--------- --------- -----------
Shareholders' equity:
Common Stock, $.00457 par value; 438,000,000
authorized; 17,782,140 shares of Class A
Common Stock outstanding and 24,782,140 shares
outstanding as adjusted(5).................... 81 81 113
26,874,795 shares of Class B Common Stock
outstanding(6).............................. 123 123 123
Preferred Stock, $.00457 par value; 65,700,000
shares authorized; no shares outstanding...... -- -- --
Warrants--Common Stock.......................... 5,544 5,544 5,544
Additional paid-in capital...................... 328,443 328,443 491,556
Accumulated deficit............................. (304,190) (304,190) (304,190)
Foreign currency translation adjustment......... (11,982) (11,982) (11,982)
--------- --------- -----------
Total shareholders' equity.................... 18,019 18,019 181,164
--------- --------- -----------
Total capitalization.......................... $ 754,486 $ 848,975 $ 1,012,120
--------- --------- -----------
--------- --------- -----------
</TABLE>
- ------------------
(1) Reflects the receipt of net proceeds of approximately $90.5 million from the
New Notes Offering.
(2) Reflects the receipt of net proceeds of approximately $163.1 million from
the Offerings.
(3) The restricted marketable securities consist of U.S. government securities
pledged to secure the payment of interest on the principal amount of the
1996 Notes. See "Description of Certain Indebtedness--1996 Notes."
(4) As of September 30, 1998, the Company had approximately $3.4 million of
available (undrawn) borrowing capacity under its current bank and vendor
facilities.
(5) The foregoing does not include (i) 1,492,625 shares of Class A Common Stock
issuable upon the exercise of outstanding stock options, (ii) 26,328,590
shares of Class A Common Stock issuable upon the conversion of the shares of
Class B Common Stock, (iii) 459,900 shares of Class A Common Stock issuable
upon the conversion of shares of Class B Common Stock issuable pursuant to
the Lauder Warrants, (iv) 917,729 shares of Class A Common Stock issuable
upon the exercise of unexercised Warrants (as defined herein), (v) 109,500
shares of restricted stock, granted pursuant to the Company's 1997 Stock
Incentive Plan or (vi) shares of Class A Common Stock issuable upon exercise
of Roll-Up Rights or Incentive Units or in the Telegate Exchange.
(6) Does not include 459,900 shares of Class B Common Stock issuable upon
exercise of the Lauder Warrants.
22
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
Set forth below are selected consolidated financial data for each of the
years in the four year period ended December 31, 1997 and for the nine months
ended September 30, 1997 and 1998. The selected consolidated financial data
presented below with respect to the years ended December 31, 1997, 1996 and 1995
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, 1997 have been audited by Deloitte & Touche LLP,
independent auditors. 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, RSL North America.
In the opinion of management, the unaudited Condensed Consolidated
Financial Statements as of September 30, 1998 and 1997 and for the nine month
periods ended September 30, 1998 and 1997 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 nine months ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the full year. In
addition, the Company has experienced rapid growth over the periods set forth
below, which growth may not necessarily continue at such rate. Accordingly, the
financial and operating results set forth below may not be indicative of future
performance.
The information set forth below is qualified by reference to and should be
read in conjunction with the Consolidated Financial Statements and notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
------------------------------------------------ SEPTEMBER 30,
PREDECESSOR ------------------------
1994 1995(1) 1996 1997 1997 1998
----------- -------- -------- --------- --------- -----------
($ IN THOUSANDS, EXCEPT LOSS PER SHARE)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues................................... $ 4,702 $ 18,617 $113,257 $ 300,796 $ 192,604 $ 564,118
Operating costs and expenses:
Cost of services (exclusive of
depreciation and amortization shown
separately below)...................... (4,923) (17,510) (98,461) (265,321) (171,203) (462,181)
Selling, general and administrative
expenses............................... (2,395) (9,639) (38,893) (94,712) (62,085) (147,494)
Depreciation and amortization............ (240) (849) (6,655) (21,819) (14,367) (43,282)
------- -------- -------- --------- --------- ---------
(7,558) (27,998) (144,009) (381,852) (247,655) (652,957)
------- -------- -------- --------- --------- ---------
Loss from operations....................... (2,856) (9,381) (30,752) (81,056) (55,051) (88,839)
Interest income............................ -- 173 3,976 13,826 9,947 13,239
Interest expense........................... (225) (194) (11,359) (39,373) (28,910) (51,646)
Other income (expense)..................... -- -- 470 6,595(2) 6,572(2) 445
Foreign exchange loss...................... -- -- -- -- -- (10,621)
Minority interest.......................... -- -- (180) 210 (212) 4,322
Income taxes............................... -- -- (395) (401) (405) (726)
Loss in equity interest of unconsolidated
subsidiaries............................. -- -- -- -- -- (1,625)
------- -------- -------- --------- --------- ---------
Loss before extraordinary item............. (3,081) (9,402) (38,240) (100,199) (68,059) (135,451)
Extraordinary item(3)...................... -- -- -- -- -- (20,800)
------- -------- -------- --------- --------- ---------
Net loss after extraordinary item.......... $(3,081) $ (9,402) $(38,240) $(100,199) $ (68,059) $(156,251)
------- -------- -------- --------- --------- ---------
------- -------- -------- --------- --------- ---------
Loss per share before extraordinary
item(3)(4)............................... $(15.41) $ (1.67) $ (5.13) $ (5.27) $ (2.16) $ (3.17)
Loss per share after extraordinary
item(3)(4)............................... $(15.41) $ (1.67) $ (5.13) $ (5.27) $ (2.16) $ (3.66)
Weighted average number of shares of Common
Stock outstanding(4)..................... 200 5,641 7,448 19,008 31,541 42,740
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
------------------------------------------------ SEPTEMBER 30,
PREDECESSOR -----------------------
1994 1995 1996 1997 1997 1998
----------- -------- --------- -------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
EBITDA(5) (as defined)..................... $(2,616) $ (8,532) $ (23,807) $(52,432) $(34,324) $ (40,790)
Capital expenditures(6).................... 1,126 6,074 23,880 49,417 26,835 104,868
Cash (used in) provided by operating
activities............................... (1,987) 3,554 (10,475) (91,812) (60,443) (116,367)
Cash (used in) provided by investing
activities............................... (478) (16,537) (225,000) (18,821) 25,305 (312,772)
Cash (used in) provided by financing
activities............................... 2,888 18,143 335,031 152,035 (14,976) 376,011
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------- AS OF SEPTEMBER 30,
PREDECESSOR -----------------------
1994 1995 1996 1997 1997 1998
----------- ------- -------- -------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 452 $ 5,163 $104,068 $144,894 $ 52,706 $ 82,196
Securities available for sale.............. -- -- 67,828 13,858 24,093 --
Restricted marketable securities(7)........ -- -- 104,370 68,836 86,034 30,579
Total assets............................... 3,682 53,072 427,969 605,664 435,961 1,167,049
Short-term debt, current portion of
long-term debt and current portion of
capital lease obligations(8)............. 2,645 5,506 6,974 8,033 5,438 17,700
Long-term debt and capital lease
obligations(8)........................... 1,404 6,648 314,425 316,608 316,677 718,767
Shareholders' (deficiency) equity.......... (3,651) 5,705 20,843 126,699 (14,275) 18,019
</TABLE>
- ------------------
(1) Effective with the acquisition of a majority equity interest in RSL North
America in September 1995, the Company began to consolidate RSL North
America's operations. From March 1995 (the date of the Company's initial
investment) to September 1995, the Company accounted for its investment in
RSL North America 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) Extraordinary item represents primarily the premium paid to retire
approximately $127.5 million of the original $300.0 million of the Company's
1996 Notes.
(4) Loss per share is calculated by dividing the loss attributable to Common
Stock by the weighted average number of shares of Common Stock outstanding,
and has been retroactively restated to reflect the 2.19-for-one stock split.
Shares issuable pursuant to outstanding stock options, unexercised Warrants,
the Lauder Warrants, Roll-up Rights or Incentive Units or in the Telegate
Exchange are not included in the loss per common share calculation as their
effect is anti-dilutive.
(5) EBITDA (as defined) consists of loss before interest, loss in equity
interest of unconsolidated subsidiaries, income taxes, extraordinary item,
depreciation and amortization and foreign exchange loss. EBITDA (as defined)
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 (as defined) 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.
(6) Capital expenditures include assets acquired through capital lease financing
and other debt.
(7) The restricted marketable securities consist of U.S. government securities
pledged to secure the payment of interest on the principal amount of the
1996 Notes. See "Description of Certain Indebtedness--1996 Notes."
(8) As of September 30, 1998, the Company had approximately $3.4 million of
available (undrawn) borrowing capacity under its current bank and vendor
facilities.
24
<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.
OVERVIEW
GENERAL
The Company is a rapidly growing multinational telecommunications company
which provides a broad array of services, with a focus on international long
distance voice services to small and medium-sized businesses in key markets. The
Company's services include international and national fixed and wireless,
calling card, fax, data, Internet, private line and other value-added
telecommunications services. The Company currently has revenue generating
operations in Australia, Austria, Belgium, Canada, Denmark, Finland, France,
Germany, Italy, Japan, Luxembourg, The Netherlands, Portugal, Spain, Sweden,
Switzerland, the United Kingdom, the United States and Venezuela. In 1997,
approximately 70% of all international long distance telecommunications minutes
originated in these markets. The Company is also in the process of commencing
start-up operations through its investments in an entity in Mexico. See
"Business--Latin American Operations--General." 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.
NORTH AMERICA. The Company commenced operations in the U.S. in 1995 and
has since implemented solutions designed to improve the operations of RSL COM
U.S.A., Inc. ("RSL USA"). 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 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.
As of September 30, 1998, the Company had recorded approximately
$277.1 million of goodwill in connection with its North American acquisitions.
Goodwill represents the excess of cost over the fair value of the net
assets of acquired entities. The Company's component cost and purchase price
allocation for its North American acquisitions for each of the three years ended
December 31, 1995, 1996 and 1997 and for the nine month period ended
September 30, 1998 are as follows:
<TABLE>
<CAPTION>
COMPONENT COST AND PURCHASE PRICE
ALLOCATION
-------------------------------------
SEPTEMBER 30,
1995 1996 1997 1998
---- ---- ---- -------------
($ IN MILLIONS)
<S> <C> <C> <C> <C>
ASSETS ACQUIRED:
Cash and cash equivalents.......................... 7.4 -- 5.1 1.0
Accounts receivable................................ 9.0 -- 5.2 29.5
Telecommunications equipment....................... 4.5 -- 0.8 35.1
Deposits and others................................ 1.9 -- 0.5 4.6
Intangible assets--goodwill........................ 29.3 26.3 80.6 140.9
LIABILITIES ASSUMED:
Accounts payable and other long-term liabilities... 32.6 7.0 12.4 73.4
Long-term debt..................................... 5.1 -- -- --
EQUITY:
Increase to shareholders' equity................... -- -- 38.2 8.7
TOTAL CASH INVESTED.................................. 14.4 19.3 41.6 129.0
TOTAL NET LIABILITIES ASSUMED........................ 14.9 7.0 0.8 3.2
TOTAL STOCK ISSUED................................... -- -- 38.2 8.7
---- ---- ---- -----
TOTAL GOODWILL RECORDED/TOTAL PURCHASE PRICE......... 29.3 26.3 80.6 140.9
---- ---- ---- -----
---- ---- ---- -----
</TABLE>
25
<PAGE>
EUROPE. Member States are in various stages of deregulation. Deregulation
in these countries may occur either because the Member States of the EU decide
to open up their own markets (e.g., the United Kingdom, Sweden and Finland) or
because they are 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.
Although interconnection was not available and implemented in most EU
countries by January 1, 1998 (as called for by an EC directive), the current
regulatory scheme in the EU 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. The Company can provide value-added services before interconnection is
available and, in certain Member States, the Company is already providing
dial-in access, coupled, when possible, with autodialers or the programming of
customers' phone systems to dial access codes, to route traffic over the
domestic public switched telephone network ("PSTN") to the Company's switches.
See "Business--International Long Distance Mechanics."
As of September 30, 1998, the Company had recorded an aggregate of
approximately $155.2 million of goodwill in connection with its European
acquisitions. Goodwill represents the excess of cost over the fair value of the
net assets of acquired entities. The Company's component cost and purchase price
allocation for its European acquisitions for each of the three years ended
December 31, 1995, 1996 and 1997 and for the nine month period ended
September 30, 1998 are as follows:
<TABLE>
<CAPTION>
COMPONENT COST AND PURCHASE PRICE
ALLOCATION
-------------------------------------
SEPTEMBER 30,
1995 1996 1997 1998
---- ---- ---- -------------
($ IN MILLIONS)
<S> <C> <C> <C> <C>
ASSETS ACQUIRED:
Cash............................................... -- 2.3 1.7 0.9
Accounts receivable................................ 0.2 0.6 2.3 28.1
Telecommunications equipment....................... -- 2.2 0.8 3.7
Deposits and others................................ -- 0.3 0.4 16.5
Intangible assets--goodwill........................ 0.9 24.7 33.7 95.9
LIABILITIES ASSUMED:
Accounts payable and other long-term liabilities... 0.2 5.9 5.0 52.8
Lease commitments.................................. -- 2.4 -- --
EQUITY:
Increase to shareholders' equity................... -- -- 3.4 --
TOTAL CASH INVESTED.................................. 0.9 21.8 30.5 92.3
TOTAL LIABILITIES (ASSETS) ASSUMED................... -- 2.9 (0.2) 3.6
TOTAL STOCK ISSUED................................... -- -- 3.4 --
---- ---- ---- -----
TOTAL GOODWILL RECORDED/TOTAL PURCHASE PRICE......... 0.9 24.7 33.7 95.9
---- ---- ---- -----
---- ---- ---- -----
</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. The Company also 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
26
<PAGE>
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 the Company 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."
NORTH AMERICAN OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------------------- NINE MONTHS ENDED
PREDECESSOR SEPTEMBER 30,
------------------ ----------------------
1994 1995 1996 1997 1997 1998
------- ------- -------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PERCENTAGE OF CONSOLIDATED REVENUES)
<S> <C> <C> <C> <C> <C> <C>
Revenues....................................... $ 4,702 $18,461 $ 85,843 $ 194,518 $ 127,491 $ 305,673
Percentage of consolidated revenues............ 100.0% 99.2% 75.8% 64.7% 66.2% 54.2%
Operating costs and expenses:
Cost of services (exclusive of depreciation
and amortization shown separately
below).................................... (4,923) (17,367) (76,892) (176,780) (117,666) (253,200)
Selling, general and administrative
expenses.................................. (2,395) (7,444) (17,606) (38,207) (20,478) (53,348)
Depreciation and amortization................ (240) (619) (3,047) (5,650) (4,009) (8,014)
------- ------- -------- --------- --------- ---------
(7,558) (25,430) (97,545) (220,637) (142,153) (314,562)
------- ------- -------- --------- --------- ---------
Loss from operations........................... $(2,856) $(6,969) $(11,702) $ (26,119) $ (14,662) $ (8,889)
------- ------- -------- --------- --------- ---------
------- ------- -------- --------- --------- ---------
</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 experiences
significant month to month changes in revenues generated by its carrier
customers (i.e., customers who acquire the Company's services for the purpose of
reselling such services on a wholesale basis to other carriers or on a retail
basis to end users). The Company believes such carrier customers will react to
temporary price fluctuations and spot market availability that will impact the
Company's carrier revenues. Over the past two years, 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 believes that as a result of these changes to its business and as a
result of utilizing a greater proportion of owned versus leased facilities, the
Company has begun to experience decreasing quarterly losses commencing in
January 1998. The Company has derived increased revenues from its commercial
customers, and it continues to reduce its reliance on wholesale carrier
revenues. The Company will also begin deriving revenues as a result of its
recent acquisition of operations in Canada. See "--Overview" in this Section.
27
<PAGE>
EUROPEAN OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------------------- -----------------------
1995 1996 1997 1997 1998
------- -------- ----------- --------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGE OF CONSOLIDATED REVENUES)
<S> <C> <C> <C> <C> <C>
Revenues....................................... $ 156 $ 27,414 $ 73,653 $ 51,220 $ 168,672
Percentage of consolidated revenues............ 0.8% 24.2% 24.5% 26.6% 29.9%
Operating costs and expenses:
Cost of services (exclusive of depreciation
and amortization shown separately
below).................................... (143) (21,569) (59,516) (40,746) (136,779)
Selling, general and administrative
expense................................... (539) (17,377) (43,004) (32,879) (64,118)
Depreciation and amortization................ (12) (1,906) (7,038) (4,298) (14,298)
------- -------- --------- --------- ----------
(694) (40,852) (109,558) (77,923) (215,195)
------- -------- --------- --------- ----------
Loss from operations........................... $ (538) $(13,438) $ (35,905) $ (26,703) $ (46,523)
------- -------- --------- --------- ----------
------- -------- --------- --------- ----------
</TABLE>
The Company commenced European operations in certain countries in the
second quarter of 1996 and has since established operations in many additional
European countries.
Substantially all revenues from the Company's European operations are
derived from commercial sales to end-users. Sales are targeted at small to
medium-sized corporate customers, as well as to niche consumer markets
(including selected ethnic communities). To reduce its credit risk to such niche
consumer markets, the Company primarily offers prepaid products to its targeted
consumer. 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 its
customers. The Company also believes that as it pursues its strategic growth
strategy it will continue to encounter various degrees of start-up time.
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. The Company believes that, with
established or start-up operations in 14 European countries, 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--General--Regulatory Environment."
28
<PAGE>
ASIA/PACIFIC RIM OPERATIONS
<TABLE>
<CAPTION>
INCEPTION
INCEPTION (APRIL 1997 NINE MONTHS
(APRIL 1997 THROUGH ENDED
THROUGH DECEMBER SEPTEMBER 30, SEPTEMBER 30,
31, 1997) 1997) 1998
----------------- ------------------ ------------------
(IN THOUSANDS EXCEPT PERCENTAGE OF CONSOLIDATED REVENUES)
<S> <C> <C> <C>
Revenues......................................... $32,333 $ 13,836 $ 89,219
Percentage of consolidated revenues.............. 10.7% 7.2% 15.8%
Operating costs and expenses:
Cost of services (exclusive of depreciation and
amortization shown separately below)........... (28,873) (12,756) (71,738)
Selling, general and administrative expenses... (5,827) (2,674) (20,555)
Depreciation and amortization.................. (824) (268) (3,604)
------- -------- --------
(35,524) (15,698) (95,897)
------- -------- --------
Loss from operations............................. $(3,191) $ (1,862) $ (6,678)
------- -------- --------
------- -------- --------
</TABLE>
The Company commenced Asian/Pacific Rim revenue producing operations
through its Australian entity with the acquisition of a customer base in
Australia in the second quarter of 1997. The Company initiated operating in
Japan through RSL COM Japan K.K. ("RSL Japan") in July 1998.
LATIN AMERICAN OPERATIONS
The Company commenced Latin American revenue producing operations in
Venezuela in the third quarter of 1997. The Company's operations in Venezuela
have generated approximately $846,000 in revenues from August 1997 through
September 30, 1998.
COST OF SERVICES (EXCLUSIVE OF DEPRECIATION AND AMORTIZATION)
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 plans to make significant investments in IRUs, MIUs and domestic
circuits and, as a result, expects an increasing amount of its total operating
costs to become fixed, as the volume of the Company's calls carried over its own
facilities increases. As the Company migrates increasing amount of traffic from
leased facilities to owned facilities, the Company experiences improving
operating results in those operations where such traffic migration
occurs. 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 only 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. While the Company intends to purchase or construct intranational
transmission facilities where such facilities are available for purchase or may
be constructed and such investments are cost effective and warranted by traffic
patterns, a significant percentage of its intranational transmission facilities
will continue to be leased on a variable cost basis. Accordingly, variable costs
will continue to be a majority of the Company's cost of services for the
foreseeable future.
29
<PAGE>
EFFECT OF DEREGULATION ON EUROPEAN COST OF SERVICES (EXCLUSIVE OF DEPRECIATION
AND AMORTIZATION)
The Company's current cost structure varies from country to country, in
part, 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 substantially deregulated than in those which are partially
deregulated and certain of the Company's European operations have become cash
flow positive. In countries that are not substantially deregulated, the
Company's access to the local exchange network is through 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 one 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 deregulation will result in improved
European operating results. Deregulation in a particular country is also
expected to permit the Company to terminate international inbound traffic in
such 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. The Company's selling, general and administrative expense also
includes the settlement of various claims and disputes relating, primarily, 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 Company's more established Local Operators.
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 recorded a foreign currency translation adjustment of
$4.7 million and $6.7 million for the year ended December 31, 1997 and for the
nine months ended September 30, 1998, respectively. Such amount is recorded upon
the translation of the foreign subsidiaries' financial statements into U.S.
dollars, and is dependent upon the various foreign exchange rates and the
magnitude of the foreign subsidiaries' financial statements.
30
<PAGE>
The Company incurs settlement costs when it exchanges traffic via operating
agreements with foreign correspondents. These costs currently represent a small
portion of the total costs of services; 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.
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'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 "--Foreign Exchange."
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
REVENUES. Revenues increased to $564.1 million for the nine months ended
September 30, 1998 compared to $192.6 million for the nine months ended
September 30, 1997, an increase of 193%. This increase is due primarily to an
increase in the Company's North American revenues from $127.5 million for the
nine months ended September 30, 1997 to $305.7 million for the same period this
year and the Company's European revenues, which increased from $51.2 million for
the nine months ended September 30, 1997 to $168.7 million for the same period
this year. The Company had revenue generating operations in the United States,
Canada, 14 European countries, Venezuela, Australia and Japan during the first
nine month period of 1998. The increase in the Company's North American revenues
was primarily due to acquisitions, which contributed $98.1 million and $0.0 for
the nine months ended September 30, 1998 and 1997, respectively, a significant
increase in the Company's U.S. commercial customer base and increased traffic
volume from existing customers. Revenues from the Company's European operations
increased as a result of increased sales of prepaid calling cards, which
contributed $20.6 million and $0.0 for the nine months ended September 30, 1998
and 1997, respectively, through acquisitions, primarily the Motorola Tel.co
acquisition, completed after September 30, 1997, which contributed
$62.6 million to the Company's September 30, 1998 European revenues, and an
increase in the European customer base. Revenues from the Company's Asia/Pacific
Rim operations increased to $89.2 million for the nine months ended
September 30, 1998, compared with $13.8 million for the same period of 1997,
primarily as a result of various acquisitions which had taken place throughout
the period.
COST OF SERVICES (EXCLUSIVE OF DEPRECIATION AND AMORTIZATION DISCUSSED
SEPARATELY BELOW). Cost of services increased to $462.2 million for the nine
months ended September 30, 1998 from $171.2 million for the nine months ended
September 30, 1997, an increase of 170%. This increase is primarily due to
increased traffic and, to a certain extent, increased rates paid to the
Company's carrier vendors. As a percentage of revenues, cost of services
decreased to 81.9% for the nine months ended
31
<PAGE>
September 30, 1998 from 88.9% for the nine months ended September 30, 1997. The
decrease in cost of services as a percentage of revenues is primarily
attributable to the increased diversification in the Company's customer base,
increase in commercial accounts and mobile subscribers which positively impacted
the Company's profitability, and the improvement in the Company's North American
operations' costs of services which represented 54.8% of the Company's total
cost of services in the period. This was offset by the Company's European
operations which experienced problems in purchasing capacity in Germany and
France due to certain delays in implementing deregulation in these countries.
Accordingly, traffic arising from increased prepaid card sales in these
countries had to be carried over uneconomical overflow capacity which produced
low and in certain cases negative gross margins for the Company's prepaid
operations in Germany and France. The Company believes that these capacity
problems were temporary and have since been corrected. In order to reduce costs,
the Company intends to purchase additional capacity, if and when regulations
permit, in each of the Company's respective countries of operation, on routes on
which it has experienced, or anticipates experiencing, overflow traffic.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense for the nine months ended September 30, 1998 increased by
$85.4 million, or 138%, to $147.5 million from $62.1 million for the nine months
ended September 30, 1997. This increase is primarily attributable to costs of
start-ups in and expansion of the Company's European operations, the hiring of
new personnel in Europe and as a result of acquisitions in North America and
Australia. The Company's European operations contributed $64.1 million or 43.5%
of the Company's consolidated SG&A for the nine months ended September 30, 1998,
although such operations accounted for only 29.9% of the Company's total
revenues in such period. European selling, general and administrative expense
increased as a result of the Motorola Tel.co acquisition and the significant
increase in employees in many of the Company's European operations. Selling,
general and administrative expense will continue to increase as a result of
start-up costs and infrastructure expansion and start-up costs attributable to
new local operations.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense increased 201% to $43.3 million for the nine months ended September 30,
1998 from $14.4 million for the nine months ended September 30, 1997. This
increase is primarily attributable to the increased amortization of goodwill
recorded as a result of the Company's 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 $13.2 million for the nine
months ended September 30, 1998 from $9.9 million for the nine months ended
September 30, 1997, primarily as a result of interest earned on the proceeds of
the 1998 Notes (as defined herein).
INTEREST EXPENSE. Interest expense increased to $51.6 million for the nine
months ended September 30, 1998 from $28.9 million for the nine months ended
September 30, 1997, primarily as a result of interest related to the 1998 Notes.
FOREIGN EXCHANGE LOSS. Foreign exchange loss increased to $10.6 million
for the nine months ended September 30, 1998 from $0.0 for the nine months ended
September 30, 1997, primarily as a result of the increase in the Deutsche mark
against the U.S. dollar in connection with the Company's 1998 Deutsche mark
denominated Senior Discount Notes.
LOSS IN EQUITY INTEREST OF UNCONSOLIDATED SUBSIDIARIES. Loss in equity
interest of unconsolidated subsidiaries increased to $1.6 million for the nine
months ended September 30, 1998 from $0.0 for the nine months ended
September 30, 1997 to account for the Company's pro-rata allocable loss in its
investment in Maxitel (as defined) and Telegate (as defined).
LOSS BEFORE EXTRAORDINARY ITEM. Loss before extraordinary item
increased to $135.5 million for the nine months ended September 30, 1998, as
compared to net loss of $68.1 million for the nine months ended September 30,
1997 due to the factors described above. An extraordinary item of $20.8 million
for the nine months ended September 30, 1998 represents primarily the premium
paid to retire approximately $127 million of the original $300 million of the
Company's 1996 Notes. The Company had no such expense in the nine month period
ended September 30, 1997.
32
<PAGE>
YEARS ENDED DECEMBER 31, 1997 AND 1996
REVENUES. Revenues increased to $300.8 million for the year ended December
31, 1997 compared to $113.3 million for the year ended December 31, 1996, an
increase of 165.6%. This increase was due primarily to an increase in the
Company's U.S. revenues from $85.8 million for the year ended December 31, 1996
to $194.5 million for the year ended December 31, 1997 and the Company's
European revenues, which increased from $27.4 million for the year ended
December 31, 1996 to $73.7 million for the year ended December 31, 1997. The
Company generated revenues in the United States, in 10 European countries, and
in Australia and Venezuela during the fourth quarter of 1997. The Company had
revenue producing operations in only the United States and five European
countries in 1996. The increase in U.S. revenues was primarily due to increased
traffic volume from existing customers, increases in the Company's U.S.
commercial customer base and the LDM acquisition on October 1, 1997 which
contributed $13.1 million (for the period October 1, 1997 to December 3, 1997)
to the Company's December 31, 1997 revenue. The increase in the Company's
European revenues was primarily due to increased traffic volume from existing
customers, increases in the Company's commercial customer base in the United
Kingdom, Sweden, Finland, Germany and The Netherlands. The Company's 1996
European acquisitions in France, Germany and The Netherlands contributed $32.7
million in revenue for the full 1997 year end compared to revenues of $16.5
million recorded from the dates of their respective acquisitions to
December 31, 1996.
COST OF SERVICES (EXCLUSIVE OF DEPRECIATION AND AMORTIZATION DISCUSSED
SEPARATELY BELOW). Cost of services increased to $265.3 million for the year
ended December 31, 1997 from $98.5 million for the year ended December 31, 1996,
an increase of 169.5%. This increase was primarily due to increased traffic and
increased rates paid to the Company's carrier vendors. As a percentage of
revenues, cost of services increased to 88.2% for the year ended December 31,
1997 from 86.9% for the year ended December 31, 1996. The increase in cost of
services as a percentage of revenues was primarily attributable to the Company's
U.S. operations' cost of services, which represented 66.6% of the Company's
total cost of services. Although the Company anticipated a decrease in U.S. and
European cost of services during 1997, rapid revenue growth in excess of the
Company's expectations continued to cause traffic overflow resulting in higher
cost of services, and increased operating losses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense for the year ended December 31, 1997 increased by $55.8
million, or 143.5%, to $94.7 million from $38.9 million for the year ended
December 31, 1996. This increase is primarily attributable to the costs
associated with the Company's expansion into nine new markets and the
concurrent hiring of more than 1,000 new personnel. The Company also
recognized all of the costs associated with opening new offices, commencing
advertising campaigns and product development. As a percent of U.S. revenues,
the Company's U.S. selling, general and administrative expense decreased to
19.6% for the year ended December 31, 1997 from 20.5% for the prior year. The
Company's U.S. bad debt expense for the year ended December 31, 1997 increased
by $8.1 million or 289% to $10.9 million from $2.8 million for the year ended
December 31, 1996. This increase was primarily attributable to a 127% increase
in the Company's U.S. revenues for the same period and increased credit exposure
primarily due to the increased diversity in the Company's customer base.
Additionally, the Company's 1997 bad debt expense included approximately $3.0
million of bad debt recorded in connection with the bankruptcy filing of one of
the Company's major customers, Cherry Communications. As a percent of European
revenues, the Company's European selling, general and administrative expense
decreased to 58.4% for the year ended December 31, 1997 from 63.4% for the prior
year. The Company's consolidated selling, general and administrative expense in
Europe was 45.4% of its total consolidated selling, general and administrative
expense, despite such operations accounting for only 24.5% of the Company's
total revenues because of a greater proportion of start-up and expansion costs.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense increased 227.9% to $21.8 million for the year ended December 31, 1997
from $6.7 million for the year ended December 31, 1996, an increase of $15.1
million. This increase was primarily attributable to the increased amortization
of goodwill recorded as a result of the Company's acquisitions.
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<PAGE>
INTEREST INCOME. Interest income increased to $13.8 million for the year
ended December 31, 1997 from $4.0 million for the year ended December 31, 1996,
primarily as a result of interest earned on the remaining net proceeds of the
1996 Units Offering (as defined) and the net proceeds from the initial public
offering of Class A Common Stock in October 1997 (the "IPO").
INTEREST EXPENSE. Interest expense increased to $39.4 million for the year
ended December 31, 1997 from $11.4 million for the year ended December 31, 1996,
an increase of approximately $28.0 million, as a result of interest related to
the 1996 Notes.
NET LOSS. Net loss increased to $100.2 million for the year ended December
31, 1997, as compared to a net loss of $38.2 million for the year ended December
31, 1996 due to the factors described above.
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 was due primarily to the full year of U.S. operations
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.
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 RSL North America's revenues in 1995. The Company commenced
legal proceedings to recover amounts owed to the Company by such customer. The
Company 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 (EXCLUSIVE OF DEPRECIATION AND AMORTIZATION DISCUSSED
SEPARATELY BELOW). 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 was 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 was primarily attributable to the Company's increased
European revenues.
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
was 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
34
<PAGE>
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.
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 was 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 $548,000, respectively. 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 a securities
offering completed in October 1996 (the "1996 Units 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
1996 Notes ($9.2 million) and borrowings under the Revolving Credit Facility
($748,000) and the remaining amounts due to interest related to capital leases.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred significant operating and net losses and negative
cash flow, due in large part to the start-up and development of the Company's
operations and RSL-NET. The Company expects that its net losses and negative
cash flow will increase as the Company implements its growth strategy.
Historically, the Company has funded its losses and capital expenditures through
capital contributions, borrowings and a portion of the net proceeds of prior
securities offerings. Cash used in operating activities for the nine months
ended September 30, 1998 totaled $116.4 million compared with $60.4 million for
the same period in 1997. Capital expenditures for the nine months ended
September 30, 1998 were $104.9 million compared with $26.8 million for the
comparable period in 1997. These capital expenditures are principally for
switches, fiber, and related telecommunications equipment. The Company intends
to increase significantly its capital expenditures to expand and develop the
Company's infrastructure, in part by replacing leased transmission facilities
with owned transmission lines, purchasing IRUs and interests in inter-city fiber
routes in European countries and installing additional national and
international telephone gateway switches. Funds expended for acquisitions were
$271.2 million during the nine months ended September 30, 1998 compared with
$26.8 million for the nine months ended September 30, 1997. At September 30,
1998, the Company had $28.6 million of working capital deficit as compared to
$83.1 million of working capital on December 31, 1997.
Cash provided by operating activities for the year ended December 31, 1995
and cash used in operating activities for the years ended December 31, 1996 and
1997 equaled $3.6 million, $10.5 million and $91.8 million, respectively.
Capital expenditures for the years ended December 31, 1995, 1996 and 1997 were
$6.1 million, $23.9 million and $49.4 million, respectively. These capital
expenditures were principally for switches and related telecommunications
equipment. Funds expended for acquisitions during the years ended December 31,
1995, 1996 and 1997 were $15.4 million, $38.6 million and $77.8 million,
respectively. During 1996, the Company funded its operating losses, capital
expenditures and acquisitions with borrowings of $44.5 million and a portion of
the net proceeds of the 1996 Units Offering. During 1997, the Company funded its
operating losses, capital expenditures and acquisitions with a portion of the
net proceeds of the 1996 Units Offering and a portion of the net proceeds of the
IPO. At December 31, 1997, the Company had $83.1 million of working capital as
compared to $124.9 million of working capital at December 31, 1996.
The Company's indebtedness was approximately $712.0 million at
September 30, 1998, of which $699.4 million represented long-term debt and
$12.6 million represented short-term debt. The Company's indebtedness was
approximately $304.6 million at December 31, 1997, of which
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<PAGE>
$300.0 million represented long-term debt and $4.6 million represented
short-term debt. Substantially all of the Company's long-term indebtedness is
attributable to the debt securities issued by RSL PLC and guaranteed by the
Issuer.
In October 1996, RSL PLC consummated the offering of $300.0 million of
12 1/4% Senior Notes due 2006, $127.5 million of which were redeemed by RSL PLC
in April 1998. In February 1998, RSL PLC consummated the offering of $200.0
million of 9 1/8% Senior Notes due 2008 and $328.1 million ($200.0 million
initial accreted value) of 10 1/8% Senior Discount Notes due 2008. In March
1998, RSL PLC consummated the offering of DM296.0 million (approximately $99.1
million initial accreted value) of 10% Senior Discount Notes. In addition, on
November 9, 1998, the Company issued $100 million ($94.5 million initial
accreted value) of 12% Senior Notes due 2008. The foregoing debt securities were
issued under indentures containing certain restrictive covenants which impose
limitations on the Company's 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. See
"Description of Certain Indebtedness--1996 Notes," "--U.S. Dollar Notes," "--DM
Notes" and "--New Notes."
In connection with the issuance of the 1996 Notes, RSL PLC was required to
purchase and maintain restricted marketable securities, which are held by the
indenture trustee for the 1996 Notes, in order to secure the payment of the
first six scheduled interest payments on the 1996 Notes. The market value of
such restricted marketable securities was approximately $68.9 million at
December 31, 1997. The market value of such securities at September 30, 1998, as
adjusted to reflect the redemption of $127.5 million of the 1996 Notes, was
$31.0 million. See "Description of Certain Indebtedness--1996 Notes."
In October 1998, the Company obtained from a group of its officers and
directors and affiliates thereof (the "New Lenders") commitments for up to $35
million of revolving credit under the New Credit Facility, subject to the
negotiation and execution of final documentation. Amounts borrowed under the New
Credit Facility will accrue interest at LIBOR plus 5% per annum. RSL PLC will be
the borrower and the Issuer will guarantee any obligations of RSL PLC under the
New Credit Facility. The commitments of the New Lenders under the New Credit
Facility will expire on the earlier of January 15, 2000 and the date of any
change of control of the Issuer. See "Certain Relationships and Related
Transactions."
The commitment under the Company's revolving credit facility with The Chase
Manhattan Bank was $7.5 million at June 30, 1998, which amount was permanently
reduced to $5 million at July 1, 1998. Approximately $3.5 million of the
commitment under the facility was utilized at September 30, 1998 and at the date
of this Prospectus. The facility is payable on June 30, 1999 and accrues
interest, at the Company's option, at (i) the lender's prime rate per annum or
(ii) LIBOR plus 1% per annum. The Company, through LDM, has a $10.0 million
revolving credit facility. There was $8.1 million outstanding under this
facility at September 30, 1998. This facility is payable in full on
September 30, 2000 and accrues interest at prime rate plus 2.5% per annum. One
of the Company's primary equipment vendors has also provided to the Company
$75.0 million in vendor financing to fund the purchase of additional switching
and related telecommunications capital equipment. At September 30, 1998, there
was approximately $7.3 million available under this facility. Borrowings under
this vendor facility accrue interest at a rate of LIBOR plus either 5.25% or
4.5% per annum depending on the equipment purchased. See "Description of Certain
Indebtedness--Credit Facilities."
When market conditions are favorable, the Company plans to raise
substantial additional capital to fund its capital expenditures, acquisitions,
strategic alliances, start-up operations and anticipated substantial net losses.
In light of current favorable market conditions, the Company may seek to raise
additional debt financing promptly following the Offerings. If market conditions
are not favorable, the Company believes that the net proceeds from the Offerings
and the New Notes Offering, together with the remaining net proceeds of prior
securities offerings and availability under its revolving credit facilities,
vendor financing facility and short-term lines of credit and overdraft
facilities from local banks, will be sufficient to fund a reduced capital
expenditure and expansion plan for its existing operations, as
36
<PAGE>
well as continuing net losses, for approximately 9 to 12 months. However, the
Company may be required to raise additional capital regardless of market
conditions, if the Company's plans or assumptions change or prove to be
inaccurate, if the Company identifies additional required or desirable
infrastructure investments or acquisitions, if the Company experiences
unanticipated costs or competitive pressures or if the net proceeds from the
Offerings, together with the remaining proceeds of prior securities offerings
and other sources of liquidity otherwise prove to be insufficient. See "Risk
Factors--Historical and Future Net Operating Losses and Negative EBITDA (as
defined)," "--Need for Additional Capital" and "--Substantial Indebtedness."
EFFECTS OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS
No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosure About
Segments of an Enterprise and Related Information." The Company adopted SFAS
No. 130 during the nine month period ended September 30, 1998. The Company has
determined to present the data on a geographical basis for SFAS No. 131.
SFAS No. 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, it has no impact on the
Company's net income. Comprehensive income includes both net income and other
comprehensive income. Other comprehensive loss for the nine months ended
September 30, 1998 and September 30, 1997 of $6.7 million and $1.2 million,
respectively, represented foreign currency translation adjustment. Accumulated
other comprehensive loss included in the accompanying condensed consolidated
balance sheet as of September 30, 1998 and September 30, 1997 was $12.0 million
and $1.8 million, respectively, consisting of the accumulated foreign currency
translation adjustment.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards for derivative instruments and hedging activities. Generally, it
requires that an entity recognize all derivatives as either an asset or
liability and measure those instruments at fair value, as well as identify the
conditions for which a derivative may be specifically designed as a hedge. The
Company does not have any derivative instruments.
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.
YEAR 2000 TECHNOLOGY RISKS
The "Year 2000" problem is the result of computer programs being written
using two digits, rather than four digits, to define the applicable year. Any of
the programs used in the Company's operations that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a major system failure or miscalculations, causing disruptions
of operations including, among other things, a temporary inability to process
transactions, billing and customer service or to engage in similar normal
business activities.
The Company is conducting a comprehensive review of its computer systems to
ensure that all such systems are, or prior to the end of 1999 will be, Year 2000
compliant. The Company's plan for its Year 2000 project includes the following
phases: (i) conducting a comprehensive inventory of the
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<PAGE>
Company's internal systems, including information technology systems and
non-information technology systems (which include switching, billing and other
platforms and electrical systems) and the systems acquired or to be acquired by
the Company, (ii) assessing and prioritizing any required remediation, (iii)
remediating any problems by repairing or, if appropriate, replacing the
non-compliant systems and (iv) testing all remediated systems for Year 2000
compliance. The Company has also retained a Year 2000 solution provider as a
consultant to assist the Company in its assessment and remediation projects and
to manage and coordinate Year 2000 compliance for each of the Local Operators
on a global basis.
In addition to assessing its own systems, the Company is conducting an
external review of its vendors and suppliers, including equipment and systems
providers and other telecommunications service providers, to determine their
vulnerability to Year 2000 problems and any potential impact on the Company.
Based on preliminary discussions with L.M. Ericsson A.B. ("Ericsson"), the
Company's primary equipment vendor, the Company believes that the equipment
provided to the Company by Ericsson will be Year 2000 compliant. The Company may
experience problems to the extent that other telecommunications carriers whose
services are resold by the Company or to which the Company sends traffic for
termination are not Year 2000 compliant. There can be no assurance that such
problems will not have a material adverse effect on the Company.
The Company expects to complete all of the phases of the process described
above by June 30, 1999 and further expects that all of its computer systems will
be fully Year 2000 compliant before the end of 1999. There can be no assurance,
however, that the Company will achieve full Year 2000 compliance before the end
of 1999 or that effective contingency plans will be developed or implemented. A
failure of the Company's computer systems or the failure of the Company's
vendors or customers to effectively upgrade their software and systems for
transition to the year 2000 could have a material adverse effect on the
Company's business, financial position and results of operations.
The Company has completed numerous acquisitions during recent periods and
is in the process of integrating the systems of the acquired businesses into the
Company's operations. Those systems are included in the Company's Year 2000
review and remediation project. The Company expects to complete additional
acquisitions prior to the end of 1999. During the process of evaluating
businesses for potential acquisition, and after any such acquisitions, the
Company will evaluate the extent of the Year 2000 problems associated with such
acquisitions and the cost and timing of remediation. No assurance can be given,
however, that the systems of any acquired business will be Year 2000 compliant
when acquired or will be capable of timely remediation.
The Company estimates that it will incur costs of between $7 million and
$10 million to become Year 2000 compliant, although the Company's evaluation of
the Year 2000 problem is not yet complete and actual costs may be significantly
higher. Costs associated with software modification are expensed by the Company
when incurred. None were incurred as of September 30, 1998.
Following the completion of the Company's Year 2000 assessment, the Company
plans to determine the nature and extent of any contingency plans that may be
required. Even if the Company's assessment is completed without identifying any
additional material non-compliant systems operated by, or in the control of, the
Company, or of third parties, the most reasonably likely worst case scenario
would be a systems failure beyond the control of the Company to remedy. Such a
failure could materially prevent the Company from operating its business. The
Company believes that such a failure would likely lead to lost revenues,
increased operating costs, loss of customers or other business interruptions of
a material nature, in addition to potential claims of, among other things,
mismanagement, misrepresentation or breach of contract. See "Risk
Factors--Dependence on Effective Information Systems," "--Year 2000 Technology
Risks," "Business--North American Operations--U.S. Operations" and "--European
Operations--General."
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BUSINESS
OVERVIEW
The Company is a rapidly growing multinational telecommunications company
which provides a broad array of services, with a focus on international long
distance voice services, to small and medium-sized businesses in key markets.
The Company's services include international and national fixed and wireless,
calling card, fax, data, Internet, private line and other value-added
telecommunications services. The Company began operations in the United States
in 1995 and has since grown rapidly through acquisitions, strategic investments,
joint ventures and alliances and the start-up of its own operations in key
markets. The Company generates revenue in 19 countries in which approximately
70% of all international long distance telecommunications minutes were
originated in 1997.
COMPANY OPERATIONS
The Company conducts its operations in four principal regions: North
America, Europe, Asia/Pacific Rim and Latin America. The Company has developed a
different strategy for each region, driven in part by the pace of local
deregulation.
The following table shows the Company's principal operations by country,
the principal subsidiary conducting such operations, the percentage of each such
subsidiary owned, directly or indirectly, 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>
DATE OF
COMPANY'S ACQUISITION OR COMMENCEMENT
PERCENTAGE START-UP OF
COUNTRY OPERATING ENTITY OWNERSHIP DATE(1) OPERATIONS(2)
- ---------------- ---------------------------------------------- ---------- -------------- -------------
<S> <C> <C> <C> <C>
United States RSL COM U.S.A., Inc. ......................... 97%(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 RSL COM Nederland B.V. ....................... 100% October 1996 October 1995
Australia RSL COM Australia Holdings Pty. Limited....... 91.5%(3)(4) October 1996 April 1997
Denmark RSL COM Danmark A/S........................... 100% November 1996 May 1997
Japan RSL COM Japan K.K. ........................... 100% March 1997 July 1998
Portugal Maxitel Servicos e Gestao de Telecomunicacoes, 39% April 1997 November 1997
SA..........................................
Italy RSL COM Italia S.r.l. ........................ 99.3%(3)(5) August 1997 December 1997
Venezuela RSL COM Venezuela C.A. ....................... 51%(6) August 1997 May 1992
Austria RSL COM Austria AG............................ 90%(3)(7) August 1997 March 1998
Spain RSL Communications Spain, S.A. ............... 90%(3) December 1997 June 1998
Switzerland RSL COM Schweiz AG............................ 78.5%(3) December 1997 August 1996
Belgium European Telecom S.A./N.V. ................... 90%(3) December 1997 April 1995
Luxembourg European Telecom SARL......................... 90%(8) December 1997 June 1998
Canada RSL COM Canada Holdings, Inc. ................ 100% July 1998 March 1993
Mexico RSL COM Mexico, S.A. ......................... 41%(3)(6) August 1998 December 1998
</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 projected 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 herein. Projected
dates are forward-looking statements and there can be no assurance that such
operations will commence generating revenues on such dates, if at all, in
the event that, among other things, the Company does not receive regulatory
approval on a timely basis, switches cannot be installed or become
operational on a timely basis or the Company is unable to hire necessary
personnel.
(Footnotes continued on next page)
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(Footnotes continued from previous page)
(3) Minority shareholders have certain rights to acquire Class A Common Stock.
Any exercise of such right would result in an increase in the Company's
ownership interest in the relevant subsidiary to up to 100%. See "Certain
Rights to Acquire Class A Common Stock."
(4) RSL COM Asia Limited ("RSL Asia"), a 91.5% owned subsidiary of the Company,
owns 100% of RSL COM Australia Holdings Pty Limited ("RSL Australia").
(5) In July 1998, as a consequence of a capital increase in RSL Com Italia
S.r.l. ("RSL Italy") that was funded by the Company but not by the minority
shareholders of RSL Italy, the Company's interest in RSL Italy was increased
to 99.3%. Beginning on July 14, 2000, however, RSL Italy's minority
shareholders will have a call option which would reduce the Company's
ownership interest in RSL Italy to 85% of (i) the entire capital, if at that
time RSL Italy will have no additional shareholders, or (ii) the capital
then held in the aggregate by the Company and the present minority
shareholders, if at that time RSL Italy will have additional shareholders.
(6) RSL COM Latin America, Ltd. ("RSL Latin America"), a 51% owned subsidiary of
the Company, owns (i) 100% of RSL COM Venezuela C.A. and (ii) 80% of RSL COM
Mexico, S.A.
(7) The Minority Interestholder (as defined herein) of RSL COM Austria AG ("RSL
Austria") was granted the right to increase his ownership interest in RSL
Austria to up to 24.9%, subject to certain conditions, which have been
satisfied. The Company is in the process of evaluating the number of shares
of RSL Austria required to be issued to such Minority Interestholder.
(8) European Telecom S.A./N.V. ("RSL Belgium"), a 90% owned subsidiary of the
Company, owns 100% of European Telecom SARL ("RSL Luxembourg").
NORTH AMERICA. The Company began operations in the U.S. in 1995 through RSL
USA. The U.S. is the largest and one of the most deregulated telecommunications
markets in the world. Through acquisitions and the development of existing
infrastructure, the Company has diversified its customer base and increased the
scale of operations in the U.S. to compete more effectively with larger
telecommunications services providers. In connection with this expansion, the
Company has hired additional experienced management, implemented new managerial
and financial controls and introduced a new marketing plan with an emphasis on
cross-selling services.
Through recent acquisitions, the Company has enhanced its U.S. network and
expanded the range of services offered to its customers. In July 1998, the
Company acquired the business of Westinghouse Communications ("WestComm") from
CBS Corporation for $90 million. WestComm provides voice telephony, data
services (including frame relay and TCP/IP networks) and Internet access to a
customer base consisting primarily of small to medium-sized businesses through a
network of six national switches. The Company is integrating WestComm's network,
complementary customer base and sales and distribution channels with the
Company's existing operations, and plans to offer to certain existing customers
the expanded range of WestComm services, including data and Internet services.
In addition, the Company has recently expanded its North American
operations and, as a result, will soon be able to terminate traffic on RSL-NET
in certain regions of Canada and Mexico, the two largest country destinations
for U.S. originated traffic. In July 1998, the Company acquired Westel
Telecommunications Ltd. ("Westel") from British Columbia Railway Company for
approximately $38 million. Westel is a telecommunications company that provides
a broad range of enhanced telecommunications services, including long distance,
data, private line and Internet access throughout British Columbia. Also, the
Company, through certain subsidiaries of RSL Latin America, has entered into
agreements for the acquisition of switches and fiber optic cable covering 14
cities in Mexico, which are expected to be fully installed by the end of 1998.
EUROPE. The Company began European operations in 1996, when many Member
States of the EU were in the initial stages of deregulation, and currently has
operations in 14 countries in Europe. In anticipation of deregulation, the
Company has established a significant presence in most major EU markets through
a series of acquisitions. Pursuing its "first to market" entry strategy, the
Company has made significant investments in advance of customer acquisition to
establish operations, retain qualified personnel and build a recognized brand
name. In the fully deregulated European markets in which it operates, the
Company (i) has been permitted to interconnect its switches directly with the
local exchange network, instead of through more expensive means, such as leased
lines or dial-in access, and (ii) has linked, or is in the process of linking,
with RSL-NET through owned international transmission facilities directly,
instead of entering into long-term lease agreements for international capacity
at a high fixed cost or purchasing per-minute of use termination rates from the
dominant
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carrier. The Company will continue to make significant investments to acquire
its own international transmission facilities where such facilities are
available and ownership of such facilities is cost effective and warranted by
traffic patterns.
The Company has recently completed a number of alliances and acquisitions
in Europe that will significantly expand its distribution channels and broaden
its customer base and product offerings. In June 1998, the Company entered into
a marketing and distribution services agreement with Metro Holding AG ("Metro
Holding"), the management holding company for Metro AG, one of the largest
retailers in Europe. Under this agreement, Metro Holding will assist the Company
in promoting, marketing, selling and distributing the Company's services through
Metro AG's wholesale and retail operations in Europe. This arrangement is
designed to provide the Company access to Metro AG's extensive distribution
network and customer base (which includes a large number of small and medium-
sized businesses) and is expected to significantly accelerate the Company's
penetration into key European markets. In connection with its alliance with the
Company, Metro Holding initially acquired in April 1998 a 12.5% equity interest
in RSL Europe. In June 1998, Metro Holding converted all of its interest in RSL
Europe into 1,607,142 shares of Class A Common Stock (based on value for value)
and purchased an equal number of Class A Common Stock from certain shareholders
of the Company. In the aggregate, Metro Holding acquired approximately 7.2% of
the outstanding stock of the Company, which it is required to hold until at
least April 1, 2001.
In May 1998, the Company acquired a minority interest in Telegate Holding
GmbH ("Telegate Holding"), the management holding company for Telegate AG
("Telegate"), Europe's third largest directory information provider, for
approximately $33.6 million. Metro Holding and certain of its affiliates also
own a minority interest in Telegate Holding. The Company, together with
Telegate, plans to expand Telegate's services and provide international
directory services and call completion throughout Europe utilizing RSL-NET. The
Company will, in certain circumstances, be required to issue shares of Class A
Common Stock to Metro Holding and its affiliates in exchange for their interests
in Telegate Holding (the "Telegate Exchange"). See "Risk Factors--Shares
Eligible for Future Sale," "Certain Rights to Acquire Class A Common Stock" and
"Shares Eligible for Future Sale."
In August 1998, the Company acquired the business of Motorola Tel.co in the
United Kingdom, Germany and Belgium from Motorola Inc. for approximately
$68.1 million. Motorola Tel.co resells wireless services and related products in
these countries to a base of over 360,000 subscribers. This transaction
significantly increases the number of direct customer relationships in Europe
and will allow the Company to cross-sell long distance and wireless services.
In January 1998, the Company purchased 90% of the equity of Telecenter Oy
("Telecenter"), an independent sales agent in Finland, for approximately $30.5
million.
ASIA/PACIFIC RIM. Most markets in the Asia/Pacific Rim region are in the
earliest stages of deregulation, with the notable exception of Australia, which
is at a significantly more advanced stage of deregulation. The Company began
operations in Australia in April 1997 and has established a significant presence
in that market. The Company also initiated start-up operations in Japan in July
1998.
In March 1998, the Company acquired the customer base of First Direct
Communications Pty, Limited ("First Direct") and Link Telecommunications Pty.
Ltd. ("Link"), two switchless mobile telecommunications resellers, for
approximately $18.0 million.
The Company is evaluating acquisition opportunities in other Asia/Pacific
Rim markets consistent with its global strategy.
LATIN AMERICA. Most markets in Latin America are in the earliest stages of
deregulation. The Company's strategy is to develop, through local operating
companies formed in conjunction with local partners, a pan-Latin American
network and operations spanning Central and South America and the Caribbean. In
mid-1997, the Company formed a joint venture to pursue this strategy with
entities controlled by the Cisneros Group of Companies (the "Cisneros Group"), a
privately held conglomerate
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with significant interests in, among other things, the Latin American media and
communications industry. Revenues for 1997 from the Company's Latin American
operations accounted for less than 1% of the Company's consolidated revenues
for 1997.
INDUSTRY OVERVIEW
International telecommunications involve 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 81.8 billion
minutes in 1997 and is projected to reach between approximately 128.7 and
158.6 billion minutes by the year 2001. The market for these services is highly
concentrated in more developed countries, with Europe and the United States
accounting for approximately 41% and 28%, respectively, of the international
long distance telecommunications minutes originated worldwide in 1997.
The International telecommunications industry has experienced a compounded
growth in total minutes of 14.3% per annum from 1989 to 1997. 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 Telecommunication Union (the "ITU"), a worldwide
telecommunications organization under the auspices of the United Nations,
projects this trend to continue with an annual growth rate between approximately
12% and 18% through the year 2001.
The size of each market of international long distance call origination in
which the Company currently operates or is in the process of commencing
operations, based on minutes of traffic originated in 1997, is set forth below.
The Company believes that it has a market share of significantly less than 1% in
each of these markets.
<TABLE>
<CAPTION>
MILLIONS OF PERCENTAGE OF 1997
COUNTRY OF MINUTES OF USE GLOBAL INTERNATIONAL
OPERATION ORIGINATED(1) TRAFFIC ORIGINATED
- ------------------- -------------- --------------------
<S> <C> <C>
USA................ 22,700 27.8
UK................. 5,800 7.1
Germany............ 5,333 6.5
Canada............. 4,286 5.2
France............. 3,545 4.3
Italy.............. 2,352 2.9
Switzerland........ 2,164 2.6
Japan.............. 1,792 2.2
The Netherlands.... 1,535 1.9
Australia.......... 1,510 1.8
Belgium............ 1,340 1.6
Mexico............. 1,200 1.5
Spain(2)........... 1,189 1.5
Sweden............. 1,140 1.4
Austria............ 996 1.2
Denmark............ 628 0.8
Portugal........... 393 0.5
Finland............ 372 0.5
Luxembourg......... 249 0.3
Venezuela.......... 159 0.2
------ ------
58,683 71.8%
</TABLE>
(Footnotes on next page)
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(Footnotes from previous page)
- ------------------
(1) All data, with the exception of U.S. outbound traffic, were taken from
Telegeography 1999, which is published by Telegeography, Inc. and the
International Telecommunication Union (the "ITU"). U.S. data were derived
from FCC Rule Section 43.61 filings which are publicly available.
(2) Minutes for Spain reflect 1996 traffic.
The increasing pace of deregulation in telecommunications is evidenced by
the recent 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
of the signatory nations which adopted these principles has set a different
timetable for the enactment of such principles, although there can be no
assurance of when or if such principles will be enacted. In November 1997 the
FCC revised its rules to implement commitments made by the U.S. under the GBT
Agreement.
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 and IP networks 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 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.
U.S. INTERNATIONAL LONG DISTANCE MARKET
The U.S. international long distance switched telecommunications market
accounted for approximately 28% of global international long distance call
originations in 1997 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 1990 to
approximately $13.9 billion (18.9 billion minutes) in 1996. 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.-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.
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The profitability of the traditional U.S.-originated international long
distance market is principally driven by the difference between settlement rates
(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. 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.
EUROPEAN INTERNATIONAL LONG DISTANCE MARKET
The European international long distance market is the largest in the
world, accounting for approximately 33 billion minutes or approximately 41% of
minutes of use originated in 1997.
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 some 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 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 Member States as to what services may be delivered and the
manner in which they can be provided. In addition, certain Member States are
late in enacting the relevant legislation implementing the 1990 Directive, which
has created further regulatory uncertainty. Under a 1996 EC directive (the "Full
Competition Directive"), Member States were required to liberalize "Open Voice
Telephony Services," effective January 1, 1998, except for certain Member States
who were granted extentions for a specified period of time. However, some of the
EU countries in which the Company operates did not 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--General" 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
44
<PAGE>
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.
ASIA/PACIFIC RIM INTERNATIONAL LONG DISTANCE MARKET
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 and New Zealand 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. Singapore
licensed two new operators in 1998.
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 has granted two
long distance operating licenses to local companies, ending the monopoly of
Colombia's PTT. In addition, various Latin American countries have completely or
partially privatized their national carriers, including Argentina, Brazil,
Chile, Mexico, Peru and Venezuela. Venezuela has also legalized value-added
services and has targeted January 1, 2000 as the date for deregulation. Brazil
privatized its PTT, Telebras, in July 1998, and has also established an
independent regulator, ANATEL, to oversee its telecommunications industry.
In Mexico, the former PTT has been privatized and its exclusive long
distance concession was modified in 1990 to allow other participants to render
long distance services as of August 1996. Additionally, the PTT has been
required to interconnect with the networks of competitors since January 1997.
Competition in Mexico has been initiated and an independent regulator has been
established.
Peru opened its market to competition in August 1998, ending the monopoly
of its PTT, Telefonica del Peru, one year earlier than scheduled.
OTHER MARKETS
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.
45
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INTERNATIONAL LONG DISTANCE MECHANICS
A long distance telephone call generally consists of three segments:
origination, transport and termination.
[Graphic]
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 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--General." 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
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<PAGE>
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 by all of the Company's
operations except in Portugal, The Netherlands, Italy, France and Spain, where
it is either not currently permitted or otherwise not implemented by the Company
in such countries. Prefix dialing was scheduled to be provided in the remainder
of the EU after January 1, 1998, when deregulation was required under the Full
Competition Directive, but such schedule has not been met and is unlikely to be
met, for the most part, until the end of 1998, at the earliest. See "Risk
Factors--Government Regulatory Restrictions." In France, RSL France has been
granted a four digit prefix by the French national telecommunications regulatory
authority and has received authorization, pursuant to article L33.1 and L34.1 of
the Postal and Telecommunications Code, to operate a public network. 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 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 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. A carrier from each country owns a half circuit of a cable,
essentially dividing the ownership of the cable extending between two countries
into two equal components. 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
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<PAGE>
holder and an owner of MIUs is that the IRU holder is not entitled to
participate in management decisions relating to the cable system. 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. For further
information regarding settlement rates, see "--North American Operations--U.S.
Operations--Regulatory Environment."
The GBT Agreement requires signatories to open their telecommunications
markets to competition. Consistent with the commitments made by the U.S. under
the GBT Agreement, the FCC has revised its rules to establish an open entry
standard for applicants from World Trade Organization member countries seeking
authority to provide international telecommunications service in the U.S., and
has adopted a rebuttable presumption that the U.S. affiliates of a foreign
carrier with less than 50% market share in its home market should be treated as
non-dominant. These open entry policies will apply to applicants of all World
Trade Organization member countries, including those who are not signatories to
the GBT Agreement.
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.
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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 Communications Corporation 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."
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.
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 strategy is to capitalize on the growth, deregulation and
profitability of the international long distance market. The key elements of
this strategy are as follows:
FOCUS ON PROVIDING INTERNATIONAL LONG DISTANCE SERVICES
The international long distance public switched telecommunications market
generated an estimated $65.9 billion in revenue and 81.8 billion minutes in
1997. Minutes of use are projected to grow at a rate of between approximately
12% and approximately 18% per annum through the year 2001, while prices are
expected to decline, resulting in substantially slower growth in revenues. The
Company currently has significantly less than a 1% share of this market. 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
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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 1996 for U.S.-originated
traffic averaged $.31 per minute of international use, compared to a 1995 gross
profit of $.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 1996, per minute settlement
payments by United States based carriers to foreign PTTs fell approximately 39%
from $.70 to $.43. In September 1997, the FCC adopted new lower benchmark rates
for these settlement payments. 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 purchased 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. The foregoing is a
forward-looking statement and there can be no assurances in this regard. See
"--Industry Overview."
IDENTIFY AND ENTER KEY MARKETS AHEAD OF FULL DEREGULATION
The Company seeks to identify markets that originate or terminate
significant levels of international traffic and are being deregulated. The
Company then seeks to enter these markets ahead of full deregulation to gain
competitive advantages over carriers that enter after deregulation is complete.
These advantages include (i) developing multiple sales and distribution channels
and a customer base prior to widespread competition, (ii) acquiring experienced
management, including technical and marketing personnel, and (iii) achieving
name recognition as an early competitor to the incumbent PTTs. The Company's
Local Operator in each market is managed independently, with centralized
strategic, financial and network support. The Company expects each Local
Operator to be independently profitable.
The Company believes that its early entry into deregulating markets has
provided, and will continue to 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 itself 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."
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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 per month in
international telephone calls. The Company believes that this segment accounts
for a significant percentage of international calling traffic in most markets
and offers significant market opportunities because it has traditionally been
underserved by the major global telecommunications carriers and the PTTs. By
offering a broad range of interrelated services and continuing its commitment to
provide high quality customer service, the Company seeks to strengthen its
direct relationships with a diverse and rapidly growing customer base and build
customer loyalty.
Small and medium-sized businesses account for the majority of all
businesses. For example, the EU estimated in 1996 that there were 15 million
small and medium-sized businesses in the EU and that businesses that employ
fewer than 100 workers in the aggregate accounted 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 were projected to produce total
telecommunications revenues larger than those of the major multinational
business sector. For the six-month period ended June 30, 1998, approximately 25%
of the Company's revenues were derived from sales to other carriers, 57% were
derived from commercial customers, including small and medium-sized businesses,
and 18% were derived from calling card customers.
BUILD A COST COMPETITIVE GLOBAL NETWORK
By integrating its current and future owned switching facilities, known as
points of presence ("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. Substantially all
of the Local Operators have network switching facilities to provide
international voice and other telecommunications services in their markets. The
Company currently connects its facilities principally by a combination of
ownership interests in fiber optic systems and private leased lines. The Company
intends to continue to make significant investments in its own fiber routes and
other transmission facilities where such facilities become available and if such
investments are cost effective and warranted by traffic patterns.
The Company uses what it believes is 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.
EXPAND MARKETING AND DISTRIBUTION CHANNELS
The Company will continue to develop marketing and distribution channels to
expand its customer base, particularly in its target market of small to
medium-sized businesses. The Company has been innovative in seeking marketing
partners to better identify potential customers and penetrate markets on a
cost-efficient basis. Also, the Company capitalizes on cross-selling
opportunities as it adds new customer bases and products through acquisitions
and strategic alliances. In addition, the Company plans to introduce a universal
brand image to create worldwide name recognition.
PURSUE STRATEGIC ACQUISITIONS AND ALLIANCES
The Company 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 experienced management. In addition, the Company seeks to
enter into strategic alliances that the Company believes will enable an
accelerated and cost effective expansion of its business. Recent examples
include:
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o In June 1998, the Company entered into a marketing and distribution
services agreement with Metro Holding, the management holding company for
Metro AG, one of the largest retailers in Europe with 750 operating units
in 18 European countries. This arrangement is designed to provide the
Company access to Metro AG's extensive distribution network and customer
base and is expected to significantly accelerate the Company's
penetration into key European markets.
o In July 1998, the Company acquired the business of WestComm from CBS
Corporation for $90 million. WestComm provides voice telephony, data
services (including frame relay and TCP/IP networks) and Internet access
through a network of six national switches. The WestComm acquisition
expands the range of the Company's services and enhances its ability to
originate and terminate U.S. long distance traffic.
o In July 1998, the Company acquired Westel from British Columbia Railway
Company ("BC Rail") for approximately $38 million. Westel is a
telecommunications company that provides a brand range of enhanced
telecommunications services through British Columbia, including long
distance, data, private line and Internet access. Westel significantly
expands the Company's presence in Canada, which is one of the key
destinations of U.S. originated long distance traffic.
o In August 1998, the Company acquired the business of Motorola Tel.co in
the United Kingdom, Germany and Belgium from Motorola Inc. for
approximately $68.1 million. Motorola Tel.co resells wireless services
and related products in these countries to a base of over 360,000
subscribers. This transaction significantly increases the number of
direct customer relationships in Europe and will allow the Company to
cross sell long distance and wireless services.
LEVERAGE EXPERTISE OF MANAGEMENT TEAM
The Company has attracted experienced management from the
telecommunications industry to facilitate the integration of its regional
operations. Many of its key managers have had significant experience with
incumbent providers and early competitors in deregulating markets. In addition,
the Company generally retains key management in the companies it acquires. As a
result, the Company believes that it is well positioned to manage the
integration of acquisitions and the rapid growth of its customer base and
network infrastructure.
EXPAND INTERNET-BASED TELEPHONY AND ON-LINE SERVICE OFFERINGS
Through Delta Three, the Company seeks to expand its IP telephony service
offerings by increasing its investment in Internet gateway servers and expanding
its sales and marketing channels. Delta Three uses IP protocol as a transmission
standard for voice communications over the public Internet and private
intranets, extranets and dedicated leased lines, at substantially reduced
transmission and termination costs. Delta Three allows customers to place long
distance and international phone calls over Internet or IP networks using
standard telephones without requiring additional equipment. Delta Three also
offers prepaid calling card services, PC to phone and phone to PC services to
retail customers, and termination to wholesale customers. In addition to
offering IP telephony services, the Company plans to develop value added
services on the Internet and to provide on-line customer service and billing.
The Company believes that Delta Three positions the Company at the forefront of
the rapidly emerging IP telephony industry. See "Business--Delta Three
Operations."
NETWORK
The Company generally utilizes a single switch technology platform for its
international telephony gateway switches comprised of state-of-the-art Ericsson
AXE-10 switches. The Company believes that a single switch platform gives the
Company a strategic advantage in developing new services and allows the Company
to upgrade network software on a more efficient basis when compared to those
other global carriers that employ multiple switch technologies. The Company is
also pursuing alternative transmission technologies such as the Internet and
managed IP networks in order to minimize its operating costs. See "--IP
Telephony Operation--General."
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OWNED FACILITIES
The Company's owned facilities include switches and interests in
international fiber optic cable systems. The Company's 17 international
telephony gateway switches are located in New York, Los Angeles, London,
Stockholm, Paris, Frankfurt, Helsinki, Vienna, Milan, Copenhagen, Lisbon,
Sydney, Zurich and Tokyo. In addition, the Company operates 16 national switches
throughout its operations. The Company's existing international telephony
gateway switches conform to international signaling and transmission standards
provided for in International Telegraph and Telephone Constructive Committee
("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
Ericsson financing for future Ericsson purchases, although there can be no
assurance that this will be the case. The Company's switching facilities are
easily expandable to accommodate growth.
The Company also owns capacity on various international digital fiber optic
cable systems. The Company's United States operations currently own IRUs on the
CANUS-1, CANTAT-3, PTAT-1, NPC, RIOJA 2, ODIN 1, RIOJA 3, ODIN 2, APCN,
JASURAUS, FLAG (various segments), Estepona-Tetouan, Gemini, Americas 1, and
Taino-Carib undersea fiber optic cable systems and owns MIUs in the ANTILLAS I,
TAT-12/13 and Southern Cross submarine cable systems. The Company also owns
capacity on the CMC and MCC terrestrial (Japan) fiber optic cable systems. The
Company has currently committed to purchase capacity in the submarine fiber
systems of Japan--USA, Pan American, MAYA and TAT-14. The Company also is
currently in negotiations to purchase capacity for its United States operations
in the TPC-5, Guam--Philippines, R-J-K, AC-1, PC-1, PAC-1, MAC and FLAG
(additional segments) undersea fiber optic cable systems. The Company's Swedish
operation owns IRUs in the CANUS-1, CANTAT-3, SWE-FIN, SWE-Latvia and KATTEGAT-1
submarine cables. The Company's United Kingdom operation owns IRUs on the
UK-NL14, CANTAT-3 and PTAT-1, GEMINI, CANUS-1, UK-GER 6, RIOJA 2 and RIOJA 3
undersea fiber optic cable systems. The Company's Australian operation owns IRUs
in the APCN, JASAURUS, NPC and Southern Cross undersea fiber optic cable systems
and on the CMC and MCC terrestrial fiber optic cable systems.
The Company also, together with its joint venture partner in Mexico,
acquired switches and fiber cable covering 14 cities in Mexico, which are
expected to be fully installed by the end of 1998.
OPERATING AGREEMENTS
The Company's operating agreements provide the Company with 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 22 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, Japan,
Jordan, Korea, Malaysia, Morocco, The Netherlands, New Zealand, Norway, the
Philippines, Russia, Srpska, Suriname, Sweden, Switzerland 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, Russia, the Philippines 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 and the Company's Finnish operation
utilizes an operating agreement which enables it to exchange traffic with
Russia. 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.
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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.
While the Company intends to purchase or construct transmission facilities where
such facilities are available for purchase or may be constructed and such
purchase or construction is cost-effective and warranted by traffic patterns, a
significant percentage of its transmission facilities will continue to be
leased. 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,
each of which maintains separate least-cost routing systems. U.S. network
management is operated from the Company's facilities in New York, Los Angeles
and Pittsburgh. European network management is operated centrally from the
Company's switching center in London. See "Risk Factors--Risks Associated with
Rapidly Changing Industry," "--Dependence on Effective Information Systems" and
"--Year 2000 Technology Risks."
NETWORK STRATEGY
The Company has connected, or is in the process of connecting, its current
switches in all 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, MIUs or transmission capacity on a point-to-point fixed cost basis,
subject to local regulatory conditions. 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, IRUs, domestic circuits 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, according to
an FCC estimate in August of 1997, were 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 Operations--Effect of Deregulation on European 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," "--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
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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 locally 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 invest in
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 fixed and wireless local, long distance and
international 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," "--North American Operations--U.S. Operations" and
"--European Operations--General."
LONG DISTANCE SERVICES
The Company provides domestic and international long distance services to
its customers. In nearly every country in which the Company operates in Europe,
the Company provides domestic long distance services. In the United States, the
Company is certified and tariffed or otherwise authorized to originate
intrastate, interexchange calls in 49 states and the District of Columbia and
can terminate calls throughout the United States.
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 certain 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 many 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 a certain 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 in most of its existing
operations.
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 the United States, Sweden and Canada 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)
video-teleconferencing, (ii) on-line billing services, (iii) consolidated
billing for all services offered by the Company, (iv) on-line directory
assistance, (v) on-line conference calling, and (vi) international directory
assistance. In addition, through
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Delta Three, the Company can offer international long distance voice service to
niche markets utilizing IP telephony 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. 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.
WIRELESS SERVICES
The Company provides wireless services to corporate, business and
residential subscribers. Through its agreements with network operators, the
Company provides subscribers with connection and access to wireless networks and
sells airtime services. The Company charges its subscribers for service
activation, monthly access, per-minute airtime and custom calling features, and
generally offers a variety of pricing options, most of which combine a fixed
monthly access fee and per-minute charges. Subscribers are also offered a wide
range of cellular telephones and accessories. Currently, the Company provides
wireless services in the United Kingdom, Germany, Belgium and Australia. The
Company intends to cross-sell long distance services to these subscribers.
DATA SERVICES
The Company offers a range of data transmission services to its customers
in certain countries, including frame relay, Internet access, remote access,
e-mail, packet switching, LAN integration and network and facilities management.
CUSTOMERS
SMALL AND MEDIUM-SIZED BUSINESSES. The Company focuses on offering high
quality products and services to small and medium-sized businesses with
significant international telephone usage (i.e., generally in excess of $500 per
month in international phone calls). 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 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 estimated 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 and almost half of all business revenue. Consistent with that, it was
estimated in 1997 that in the United Kingdom, companies employing fewer than 250
people spent 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
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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."
RESIDENTIAL CUSTOMERS. The Company targets residential customers in
neighborhoods with large immigrant populations and/or 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. Primarily as a result of the Westcomm acquisition, the
Company services a number of large corporations in the United States. The
Company also targets large corporations on those routes where the Company's cost
structure allows it to compete effectively. See "--North American
Operations--U.S. Operations."
MARKETING AND SALES
The Company has developed a wide range of marketing and distribution
channels focused on reaching a broad range of customers in the most
cost-effective manner. The Company markets its products and services through
(i) its direct sales forces, (ii) strategic alliances with companies that have
access to significant customer bases, (iii) networks of independent agents and
distributors, (iv) strategic alliances with resellers and (v) telemarketing
organizations. The Company's services are currently marketed independently by
the Local Operators in each country.
The Company continually seeks innovative ways to expand the scope of its
marketing channels and to enhance its ability to identify and retain customers.
For example, the Company has recently entered into a strategic alliance with
Metro Holding. The Company's alliance with Metro Holding will assist the Company
in promoting, marketing, selling and distributing the Company's services through
Metro AG's wholesale and retail operations in Europe. In addition, the Company
capitalizes on cross-selling opportunities as it adds new customer bases and
products through acquisitions and strategic alliances. Following its acquisition
of Motorola Tel.co, the Company intends to cross-sell its fixed wire and other
traditional long distance services to the Motorola Tel.co subscriber base and
Motorola Tel.co's wireless services to existing customers. The Company also
plans to introduce a universal brand image to create worldwide name recognition
for the Company.
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 maintain their own direct sales force.
Generally, sales representatives are compensated primarily 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 in certain countries in Europe for
the sale of prepaid cards and will seek such arrangements in its other markets.
In addition, through the acquisition of Motorola Tel.co, the Company has greatly
expanded its dealer network.
TELEMARKETING SALES. The Company's U.S. and 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. The Company expects that its
telemarketing sales
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agents will become an increasingly important means to attract customers in
related markets, including in the U.S.
ON-LINE SALES. The Company intends to offer potential subscribers the
ability to subscribe on-line for the Company's services and to obtain on-line
billing, directory assistance and conference calling.
CUSTOMER MANAGEMENT
The Company strives to provide competitive pricing, high quality services
and superior customer care 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 Issuer 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 Issuer will
enter such markets and oversight of the implementation of these plans is also
done at the Issuer level. The Issuer is continuously reviewing and considering
investment and acquisition opportunities. The Issuer 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
Issuer level, generally working together with local and regional management in
cases where the acquisitions supplement existing operations. In addition, the
Issuer seeks alliances with carriers to expand the scope of the Company's
network and improve its competitive profile.
The Issuer currently provides centralized financial services for all of the
Local Operators, including financial planning and analysis, cost control and
network management. The Issuer attempts to coordinate the acquisition of
additional transmission capacity (either leased or purchased) with the growth of
traffic volumes of each Local Operator. The Issuer assists in securing financing
and discounts for these expenditures as well as other capital expenditures
through its arrangements with particular vendors. The Issuer 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 Issuer expects to eventually link all of its switching facilities to a
central billing system administered at the Issuer level, and provide the billing
information to Local Operators which will then invoice the customers directly.
The invoice will be branded with the Issuer's name and will be payable to an
Issuer account in the Local Operator's country.
The Issuer 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 Issuer coordinates the routing of
traffic on RSL-NET to effect routing on a least cost basis. Least cost routing
involves the programming of the Issuer's switches to transport international
calls over the route which is most likely to produce the lowest cost to the
Issuer without compromising call quality. The Issuer consolidates the least cost
routing information of each of its Local Operators to allow them to take
advantage of each others' cost structure.
The Issuer is in the process of coordinating the marketing activities of
the Local Operators and plans to introduce a universal brand image to create
worldwide name recognition for the Issuer. In addition, the Issuer intends to
direct the service offerings of the Local Operators to enable the Issuer to
provide services to a single customer in more than one country. The Issuer
intends to then provide the
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customer with a single bill and designate a primary customer service
representative to address the customer's overall needs.
NORTH AMERICAN OPERATIONS
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 1996 were Canada, Mexico, the United Kingdom, Germany,
Japan, Hong Kong and France. The Company initiated its U.S. operations in March
1995 with its initial investment in RSL North America and has grown the business
significantly since then. The Company primarily operates in the United States
through RSL USA. 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's principal offices for its U.S.
operations are located in the New York, Los Angeles and Pittsburgh metropolitan
areas, and RSL USA maintains sales offices in 11 U.S. metropolitan areas.
During 1998, the Company acquired WestComm, which offers voice telephony
and data services (including frame relay and TCP/IP networks) and Internet
access to a customer base consisting primarily of small to medium-sized
businesses in the United States. WestComm operates six switches strategically
located in the United States and employs approximately 335 people. The Company
has the exclusive right to the use of the Westinghouse Communications brand name
and a non-exclusive right to the use of the Westinghouse logo in connection with
providing telecommunications services in the United States and Canada for three
years following the date of the acquisition.
SERVICES AND CUSTOMERS
The Company offers its customers in the United States international and
domestic long distance, private line, calling card, data, Internet access and
value added services. Since the first quarter of 1996, the Company has focused
its U.S. operations on providing international and domestic long distance
services to small and medium-sized businesses.
In addition, through RSL COM PrimeCall, Inc. ("RSL PrimeCall"), the Company
specializes in the provision of prepaid calling cards for niche ethnic markets.
MARKETING AND SALES
The Company markets its services and products in the United States through
a variety of channels, including direct sales and indirect sales through
independent agents and distributors and third-party telemarketing sales. The
Company's U.S. operations employ sales and marketing employees and have
relationships with master agents with an underlying network of independent
agents, distributors and telemarketing agents. The Company expects that its
telemarketing sales agents will become an increasingly important means to
attract customers in related markets, including in the U.S. In addition, the
Company employs a retail and wholesale sales force dedicated to the sale of
promotional post and prepaid card products. The Company currently employs
approximately sixty sales professionals experienced in designing and developing
integrated voice and data telecommunications solutions. The Company believes
that its engineering and network management capabilities, as well as its ongoing
service and support personnel, will allow it to attract and retain commercial
customers.
U.S. NETWORK ARCHITECTURE
The Company operates an Ericsson AXE-10 international gateway switch in New
York and Los Angeles. The Company's international telephony gateway switches
conform to CCITT recommendations and are directly connected to each other via
leased lines on a fixed cost, point-to-
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point basis. In 1998, the Company agreed to acquire an OC3 transport facility
from IXC Communications, Inc. for approximately $14 million. The Company also
operates seven domestic switches strategically located in the United States and
a prepaid card platform in New York. The Company's data network consists of a
Magellan Passport backbone with a ring network architecture for reliability. The
Magellan Passport network is connected to Telematics switches which concentrate
and collect the data from certain geographic regions in which the Company
conducts its business or, in some circumstances, from individual customers.
The Company's US operations own IRUs in the following fifteen undersea
fiber optic cable systems: CANUS-1, CANTAT-3, PTAT-1, NPC, RIOJA 2, RIOJA 3,
ODIN 1, ODIN 2, APCN, JASAURUS, FLAG (various segments), Estepona-Tetouan,
Gemini, America 1 and Taino-Carib systems. In addition, RSL USA owns MIUs on
three undersea fiber optic cable systems, which are the ANTILLAS I,
TAT-12/TAT-13 and Southern Cross systems. The Company also owns MIUs on the CMC
and MCC terrestrial (Japan) fiber optic cable systems. The Company has committed
to purchase capacity on the Japan-USA, Pan American, MAYA and TAT-14 undersea
fiber optic cable systems. The Company also is currently in negotiations to
purchase IRUs for its United States operations on the TPC-5, Guam-Philippines,
R-J-K, AC-1, PC-1, PAC-1, MAC and in the FLAG (additional segments) undersea
fiber optic cable systems.
The Company currently is a party to 22 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, Japan, Jordan, Korea, Malaysia, Morocco, The
Netherlands, New Zealand, Norway, the Philippines, Russia, the Republic of
Srpska, Suriname, Sweden, Switzerland 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 operating agreements in the Dominican
Republic, the United Kingdom, Denmark, The Netherlands, Russia, the Philippines
and Norway. The Company transmits call traffic bound for all other destinations
through leased capacity. The remaining operating 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.
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 AS/400 hardware platform. The Company is utilizing
the EDS system 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 Company has also implemented a customer
care and trouble management system, as well as developed what it believes is 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. 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
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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. The billing and information systems purchased by the Company in
connection with its acquisition of WestComm are being integrated into the
Company's current operations.
The Company has reviewed the EDS IXPlus System in connection with the Year
2000 problem and the Company expects to receive from its vendor, at no
additional cost to the Company, a Year 2000 compliant version of the EDS IXPlus
System by the end of 1998. The Year 2000 compliant EDS system is expected to be
operational in early 1999. In addition, the Company's standardized desktop and
server configurations and software applications are already Year 2000 compliant.
See "Risk Factors--Dependence on Effective Information Systems" and "--Year 2000
Technology Risks."
COMPETITION
The Company competes with AT&T, Sprint, MCI WorldCom and other U.S.-based
and foreign carriers, many of which have considerably greater financial and
other resources than the Company. Certain of the larger U.S. 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 U.S. 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 competitors in the U.S.
market.
REGULATORY ENVIRONMENT
The Company's U.S. 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. In 1997, 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, 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 prices. Nonetheless, the FCC placed certain
conditions on AT&T's
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reclassification to promote the development of vigorous competition in the
international services marketplace.
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, Australia, Sweden, The
Netherlands, Luxembourg, Norway, Denmark, France, Germany, Belgium, Austria,
Switzerland, Japan and 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, Australia,
Canada, Sweden, The Netherlands, Luxembourg, Norway, Denmark, France, Germany,
Belgium, Austria, Switzerland, Japan 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 services. 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 telecommunications 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
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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 abuse of market power by the foreign correspondent. The Company has
numerous agreements with foreign carriers providing for the handling of switched
calls.
In September 1997, 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 of outbound and
inbound call volume. The settlement rate for terminating international calls was
estimated to be approximately 70% higher than the actual cost of terminating
international calls by the FCC in August of 1997. 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 adopted. 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.
The Commission's initiatives have had some measure of success: in the first
six months of 1998, the average accounting rate for calls originating from the
United States fell by 14.1%, almost doubling the rate of decline for the same
period in 1997. Moreover, an increasing number of foreign carriers, whose
countries account for over 50% of the total U.S. net settlement minutes, have
negotiated agreements with U.S. carriers that satisfy, or will satisfy, the
FCC's benchmark settlement rates.
The FCC has recently proposed to no longer require U.S. carriers to comply
with its International Settlements Policy with respect to arrangements between
U.S. carriers and foreign carriers that lack market power in WTO member
countries, and with foreign carriers in WTO member countries to which U.S.
carriers are authorized by the FCC to provide international simple resale. The
Commission has also proposed to modify its flexibility policy to allow carriers
to obtain authority to enter into flexible settlement arrangements for
agreements affecting less than 25% of the traffic on a particular route without
naming the foreign correspondent and without filing the terms and conditions of
the actual agreement.
The GBT Agreement, executed in February 1997, requires signatories to open
their telecommunications markets to competition. Consistent with the commitments
made by the U.S. under the GBT Agreement, the FCC has revised its rules to
establish an open entry standard for applicants from WTO member countries
seeking authority to provide international telecommunications service in the
U.S., and has adopted a rebuttable presumption that the U.S. affiliates of a
foreign carrier with less than 50% market share in its home market should be
treated as non-dominant. These open entry policies will apply to applicants of
all WTO member countries, including those who are not signatories to the GBT
Agreement.
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
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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 49 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. 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.
CANADIAN OPERATIONS
OVERVIEW
The Company operates in Canada through Westel and RSL COM Canada Inc. ("RSL
Canada") which operates the Canadian operations of WestComm. Westel began
commercial operations in Canada in 1993.
SERVICES AND CUSTOMERS
The Company offers its customers in Canada a broad range of enhanced
telecommunications services including long distance, data, private line and
Internet access throughout British Columbia and Southern Ontario, including
metropolitan Toronto. The Company's customer base in Canada consists of both
commercial and residential customers.
MARKETING AND SALES
The Company markets its services in Canada through a variety of channels,
including direct sales and indirect sales through independent agents and an
external telemarketing company, association groups and ethnic niche marketing.
CANADIAN NETWORK STRUCTURE
Westel operates a domestic switch in Vancouver. Westel leases capacity on
the network owned and operated by MK Network (as defined below) pursuant to a
long-term services agreement. MK Network employs a state-of-the-art Synchronous
Optical Network/Synchronous Digital Hierarchy microwave network adjacent to, and
extending beyond, the historical rail right-of-way of BC Rail. The network
employs a star configuration with a network operation center in Vancouver. This
low-cost network extends over 3,000 kilometers and serves 10 major population
centers including Greater Vancouver. In addition, Westel has installed an
Asynchronous Transfer Mode ("ATM") switching apparatus in six network nodes in
order to support its high speed data products.
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INFORMATION SYSTEMS AND BILLING
Westel's billing system, which was upgraded in 1996, provides it with the
ability, among other things, (i) to produce one invoice for multiple services
provided to a customer and (ii) to store and track customer usage. Westel's
critical information systems have been assessed for Year 2000 compliance and the
non-compliant systems are expected to be made compliant by the beginning of
1999.
COMPETITION
Westel's principal competitor in British Columbia is BC Telecom ("BCTel"),
the dominant local access and long distance provider in British Columbia. The
Company also faces competition from national telecommunications providers
including AT&T Canada Long Distance Services Company and Sprint Canada Inc., as
well as the separate regional telephone companies (similar to BCTel) in the
other provinces of Canada. The Company also faces increasing competition from
cable companies, such as Rogers Communications Inc. and Shaw Cable, cellular
service providers and Personal Communications Service (PCS) providers such as
Microcell Solutions, Mobility Canada and Clearnet.
REGULATORY ENVIRONMENT
The principal federal legislation governing telecommunications in Canada is
contained in the Telecommunications Act, effective as of October 1993 (the
"Telecom Act"). The Telecom Act defines a number of objectives of the Canadian
telecommunications policy, one of which is to promote Canadian ownership and
control of the telecommunications infrastructure. Generally, the Telecom Act
limits eligibility to operate as a telecommunications common carrier in Canada
to Canadian-owned and controlled corporations incorporated or continued under
the laws of Canada. The Radiocommunications Act (the "Radiocom Act"), which
governs the licensing and regulation of radio apparatus, has adopted the same
Canadian ownership and control restrictions set out in the Telecom Act. The
Telecom Act defines a "telecommunications common carrier" as a person owning and
operating transmission facilities (which is defined as any wire, cable, radio,
optical or other electromagnetic system for the transmission of
telecommunications services and which does not include switches).
The effect of the Telecom Act, the Radiocom Act and the regulations
promulgated under such Acts are to prohibit Canadian facilities-based carriers
from being controlled by non-Canadians and to set a maximum effective foreign
ownership level (directly and through a "qualified corporation" (as defined in
the regulations under the Telecom Act)) of such carriers at 46.7% of the voting
shares.
In compliance with the Telecom Act and the Radiocom Act, Westel transferred
(the "MK Network Transfer") its telecommunications facilities (as defined in the
Telecom Act) to MK Telecom Network Inc. ("MK Network"), an entity in which the
Company owns a 46.7% beneficial interest, effective as of the Company's closing
of the acquisition of Westel. MK Network is majority-owned and controlled, in
accordance with the Telecom Act and the Radiocom Act, by a Canadian citizen.
Concurrently with the consummation of the MK Network Transfer, Westel entered
into a long-term agreement with MK Network for the provision of
telecommunications services.
As a signatory to the WTO Agreement, Canada has agreed to end Teleglobe
Canada's monopoly on the sale of international long distance services to
customers in Canada commencing on October 1, 1998 with full deregulation
expected to be effective by the beginning of the year 2000. Since October 1,
1998, the Company has been permitted to file an application with the Canadian
Radio-television and Telecommunications Commission (the "CRTC") for the issuance
of an international telecommunications service license. The Company expects to
make such a filing. Upon issuance of such a license to the Company, the Company
intends to offer international long distance services to its customers in
Canada.
While the Canadian telecommunications market continues to move towards full
deregulation, the CRTC retains a critical regulatory function in Canada. As a
reseller of telecommunications services, Westel is required to register with the
CRTC and to comply with a variety of CRTC mandated obligations (including the
requirement to make contribution payments to support the affordability of
universal local services), but is not subject to any Canadian foreign ownership
and control restrictions.
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Unlike the U.S. telecommunications market, the Canadian telecommunications
market does not contain a mandated structural separation between the incumbent
local service providers and long distance service providers. However, the CRTC
has implemented certain non-structural safeguards to encourage competition in
the provision of long distance services. In particular, the CRTC has required
incumbent local access providers to (i) resell capacity on their underlying
local facilities to third party carriers and (ii) provide interconnection
arrangements to competing long distance providers. As a result of the ability of
the incumbent local access providers to maintain a virtual monopoly in the
provision of local services, these telecommunications companies have been able
to secure the largest market shares in their respective operating territories
for the provision of long distance services.
EUROPEAN OPERATIONS--GENERAL
OVERVIEW
The Company began European operations in 1996, when most Member States of
the EU were in the initial stages of deregulation, and currently has operations
in 14 countries in Europe. In anticipation of deregulation, the Company has
established a significant presence in most major EU markets through a series of
acquisitions commencing in 1995. Pursuing its "first to market" entry strategy,
the Company has made significant investments in advance of customer acquisition
to establish operations, retain qualified personnel and build a recognized name.
In the fully deregulated European markets in which it operates, the Company
(i) has been permitted to interconnect its switches directly with the local
exchange network, instead of through more expensive means, such as leased lines
or dial-in access, and (ii) has linked, or is in the process of linking, with
RSL-NET through owned international transmission facilities directly, instead of
entering into long-term lease agreements for international capacity at a high
fixed cost or purchasing per-minute of use termination rates from the dominant
carrier. The Company intends to make significant investments to acquire its own
international transmission facilities where such facilities are available and
ownership of such facilities is cost effective and warranted by traffic
patterns.
The Company has recently completed a number of alliances and acquisitions
in Europe that will significantly expand its distribution channels and broaden
its customer base and product offerings. See "--Overview--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 several of the Company's
European entities. 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.
The Company has reviewed the System in connection with the Year 2000
problem and has determined that the System is Year 2000 compliant. The Company's
standardized desktop and server configurations and software applications in
Europe are also Year 2000 compliant. The Company is in the process of reviewing
its Ericsson international telephony gateway and domestic switches in Europe
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in connection with the Year 2000 problem and the Company expects that its
switches will be Year 2000 compliant by June 30, 1999. See "Risk
Factors--Dependence on Effective Information Systems" and "--Year 2000
Technology Risks."
In connection with the acquisition of Motorola Tel.co, the Company acquired
the proprietary information and billing system developed by Motorola Tel.co.
This billing system is a uniform billing platform that has been customized to
address the specific requirements of each of the Company's cellular operations
in Europe. The Year 2000 compliant version of this billing system is expected to
be operational in early 1999. The Company is in the process of reviewing its
existing billing System and that of its cellular operations and expects to
implement an integration of the two systems during 1999.
REGULATORY ENVIRONMENT
Most 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 EC through one or more directives issued thereby. In
the latter case, such an EC directive would be addressed to each Member State of
the EU, calling for such legislative body to implement such directive through
the passage of national legislation or otherwise.
The Company has developed a two stage market penetration strategy to
capitalize on the future opportunities in Europe. The first step is to take
advantage of current market conditions and, within the parameters of the
Company's established service offerings, to provide the fullest range of
services permissible under relevant local regulation. The Company thereby seeks
to become a recognized 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 various countries at
different times during 1998 and is expected to require the incumbent PTTs to
interconnect to other carriers. 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 cost-oriented transparent 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 effective implementation of
this or any EC directive by Member States is subject to substantial delay. See
"Risk Factors--Government Regulatory Restrictions."
The EC also issued in 1997 a Directive designed to harmonize licensing
procedures in the EU (the "Licensing Directive"). Among other things, the
Licensing Directive prevents Member States from limiting the number of new
entrants unless required to ensure efficient use of radio frequencies/numbers.
The Licensing Directive encourages the use of general authorizations rather than
individual licenses, but specifically allows Member States to grant individual
licenses for the provision of voice telephony services. Member States were
required to implement the Licensing Directive by January 1, 1998 and most Member
States have introduced implementing measures. Notwithstanding the general intent
of the Licensing Directive, the licensing regimes vary considerably across
Member States as do the requirements that must be satisfied for the grant of a
license leading to potential expense and delay.
Member States have limited flexibility in interpreting EC directives. If
the EC determines that a Member State's legislation has not properly implemented
an EC directive, the EC may commence legal proceedings in the European Court of
Justice. This process is time consuming. Accordingly, while a
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date has been set for the liberalization of voice telephony services generally
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 wide-ranging change. For
example, notwithstanding the time parameters set down by relevant Directives,
the negotiation and implementation 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
capacity, prices and billing are to be expected.
In an attempt to speed 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 many
EU countries, although several Member States have enacted national legislation
to adopt the Full Competition Directive.
Although interconnect has been implemented in most countries in Europe, as
discussed above, there are practical difficulties in securing commercial
agreements with the incumbent PTTs. In European countries where interconnect has
not been implemented, the current regulatory scheme, nevertheless, provides an
opportunity for the Company to provide a range of services immediately in such
countries, while putting in place adequate infrastructure to capitalize on final
deregulation when it occurs. The Company provides value-added services and, in
certain EC countries beginning later 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."
U.K. OPERATIONS
OVERVIEW
The Company's U.K. operations began generating revenues in May 1996.
SERVICES AND CUSTOMERS
The Company offers its customers in the United Kingdom international and
domestic long distance services, as well as wireless services. Customers access
the fixed wire long distance 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 C&W.
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. Oftel has stated
that preselect will be introduced in the UK market in 2000. In anticipation of
this move, the Company intends to install at least five local switches to
facilitate the offering of local services. The Company is able to offer its
customers a comprehensive set of wireless service offerings through its
agreements with multiple network operators in the United Kingdom. The Company's
customer base in the United Kingdom consists primarily of carriers, commercial
customers and prepaid account customers, as well as certain residential
customers. The Company's current commercial customers include multinationals and
large national companies, as well as small and medium-sized businesses.
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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 also relies heavily on its network of 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. In addition, through the acquisition of
Motorola Tel.co, the Company has greatly expanded its dealer network and certain
of these dealers have long-term agreements with the Company.
U.K. NETWORK ARCHITECTURE
The Company operates two Ericsson switches in the United Kingdom: an
international gateway switch and a domestic switch, both located in London. The
Company intends to connect its local switches with leased fiber that the Company
believes is available at economical rates. 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 C&W. The Company's United Kingdom operation owns
IRUs on the UK-NL14, CANTAT-3 and PTAT-1, GEMINI, CANUS-1, UK-GER 6, RIOJA 2 and
RIOJA 3 undersea fiber optic cable systems. The Company intends to invest in its
own transmission facilities where such facilities become available and if such
investments are cost effective and warranted by traffic patterns.
COMPETITION
The Company's principal competitors in the United Kingdom are British
Telecom, the dominant supplier of telecommunications services in the United
Kingdom, and C&W. 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 MCI WorldCom, Esprit and
Global One. The Company also competes in the wireless service market with the
four wireless network operators (Vodafone, CellNet, Orange and One-to-One), as
well as other wireless service providers.
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 C&W. In addition, the Company holds an International Simple Voice Resale
("ISVR") license in the United Kingdom. An ISVR license allows the Company to
resell international private lines, as well as interconnect with, and lease
capacity at wholesale rates from, British Telecom and C&W.
With respect to the provision of wireless services, the regulatory
environment in the United Kingdom has been under review by Oftel for more than
two years following the publication of Oftel's consultative document Fair
Trading in Mobile Service Provision in May 1996. This was followed by a
statement titled Fair Trading in Mobile Service Provision in April 1997. An
important development resulting from these regulatory statements is that Oftel
will, when competition among network operators is in the opinion of Oftel fully
effective, amend the licenses issued to Vodafone and CellNet to remove the
requirement that these two network operators offer wireless services to service
providers. These policy statements are currently under review. If Oftel has not
modified its position by the end of 1998, the Company believes, although no
assurances can be made in this regard, that applications for judicial review
will be filed by independent service providers.
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GERMAN OPERATIONS
OVERVIEW
RSL COM Deutschland GmbH ("RSL Germany") was formed in April 1996 for the
purpose of acquiring Sprint's international voice business in Germany. Sprint,
which commenced its German voice business in 1993, was required to divest itself
of its German and French international voice businesses pursuant to the terms of
the Global One joint venture agreement.
The Company is in the process of establishing a network of eight national
switches in Germany connected by leased lines. The Company's capital expansion
plan includes installing remote POPs and the purchase of domestic circuits in
order to interconnect its German national network.
SERVICES AND CUSTOMERS
The Company offers its customers in Germany domestic and international
fixed wire long distance and wireless services. The Company's customers in
Germany are provided with fixed wire long distance services by direct access and
prefix dialing. The Company is able to offer its customers a comprehensive set
of wireless service offerings through its agreements with multiple network
operators in Germany. The Company's current customer base in Germany consists of
small, medium-sized and large business customers, residential customers and
calling card customers. Following receipt of its Category 4 license, RSL Germany
commenced the use of its interconnect and began operating pursuant to such
license. RSL Germany has also applied for a Class 3 Infrastructure License.
MARKETING AND SALES
The Company employs direct sales and marketing employees in Germany. The
Company currently has five sales offices in Germany, located in Munich, Hamburg,
Wiehl, Stuttgart and in Frankfurt. RSL Germany is expanding its direct sales
force as a part of its growth strategy by adding additional sales
representatives. The Company currently markets its services through a variety of
channels including indirect sales, resellers and agents. The Company has
expanded its network of independent sales agents in Germany through the
acquisition of Motorola Tel.co.
GERMAN NETWORK ARCHITECTURE
RSL Germany currently operates an Ericsson AXE 10 international gateway
switch which is connected directly to the Company's international telephony
gateway switches in London, New York, Paris and Vienna. The Company is in the
process of installing an additional seven Ericsson AXE switches. International
transmission facilities are currently leased from other carriers. The Company
has interconnect agreements with other carriers for excess and termination of
its international traffic. The Company is currently in the process of
negotiating with German carriers and certain prospective developers of
telecommunications infrastructure to purchase or lease capacity to meet its
demands in the near future with respect to German-originated traffic.
COMPETITION
In Germany, the Company competes with facilities-based carriers, wireless
network operators 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 MCI WorldCom, call-back providers,
such as TelePassport, and wireless network operators, such as Mannesmann
Mobilfunk and E-Plus Mobilfunk. After deregulation on January 1, 1998,
alternative networks became available to route and terminate voice traffic.
REGULATORY ENVIRONMENT
Effective January 1, 1998, the German telecommunications market was fully
liberalized. The Telecommunications Act (Telekommunikationsgesetz) ("TKG"),
which became effective on August 1, 1996, implements the telecommunications
policy of the EU into national law. The TKG called for the
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immediate liberalization of public switched voice telephony with effect as of
January 1, 1998. Accordingly, public switched voice telephony services,
previously provided by Deutsche Telekom, may now be provided on the basis of
self-operated networks.
Pursuant to the TKG, a license is required in order to operate transmission
lines for public use and to provide voice telephony services. RSL Germany was
issued a Category 4 license on a nationwide basis to transmit voice traffic via
the Company's international telecommunications network. As of March 1998,
Category 4 licenses have been granted to 49 companies in Germany.
To monitor licensing, rate and interconnection regulation as well as
numbering and customer protection, the TKG established the Regulatory Authority
for Telecommunications and Post. The Regulatory Authority deals primarily with
interconnection issues. The TKG and the respective ordinance (Network Access
Ordinance "Netzugangsverordnung" or "NZV") provide that any public
telecommunications network operator is obliged to offer interconnection at the
request of other operators of such networks. Therefore, market dominating
providers, such as Deutsche Telekom, must allow other providers access to their
telecommunications networks. RSL Germany has entered into an interconnection
agreement with Deutsche Telekom and therefore is able to accept calls from and
terminate calls with Deutsche Telekom and other third party networks, thereby
facilitating the offering of national and international telecommunication
services via the RSL Germany network.
DUTCH OPERATIONS
OVERVIEW
The Company operates in The Netherlands through RSL COM Nederland B.V.
("RSL Netherlands"). RSL Netherlands is an international carrier with switches
installed in Rotterdam and Amsterdam. RSL Netherlands began generating revenues
in October 1995.
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. The Company's customer base in The Netherlands
consists primarily of commercial and calling card customers.
MARKETING AND SALES
The Company markets its services in The Netherlands through a variety of
channels, including direct sales through representatives, indirect sales through
independent agents and telemarketing sales. 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. The Company sells its prepaid calling cards through independent
distributors.
DUTCH NETWORK ARCHITECTURE
In The Netherlands, the Company operates two Nortel Meridian switches,
directly linked by leased capacity, from its offices in Rotterdam and Amsterdam.
The Company is currently in the process of installing in The Netherlands an
Ericsson AXE-10 gateway switch. 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 MCI WorldCom and from mega-carriers including Concert and Global One.
Assuming deregulation occurs in 1998, it is expected that alternative
networks currently under construction will become available to route and
terminate voice traffic.
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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 has been approved by both houses of the Dutch
parliament, and has been signed by the Queen. The exact date of the new law's
effectiveness is still under discussion. 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 may be required to obtain a registration with
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.
FRENCH OPERATIONS
OVERVIEW
RSL COM France S.A. ("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.
SERVICES AND CUSTOMERS
The Company offers its customers in France international and domestic long
distance services and national long distance services, both fixed-to-mobile and
fixed-to-fixed, utilizing direct access over leased lines and dial-in access. In
May 1998, RSL France was granted L.33.1 and L.34.1 licenses which entitle it to
own and operate a public network in 12 out of 18 regions of France and to
provide telephone services throughout France. In addition, RSL France is no
longer restricted from providing its services to the public.
Direct access is provided via a leased line connection between the
customer's phone system and the Company's switches. The Company's French
customer base consists of carrier customers and direct access and dial-in access
commercial customers. The Company's customers in France include small and
medium-sized businesses, residential and calling card customers.
MARKETING AND SALES
The Company markets its services through a variety of channels, including
direct sales and indirect sales through independent agents as well as private
installers and consultants. The Company's French operation employs sales
representatives and has relationships with various independent agents. The
Company intends to expand its direct sales force and agent network as a part of
its growth strategy.
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FRENCH NETWORK ARCHITECTURE
RSL France operates an Ericsson AXE-10 and AXE10 CCP international
telephony gateway switch in its main switching center located at Nanterre. It
also operates on AXE10 SSP at Marseilles which provides interconnection with
France Telecom. The services are currently available in 12 regions in France
pursuant to L.33.1 and L.34.1 Licenses. RSL France also operates five POPs
located as follows: two in Paris, and one each in Marseilles, Nice and Toulouse.
A new wide band network using the latest optic fiber technology (SDH/STM16)
is being built.
COMPETITION
The Company's principal competitor in France is France Telecom, the
dominant supplier of telecommunications services in France, and the Modulance
Partenaire International 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 and who are interconnected to France Telecom), such as
Worldcom, COLT, AT&T, CEGETEL, and Bouygues, and from resellers, including
Omnicom and Esprit. Upon deregulation, alternative networks currently under
construction are expected to become available to route and terminate traffic
domestically.
REGULATORY ENVIRONMENT
In accordance with the Telecommunications Laws passed in July 1996, the
liberalization process is regulated by a new government authority, the French
Telecommunications Authority ("Autoritede Regulation des Telecommunications"),
which was established in January 1997. The telecommunications market in France
was scheduled to be liberalized on January 1, 1998. RSL France obtained an
authorization to operate a public network and to offer public telephony pursuant
to articles L.33.1 and L.34.1 of the Postal and Telecommunications Code on May
12, 1998 and this authorization was published in the French Official Gazette on
May 30, 1998. Since then, RSL France is legally authorized to operate a public
network and to offer telephony services to the public. Therefore, dial-in access
is no longer restricted to closed-user groups. To the extent that RSL France
obtained on May 12, 1998 its authorization pursuant to articles L.33.1 and
L.34.1 of the P & T Code, it is authorized to provide international and domestic
long distance services utilizing direct access or dial-in access in those areas
where the Company establishes POPs. These services are to be provided utilizing
direct access through interconnection with other operators of a public network
(i.e., operators holding an L.33.1 license).
Currently, France Telecom and Telecom Development are the only operators
capable of providing interconnection services on a national scale in France. New
operators of public networks should be able to interconnect with France
Telecom's PSTN as from the date they have obtained the authorization pursuant to
articles L.33.1 and/or L.34.1 of the P & T Code, from a strictly legal point of
view. In practice, interconnection with France Telecom for all new entrants
knows significant delay and RSL France expects to interconnect with France
Telecom, for the most part of the French territory, late 1998 only. However,
regulatory French law does not set forth any compulsory delay for France Telecom
to provide interconnection. In its contractual offer, France Telecom only
commits to make its best effort to provide interconnection within an 18 month
period as from the order.
The terms and conditions of interconnection offered by France Telecom will
provide for "direct interconnection" of calls originated by RSL France
subscribers to France Telecom subscribers throughout France, even where RSL
France has no POPs, while "indirect interconnection" of calls originated by
France Telecom subscribers to RSL France subscribers will be available only in
those areas where RSL France has POPs. Currently, POPs of RSL France are located
in Lille, Lyon, Toulouse, Marseilles and Nice.
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Under the terms of the authorization granted to RSL France, the French
government expects RSL France to commit approximately $12 million in capital
expenditures for infrastructure over the next three to five years.
In November 1997, RSL France entered into a joint venture agreement with
the Chamber of Commerce and Industry of Marseilles Provence (the "CCIMP") and
Teleport Marseilles Provence ("Teleport"), a licensed telecommunications service
provider in Marseilles, France, to promote international telecommunications
services in certain regions of France. Through Teleport, RSL France will be
permitted to provide, to a maximum of 20,000 users, telecommunications services
in Marseilles and in other regions of France. Beginning in October 1998, RSL
France expects to offer, pursuant to its L.33.1 and L.34.1 licenses, nationwide
services in Marseille through an interconnection link to France Telecom acquired
as a result of the joint venture with Teleport.
RSL France has filed a complaint with the governmental body in charge of
telecommuncations matters regarding certain effects caused by low retail
tariffs, that RSL France has alleged prevent competition and set barriers to
entry for entrants.
RSL France has requested the French Ministry to withdraw its approval of
certain France Telecom International French Ministry retail tariffs. The
Ministry has not yet ruled on such request.
SWEDISH OPERATIONS
OVERVIEW
The Company operates in Sweden through RSL COM Sweden AB ("RSL Sweden").
The Company acquired a majority interest in RSL Sweden 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.
SERVICES AND CUSTOMERS
The Company offers domestic and international long distance and value-added
services to its customers in Sweden. Customers access the Company's switch
utilizing prefix dialing and direct access. The Company's customer base in
Sweden consists primarily of commercial customers and residential customers.
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. The Company employs full-time sales and marketing employees
in Sweden. The Company primarily relies on its network of independent sales
agents to sell its long distance calling services in Sweden. In addition, the
Company sells its services through a chain of 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 telephony
gateway switch from its offices outside of Stockholm. RSL Sweden is connected to
RSL-NET by leased facilities. The Company's Swedish operation owns IRUs in the
CANUS-1, CANTAT-3, SWE-FIN, SWE-Latvia and KATTEGAT-1 submarine cables. RSL
Sweden currently has operating agreements with carriers in Denmark and Norway,
as well as direct connections to a carrier in Latvia and the Company's
operations in the United Kingdom, the United States and Finland.
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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 MCI 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.
REGULATORY ENVIRONMENT
The Swedish telecommunications market was deregulated by the
Telecommunications Act of 1993. Pursuant to the Act, the Company, through RSL
Sweden, holds a full license to provide fixed wire telephony in the Swedish
market. As a licensed carrier, the Company may purchase IRUs or lease fixed
capacity from other providers, or utilize the PSTN to originate and terminate
its traffic. Presently, the Company's services are accessed primarily by prefix
dialing. However, the Telecommunications Act has recently been amended and the
Company believes that such amendments, which will be effective by the middle of
1999, will require the provider of the PSTN to offer pre-selected access to
other carriers.
FINNISH OPERATIONS
OVERVIEW
Finland is a strategically important market because it serves as a gateway
to Russia. The Company operates in Finland through RSL COM Finland Oy ("RSL
Finland"), a wholly-owned subsidiary of the Company. The Company acquired a
majority interest in RSL Finland 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.
SERVICES AND CUSTOMERS
The Company offers its customers in Finland international and domestic long
distance services utilizing direct access and prefix dialing. The Company's
customer base in Finland consists primarily of commercial and residential
customers. In addition, a majority of the Company's revenues in Finland are
derived from recurring rental and servicing fees related to the rental of
telecommunications terminal equipment, telecommunications systems and ancillary
equipment under multi-year contracts between business customers and the
Company's 90%-owned subsidiary, Telecenter Oy, an independent agent in Finland.
MARKETING AND SALES
The Company markets its services in Finland through a variety of channels,
including direct sales and indirect sales through independent agents. The
Company relies heavily on its direct sales to sell its long distance calling
services in Finland.
FINNISH NETWORK ARCHITECTURE
In Finland, the Company operates an Ericsson AXE-10 international telephony
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 Sonera Corporation (formally
known as Telecom Finland) ("Telecom Finland") and other carriers' international
circuits. RSL Finland utilizes an operating agreement with a Russian carrier and
is directly connected to RSL Sweden.
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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 Finnnet, Telia,
Global One and Faciliacom.
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. However, RSL Finland does not have
its own network of domestic transmission lines, except for a fiber optic network
in the city of Helsinki, expected to become operational in the beginning of
1999.
In April 1997, the New Telecommunications Market Act 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 Act provides that companies will only need to hold a
license in order to provide services as a mobile phone network operator.
DANISH OPERATIONS
The Company operates in Denmark through RSL COM Denmark A/S ("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 international and domestic long
distance services utilizing prefix dialing. The services are offered to
commercial customers as a subscription service.
MARKETING AND SALES
The services are distributed through direct sales by the Company and by
appointed resellers. The Company's interconnect prefix, which was recently
installed, provides customers with the option of using the Company's direct
line, without requiring a physical connection.
DANISH NETWORK ARCHITECTURE
The Company has installed an Ericsson AXE-10 international telephony
gateway switch in Copenhagen. The Company routes all calls through Tele
Danmark's network via the interconnect agreement between the Company and Tele
Danmark and other Danish telecommunication providers.
COMPETITION
The Company's principal competitor in Denmark is Tele Danmark, the dominant
supplier of telecommunications services in Denmark. In January 1998, the Danish
government sold a controlling interest in Tele Danmark, to U.S.-based Ameritech.
The Company also faces competition from various other carriers, primarily Telia
(the Swedish PTT), the smaller Tele 2 (NetCom Systems), Mobilix A/S (the Danish
subsidiary of France Telecom) and Global One, which are all connected to Tele
Danmark's fixed line network via interconnect agreements. Recently, several of
these carriers have entered into agreements with Powercom, a subsidiary of two
Danish power suppliers, to offer telecommunications services over Powercom's
fixed line network, which has hitherto been used to manage power transmission.
Mobilix A/S has also entered into an agreement with the Danish national railway
agency to develop the agency's fixed line network for telecommunications
services.
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Tele Danmark offers full scale telephony in all areas. Telia and Mobilix
both hold mobile licenses, offer a variety of telecommunications services and
have the goal of eventually becoming full-scale operators.
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 wireless telephony, which
requires a license. Tele Danmark, in practice, still has an effective (but not
legal) monopoly on the ownership of fixed lines. Thus, the Company can only
construct its own fixed lines, lease fixed lines from Tele Danmark or operate
through interconnection agreements, but competition is growing on the market of
fixed lines, and it is expected that pending regulation may further limit Tele
Danmark's market control, although there can be no assurance in this regard.
Effective April 1, 1998, Tele Danmark implemented a new tariff structure which
basically results in a reduction of Tele Danmark's minute rates and an increase
in the price of the basic telephony subscription service. This amendment may
ultimately force RSL Denmark to lower its rates as a result of stronger price
competition.
PORTUGUESE OPERATIONS
The Company operates in Portugal through its 39% investment in Maxitel
Servicos e Gestao de Telecomunicacoes, SA ("Maxitel"). The Company made its
initial investment in Maxitel in April 1997. Maxitel commenced operations in the
international voice and data business in December 1994.
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 and real-time fax services.
MARKETING AND SALES
Maxitel markets its services through a direct sales force and is developing
an indirect sales force through independent agents. Maxitel operates primarily
in the Lisbon and Oporto areas.
PORTUGUESE NETWORK ARCHITECTURE
Maxitel operates an Ericsson AXE-10 international telephony gateway switch
in its offices in Lisbon and is in the process of converting its entire customer
terminal equipment to this new platform. The Oporto node is already working in
this new configuration. 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-wire voice telephony services were subject to a monopoly until March
1997. Under the terms of the current legislation it is possible for companies
other than Portugal Telecom to offer both national and international voice
services to closed user groups. Interconnection to the Portugal Telecom PSTN is
permitted for such services. The privatization process of Portugal Telecom was
concluded at the end of 1997 and the Portugese government maintains a 25%
interest in Portugal Telecom. Full deregulation is expected to occur by
January 1, 2000.
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ITALIAN OPERATIONS
OVERVIEW
The Company operates in Italy through RSL Italy in which it acquired an 85%
interest in August 1997. RSL Italy, under its former ownership, commenced
operations in 1995. In July 1998, as a consequence of a capital increase in RSL
Italy that was funded by the Company but not by the minority shareholders of RSL
Italy, the Company's interest in RSL Italy was increased to 99.30%. Beginning on
July 14, 2000, however, RSL Italy's minority shareholders will have a call
option right to purchase a quota which would reduce the Company's ownership
interest in RSL Italy to 85% of (i) the entire capital, if at that time RSL
Italy will have no additional shareholders, or (ii) the capital then held in the
aggregate by the Company and the present minority shareholders, if at that time
RSL Italy will have additional shareholders. In addition, in July 1998, RSL
Italy acquired 75% of the equity of Comesa ("Comesa"), a telecommunications
company located in Northern Italy and a subsidiary of RSL Italy.
SERVICES AND CUSTOMERS
RSL Italy offers its customers in Italy international and domestic long
distance services utilizing dial-in access via autodialers and dedicated access
lines. RSL Italy's current customer base consists primarily of small and
medium-sized businesses. RSL Italy markets its services also through Comesa.
MARKETING AND SALES
RSL Italy markets its services through a direct sales force and an indirect
sales force and has acquired a network of independent agents through Comesa.
ITALIAN NETWORK ARCHITECTURE
RSL Italy currently operates as a reseller, purchasing wholesale facilities
from other Italian carriers. RSL Italy has installed an Ericsson AXE-10
international telephony gateway switch and two AT&T Definity switches in Milan.
RSL Italy has also installed an Ericsson AXE-10 and three AT&T Definity switches
in the Rome area. Additionally, the Company intends to install 18 additional
AT&T Definity POPs and intends to lease and, if available and cost-effective and
warranted by traffic patterns, purchase, domestic circuits and IRUs. The Company
has linked RSL Italy with RSL-NET in London and in Paris.
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 British
Telecom and Global One. In addition, the Company competes with
telecommunications providers in the Italian market such as Infostrada (a joint
venture between Olivetti and Mannesmann) and Wind (a joint venture among
Deutsche Telecom, France Telecom and ENEL, the Italian energy public utility).
REGULATORY ENVIRONMENT
Under the current regime, certain domestic and international voice services
(such as those presently offered by RSL Italy) do not fall within the definition
of "voice telephony" as contained in Directive 90/388/EEC and construed by
Italian authorities. In order to render these voice services (the "Specified
Voice Services"), the would-be operator is required to file a declaration with,
or obtain an authorization from, the Italian Ministry of Communications. Whether
the would-be operator needs the declaration or the authorization depends on the
type of links to the PSTN actually necessary to render Specified Voice Services.
In fact, for Specified Voice Services to be offered through switched links to
the PSTN, the declaration is required, whereas the authorization is needed for
Specified Voice Services to be offered through dedicated links.
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As of January 1, 1998, domestic and international voice services that fall
within the above-mentioned definition of "voice telephony" can be rendered only
after having obtained an individual license from the Ministry of Communications
and the NRA, an independent body, established in 1998, which is taking over most
of the regulatory and monitoring functions of the Ministry of Communications.
Such license is necessary, inter alia, to establish and provide public
telecommunications networks.
In light of the above and in compliance with the Full Competition
Directive, the "voice telephony" monopoly in Italy has been abolished. However,
"voice telephony" is currently principally provided by Telecom Italia and a few
other telecommunications organizations (see "--Competition" above).
Specific rules to further implement the Full Competition Directive and
other subsequent EU Directives have been enacted with respect to significant
matters, including numbering, universal service, fees to be paid in connection
with individual licenses as well as interconnection. As to the latter, the
relevant legislation has been challenged by Telecom Italia through a request of
a temporary restraining order. The Court has postponed the decision on the
temporary restraining order, so that the challenged interconnection legislation
is now still valid and enforceable. The decision on the merits of the challenge
is expected not earlier than the end of 1998.
Further implementing legislation is expected to be enacted in the near
future with reference to other matters, including a regime that will replace the
current regulations on, among other things, the Specified Voice Services.
The effective liberalization of the Italian telecommunications market will
depend on the actual application of the rules enacted and to be enacted as well
as on the actual exercise of the powers and functions of the NRA, which is
taking over most of the regulatory and monitoring functions of the Ministry of
Communications.
RSL Italy has the approvals and authorizations required to offer its
domestic and international Specified Voice Services.
In addition, in July 1998, RSL Italy obtained an individual license to
establish a telecommunications network in order to provide "voice telephony"
services in Italy. RSL Italy is currently implementing the activities necessary
to benefit from the rights established and the obligations imposed by this
individual license.
AUSTRIAN OPERATIONS
OVERVIEW
The Company operates in Austria through RSL Austria in which it currently
holds a 90% interest. However, the Minority Interestholder (as defined herein)
of RSL Austria was granted the right to increase his ownership interest in RSL
Austria to up to 24.9%, subject to certain conditions which have been satisfied.
The Company is in the process of evaluating the number of shares of RSL Austria
required to be issued to such Minority Interestholder.
SERVICES AND CUSTOMERS
RSL Austria began offering international and national long distance voice
services utilizing autodialers, direct access, call by call and calling cards in
March 1998. RSL Austria's targeted customers are small to medium-sized
businesses.
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MARKETING AND SALES
RSL Austria markets its services through both a direct and indirect sales
force as well as independent agents.
AUSTRIAN NETWORK ARCHITECTURE
RSL Austria began offering services in March 1998 as a full licensed
operator. The Company has installed an Ericsson AXE-10 telephony international
gateway switch in Vienna which is operational. This international gateway switch
in Austria will enable RSL Austria to expand the products and services it
offers.
COMPETITION
RSL Austria's primary competitors in Austria are Telecom Austria (the
"TA"), the dominant supplier of telecommunications services in Austria, UTA and
others. The Company competes with the local Austrian affiliates of global
carriers such as Global One and Swisscom. In addition, the Company is competing
with resellers in the Austrian market.
REGULATORY ENVIRONMENT
New telecommunications legislation was passed in July 1997 which permitted
interconnection with the TA's PSTN beginning on January 1, 1998. Competition in
all voice telephony services is now permitted. Telecommunications services are
subject to licenses granted by an Austrian regulatory authority to applicants
with sufficient technical and economic facilities. The Company has been granted
a license to operate as a full service telecommunications provider of local,
long distance and international services in Austria. In February 1998, RSL
Austria signed an interconnection agreement with the TA.
SPANISH OPERATIONS
OVERVIEW
RSL Communications Spain, S.A. ("RSL Spain") was formed in December 1997.
The Company operates in Spain through RSL Europe which holds a 90% interest in
RSL Spain.
SERVICES AND CUSTOMERS
Only Telefonica de Espana, S.A. ("Telefonica de Espana"), Lnce and
Retevision, S.A. ("Retevision") are licensed to provide international long
distance services in Spain. The range of services that can currently be provided
by RSL Spain, pending further deregulation, is limited to closed-user group
services, resale of capacity, fax and Internet services.
MARKETING AND SALES
RSL Spain markets its services through both a direct and indirect sales
force.
SPANISH NETWORK ARCHITECTURE
The Company has installed an Ericsson AXE-10 international gateway switch
in Madrid, which is linked to Ericsson MD110 POPs in Barcelona, Valencia and
Mabella.
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COMPETITION
The Company's main competitor in Spain is Telefonica de Espana, the company
that has traditionally enjoyed a monopoly in the provision of telecommunications
services and the current dominant supplier of telecommunications services in
Spain. The Company also faces competition from Retevision, an emerging public
telephone operator which was granted the second nation-wide license to provide
voice telephony services, and which is in the process of building its own
network, and Lnce, which was awarded a third nation-wide license to provide
voice telephony services, but has not yet started to operate. Retevision,
started operations at the beginning of 1998. Cable operators have been
authorized to provide voice telephony services since January 1998. The Company
also faces competition from resellers, which at present, generally, have small
operations in Spain, and from mega-carriers interested in long distance services
upon deregulation of the market.
REGULATORY ENVIRONMENT
Market deregulation is expected in Spain by December 1, 1998. Spain was one
of the Member States which was granted a waiver of up to five years to implement
the Full Competition Directive. After negotiations to determine the specific
duration of the waiver period, the EC granted Spain an additional period, until
November 30, 1998, for the complete deregulation of voice telephony and public
telecommunications networks. Spain is now moving towards deregulation. Major
events in the Spanish telecommunications market have occurred in the last two
years, including (i) the complete privatization of Telefonica de Espana which
took place at the beginning of 1997, (ii) the licensing of Retevision and its
privatization, (iii) the third basic telephony license, granted in May 1998 to
Lnce and authorization to enable cable operators to provide voice telephony as
of December 1998, (iv) the third license for mobile telephone service granted to
Retevision (which had already been operating under a voice telephony license),
and (v) the creation of the Telecommunications Market Commission as a regulatory
independent entity.
The 1987 Telecommunications Act was previously enacted for a monopolistic
market. The General Telecommunications Act, a new telecommunications act, was
approved by the Parliament in April 1998. The legislation is intended to address
issues inherent to a competitive market such as a new licensing procedure,
universal service, definition of public service obligations, interconnection
rules, numbering, tariffs, etc., and will require further implementation by
means of regulations. Implementing regulations should be enacted during 1998, so
that the regulatory framework is in place by December 1, 1998.
Telecommunications services in Spain are subject to licenses granted by a
Spanish regulatory authority. In February 1998, RSL Spain was granted a license
to provide closed-user group services, resale of capacity, fax services and
internet services in Spain. RSL Spain has also applied for licenses to resell
telecommunications services and to provide value added services.
BELGIAN OPERATIONS
OVERVIEW
The Company primarily operates in Belgium through RSL Belgium, in which the
Company currently holds a 90% interest. In addition, the Company offers wireless
services to its customers through RSL Telco Belgium S.A./N.V. ("RSL Telco
Belgium"), a wholly owned subsidiary of the Company.
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SERVICES AND CUSTOMERS
The Company, through RSL Belgium and RSL Telco Belgium, offers its
customers in Belgium international long distance voice services utilizing
dial-in access via autodialers and wireless services. In addition to the dial-in
access services currently offered by RSL Belgium, RSL Belgium was granted a
license to offer international and domestic fixed wire long distance service.
RSL Belgium intends to commence offering its customers international and
domestic long distance fixed wire voice services utilizing pre-fix dialing
during 1999. Through existing agreements with each of the wireless network
operators in Belgium, the Company is able to offer its customers a comprehensive
set of wireless service offerings. The Company's customer base in Belgium
consists primarily of small and medium-sized businesses.
MARKETING AND SALES
The Company markets its services in Belgium through a direct and indirect
sales force as well as independent agents. RSL Belgium has offices in Zaventem,
Gent, Liege, Antwerp and Charleroi.
BELGIAN NETWORK ARCHITECTURE
RSL Belgium currently operates as a reseller, purchasing wholesale
facilities from other carriers operating in Belgium. The Company has installed
an Ericsson AXE-10 international telephony gateway switch in Belgium and
anticipates that the switch will become fully operational in the fourth quarter
of 1998.
COMPETITION
RSL Belgium's primary competitor is Belgacom, the former PTT and the
dominant supplier of telecommunications services in Belgium. RSL Belgium also
competes with local Belgian affiliates of global carriers, such as Global One
and Unisource, local resellers, as well as subsidiaries of other U.S. and
European telecommunication companies, such as WorldxChange, C&W Telemart, and
others. The Company also competes for wireless subscribers with the two Belgian
wireless network operators, Proximus and Mobistar, as well as other wireless
service providers.
REGULATORY ENVIRONMENT
The Belgian Parliament passed the first Belgian Telecommunications Act (the
"Belgian Act") in March 1991, in order to liberalize the Belgian
telecommunications market. Since then, the Belgian Act was amended on numerous
occasions, most recently in December 1997. On January 1, 1998, the last
remaining monopolies of Belgacom ceased to exist. The Belgian Act provides,
among other things, for regulations regarding licensing, rate and
interconnection regulation, universal service obligations, numbering and
customer protection. Since December 1997 and the summer of 1998, many of the
Royal Decrees necessary to implement the provisions of the Belgian Act have
become law. According to these Royal Decrees, providers of voice telephony
services must apply for a voice telephony license with the Belgian Institute for
Post and Telecommunications (the "BIPT") the Belgian regulatory authority. The
licenses are granted by the Minister for Telecommunications, upon recommendation
of the BIPT. Prior to this regime, which only existed since July 1998, such
providers had to apply for a temporary license. The Company applied for and
obtained such a temporary license and will apply for a new permanent voice
telephony license.
SWISS OPERATIONS
OVERVIEW
The Company operates in Switzerland through RSL COM Schweiz AG ("RSL
Switzerland") in which it currently holds a 78.5% interest. RSL Switzerland
started operations in 1995 as a long distance carrier for closed user groups.
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SERVICES AND CUSTOMERS
While in the past RSL Switzerland targeted multinationals and supplied
international voice and fax services, RSL Switzerland is, in addition to such
multinationals, currently targeting small to medium-sized businesses.
MARKETING AND SALES
RSL Switzerland markets its services through both a direct sales force and
an indirect sales force.
SWISS NETWORK ARCHITECTURE
The Company is in the process of installing an Ericsson AXE-10
international telephony gateway switch. Customer access will be over leased
lines or over the three carrier selection codes which were assigned to the
Company in December 1997.
COMPETITION
RSL Switzerland's primary competitors in Switzerland are Swisscom, Diax,
Sunrise, GlobalOne, Colt, MCI WorldCom, Equant and other smaller resellers.
REGULATORY ENVIRONMENT
The sale of value-added telecommunication services (data networks) as well
as telecommunications equipment such as telephones and fax machines was
liberalized in 1992. The transmission of voice for closed user groups has been
permitted since July 1, 1995. With the new law on telecommunication services
which came into force on January 1, 1998, Switzerland is a fully liberalized
telecommunications market.
LATIN AMERICAN OPERATIONS--GENERAL
RSL Latin America was formed in mid-1997 as a joint venture pursuant to a
shareholders agreement (the "Latin America Joint Venture Agreement"), between
the Company and Coral Gate Investments Ltd., a British Virgin Islands
corporation ("Coral Gate"), 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. RSL
Latin America is in an early stage of its development and most of Latin America
is in the earliest stages of deregulation. As a result, the Company's Latin
American operations have not generated significant 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.
In August 1998, subject to completion of certain conditions and obtaining
authorization from the Mexican Anti-trust Commission, the Company acquired a 49%
interest in PCM Communicaciones S.A. de C.V. ("PCM"), a licensed long distance
telecommunications service provider in Mexico. Pursuant to Mexican regulatory
requirements and a joint venture agreement with the majority shareholders of
PCM, PCM will develop a telecommunications network in Mexico and RSL Mexico will
market and sell domestic and international long distance telecommunications
services primarily to small and medium-sized businesses in Mexico. Also in
August 1998, the Company together with PCM, acquired switches and fiber cable
covering 14 cities in Mexico, which are expected to be fully installed by the
end of 1998.
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
The Company operates in Venezuela through RSL COM Venezuela C.A. ("RSL
Venezuela"), acquired in connection with the Latin America Joint Venture
Agreement. RSL Venezuela was organized in 1992.
SERVICES AND CUSTOMERS
RSL Venezuela offers its customers in Venezuela international long distance
voice services utilizing dedicated access along with prepaid and postpaid cards
and provides value-added telecommunications services. RSL Venezuela's customer
base consists primarily of small and medium-sized businesses.
MARKETING AND SALES
RSL Venezuela markets its services through a direct sales force and
telemarketing and uses distributors to market its prepaid calling card products.
VENEZUELAN NETWORK ARCHITECTURE
RSL Venezuela 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
RSL Venezuela's primary competitor is CANTV, the dominant supplier of
telecommunications services in Venezuela. RSL Venezuela also competes with local
Venezuelan affiliates of global carriers, such as British Telecom, Global One
and Mercury, regional competitors, such as 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 November 2000. However, certain value-added
services are open to competition, although a concession from Conatel is
required. RSL Venezuela 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. RSL Venezuela is not required to obtain a
concession to provide prepaid and post paid card services.
RSL Latin America, which is 51% owned by the Company and 49% owned by the
Cisneros Group, filed an application to register its investment in RSL Venezuela
with the Venezuelan Office of the Superintendent of Foreign Investments ("SIEX")
pursuant to Venezuelan foreign investment regulations. RSL Latin America is
awaiting receipt of a certificate of registration from SIEX.
ASIA/PACIFIC RIM OPERATIONS--GENERAL
The Company carries on its Asian operations through RSL Asia, a 91.5%-owned
subsidiary of the Company and RSL COM Asia/Pacific Ltd. ("RSL Asia/Pacific"), a
wholly-owned subsidiary of the Company based in Hong Kong. In October 1996, RSL
Asia established RSL Australia to carry on its Australian operations. In March
1997, the Company incorporated RSL Japan as a wholly-owned subsidiary of RSL
Asia/Pacific to initiate the Company's operations in Japan. RSL Asia and RSL
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Asia/Pacific intend to capitalize on the trend toward deregulation within the
region to establish operations in key countries.
The Company has hired a managing director to oversee and develop RSL
Japan's operations. In January 1998, RSL Japan was granted an International
Simple Resale license by Japan's Ministry of Ports and Telecommunications (the
"MPT") to resell international telephony, fax and data services to and from
Japan. RSL Japan has also received a Type II value added network provider
license and expects to provide such services in the third quarter of 1998. RSL
Japan may apply for a Type I license in Japan to provide facilities-based
international long distance service. The Company has installed an Ericsson
AXE-10 international telephony gateway switch in its offices in Tokyo. The
Company's Tokyo switch is currently connected to the Company's Australian
switch.
AUSTRALIAN OPERATIONS
OVERVIEW
The Company operates in Australia through RSL Australia, a wholly-owned
subsidiary of RSL Asia. The Company began generating revenues in Australia in
April 1997.
SERVICES AND CUSTOMERS
As a result of its acquisition of the customer bases of several Australian
resellers, the Company's fixed wire customer base in Australia has grown
significantly and consists primarily of commercial customers. The Company offers
these customers local services and domestic and international long distance
services. RSL Australia also offers prepaid cards and wireless telephony
services to residential customers. The Company recently entered the wireless
telephony business in Australia. The Company has commenced efforts to cross-sell
fixed wire services to its wireless subscribers and wireless services to its
fixed wire customers.
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 primarily from the fixed wire
customer base acquired from the Call Australia Group and the wireless telephony
customer bases acquired from First Direct Communications Pty., Limited and Link
Telecommunications Pty., Ltd. In addition, RSL Australia maintains an extensive
calling card distribution network.
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. In addition, RSL Australia operates a
prepaid card platform. The Company's Australian operation owns IRUs in the APCN,
JASAURUS, NPC and Southern Cross undersea fiber optic cable systems and on the
CMC and MCC terrestial fiber optic cable systems.
COMPETITION
The Company's principal competitors in Australia are the two licensed
general carriers Telstra Corporation Limited (the former PTT) and C & W Optus
Limited. Each of these competitors provides 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
AAPT Limited, Primus Limited, WorldCom Limited, One-Tel Limited, Macquarie
Corporate Pty Limited, Hutchison Telecommunications Pty Limited and Vodatone Pty
Limited.
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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 "national
access," a preselect and override code service for domestic and international
calls. 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 can, at any time, apply for a general
carriers license under the new act, but obtaining such a license may impose
certain restrictions and costs rather than expand the scope of operations of RSL
Australia. Since there have been delays in implementing the new act, the Company
has continued to operate as it has under the old act pursuant to the
transitional provisions of the new act. See "Risk Factors--Government Regulatory
Restrictions."
IP TELEPHONY OPERATION--GENERAL
In mid-1997, the Company acquired Delta Three, a telecommunications
provider utilizing packet switched networks, such as the Internet and networks
based on Internet protocols, to provide telecommunications services and to
transmit voice communications.
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 communications, software and hardware developers have
developed technologies capable of allowing the Internet and managed IP networks
to be utilized for voice communications.
Delta Three offers services that provide real-time voice conversations over
the Internet and IP networks ("IP Telephony"). These services work by the use of
an Internet gateway server ("IP Telephony Gateway"), which provides a connection
between the PSTN and Delta Three's IP networks and converts analog voice signals
into digital signals. These signals are in turn compressed and split into
packets which are sent over the Internet or IP network like any other packets
and reassembled by a second IP Telephony Gateway as audio output at the
receiving end. The packets are converted back into analog format and then to the
telephone number dialed.
Certain Internet Telephony software today requires one or both parties to a
call to use computers that are connected to the Internet or an IP network at the
time of the call. In addition to these types of services, Delta Three provides
services that allow both parties to use ordinary telephones. Although current
Internet Telephony does not provide comparable sound quality to traditional long
distance service, the sound quality of IP Telephony has increased over the past
few years, and the Company expects such quality to continue to improve; however
there can be no assurance in this regard.
DELTA THREE OPERATIONS
OVERVIEW
Delta Three began operations in May 1996 and began offering commercial IP
telephony services in January 1997. Delta Three currently offers commercial
service between 23 countries and it plans to extend the service to additional
countries within the next two years.
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SERVICE AND CUSTOMERS
Delta Three utilizes the Internet and managed IP networks traditionally
used for data communications, as a transmission medium for ordinary telephone
calls. The primary service offered by Delta Three enables customers to place
long distance and international phone calls to be carried over the Internet
while using a standard telephone, without any additional equipment. Delta Three
also offers a service that enables customers to place long distance calls from a
personal computer to a standard telephone. Delta Three offers these services at
a price which is 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 residential customers in
designated areas and corporations. Currently, most of the minutes sold by Delta
Three are sold to the Company on a wholesale basis. Delta Three recently entered
into a joint venture agreement with Quintel Entertainment, Inc., a direct sales
and marketing company, to market and sell Delta Three's services to customers in
the U.S. and Canada. Delta Three expects to significantly increase its retail
customers base as a result of this joint venture.
Delta Three currently provides IP Telephony service from the U.S., Europe,
Australia and Japan with termination capabilities to 23 points of presence
around the world utilizing RSL-NET.
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 is also
focused on providing high margin innovative value-added services in niche
markets. Delta Three utilizes the Web as an additional sales venue to offer
services to retail customers and is increasing its resources towards on-line
marketing and sales. Delta Three also offers the Company the ability to purchase
minutes wholesale at preferred rates.
DELTA THREE NETWORK
The Delta Three network consists of IP Telephony Gateways, primarily IPTC
Ericsson platforms, 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 IP Telephony Gateway and instructs the IP
Telephony Gateway to place a local call to the telephone the customer has
dialed. Once the local call is transmitted, the IP Telephony Gateway converts
the call into a form which can be routed over the Internet and transfers the
call to a second Internet Gateway. The IP Telephony 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. Delta Three has also entered into a co-development agreement
with Ericsson to develop IP Telephony Gateways and application technology.
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, 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 IP 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
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carriers are subject, are not imposed on providers of IP 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/or
foreign regulators will not regulate IP Telephony or Internet service providers
in the future. In a recent Report to Congress, the FCC indicated that certain
forms of phone-to-phone Internet Telephony may bear the characteristics of
telecommunications, as opposed to information, services, thereby subjecting them
to regulation as common carrier offerings.
The level of regulation of IP Telephony differs significantly from country
to country and, in many countries, IP Telephony is not regulated any differently
than other Internet service. In some countries IP Telephony is illegal. There
can be no assurance that regulation of IP Telephony will not increase around the
world. See "Risk Factors--Government Regulatory Restrictions."
EMPLOYEES
As of September 1, 1998, the Company employed approximately 2,000 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 approximately 11,000 square feet under a lease
which expires on January 31, 2002. The lease provides for annual lease payments
of $767,000.
The Company also maintains a 3,040 square foot office at 60 Hudson Street,
New York, New York which houses the Company's international telephony gateway
and domestic switches located in New York. The lease extends until March 2006
and provides for annual lease payments of $312,240.
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 a 15,000 square foot office at 5550 Topanga Canyon
Boulevard, Woodland Hills, California which houses RSL USA's western offices.
The lease for such space extends until January 15, 2003 and provides for annual
lease payments of $333,000.
The Company, as a result of the acquisition of WestComm, leases office
space in Pittsburgh, Pennsylvania and various other sales offices for annualized
aggregate rent of approximately $1.8 million. The lease for the principal office
in Pittsburgh extends until July 31, 2008.
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. The lease extends until October
1, 2005 and provides for annual lease payments of $90,000 until October 2000 and
may be increased thereafter.
The Company maintains office space at Victoria House, London Square, Cross
Lanes, Guildford, Surrey, which is RSL Europe's headquarters. The lease extends
until August 20, 2006 and provides for annual lease payments of approximately
$245,000, which may increase in December 1999 and December 2004.
The Company maintains additional office space for RSL Europe at 21/27
Tabernacle Street, London, England. The lease extends until 2008 and provides
for annual lease payments of approximately $420,000, and may be increased in
July 2003. The space is rent free until April 1999.
In addition, the Company maintains offices with respect to its other
foreign operations, for which the aggregate annual lease payments equal
approximately $3.0 million.
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The Company, through its direct and indirect subsidiaries, also leases
additional office spaces for its operations.
LEGAL PROCEEDINGS
In mid-1997 AT&T 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.
In April 1997, the Attorney General of the State of Illinois filed a
complaint against LDM arising from alleged instances of unauthorized changes in
subscribers' selections of interexchange carriers ("slamming"). In October 1997,
the Attorney General of the State of New Jersey served a subpoena on LDM seeking
information also relating to various slamming complaints lodged against LDM.
Both the Illinois complaint and the New Jersey subpoena relate to alleged
activity by LDM occurring prior to its acquisition by RSL USA. In March 1998 and
in May 1998, the Attorney General of the State of Florida served a subpoena on
each of LDM and RSL USA, respectively, seeking information relating to slamming
in connection with the unauthorized changing or combining of local and long
distance telephone service providers or billing for telephone related services.
The Florida subpoenas relate to alleged activity by LDM which would have
primarily occurred prior to LDM's acquisition by RSL USA. Pursuant to the terms
of the stock purchase agreement between RSL USA and the shareholders of LDM, RSL
USA is entitled to indemnification for losses, costs and expenses as a result
of, among other things, "slamming" and related matters. The Company does not
believe that the resolution of these matters reasonably can be expected to have
a material adverse effect on its business or results of operations.
A subpoena, relating to alleged slamming activities, has also been issued
by the Attorney General of the State of New Jersey against Cyberlink. There are
also pending against LDM and Cyberlink before the FCC and various state public
service commissions informal complaints relating to alleged slamming activities.
The Company does not believe that the resolution of these matters 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.............................. 54 Director and Chairman of the Board
Itzhak Fisher................................. 42 Director, Chief Executive Officer and
President
Jacob Z. Schuster............................. 49 Director, Executive Vice President, Chief
Financial Officer, Assistant Secretary and
Treasurer
Richard E. Williams........................... 46 Chief Executive Officer and President of RSL
Europe
Adrian Coote.................................. 44 Managing Director of RSL Australia
Edmond J. Thomas.............................. 55 Chief Executive Officer and President of RSL
USA
Karen van de Vrande........................... 48 Vice President of Marketing
Nir Tarlovsky................................. 32 Vice President of Business Development
Nesim N. Bildirici............................ 31 Vice President of Mergers and Acquisitions
Mark J. Hirschhorn............................ 34 Vice President--Finance, Global Controller and
Assistant Secretary
Roland T. Mallcott............................ 51 Vice President of Engineering
Andrew C. Shields............................. 41 Vice President of International Carrier
Relations
Elie C. Wurtman............................... 29 Vice President of Emerging Technologies
Avery S. Fischer.............................. 31 Legal Counsel
Michael Ashford............................... 52 Secretary
Gustavo A. Cisneros........................... 53 Director
Fred H. Langhammer............................ 54 Director
Leonard A. Lauder............................. 65 Director
Eugene A. Sekulow............................. 67 Director
Nicolas G. Trollope........................... 51 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 the principal and controlling shareholder of the Company. 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
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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 Chairman of the Board of Trustees of the
Museum of Modern Art, Treasurer of the World Jewish Congress, a member of the
Board of Governors of the Joseph H. Lauder Institute of Management and
International Studies at the University of Pennsylvania and a member of the
Visiting Committee of the Wharton School at the University of Pennsylvania.
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. 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 Clal, 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. Mr. Fisher previously was a consultant to Mobil Oil Corporation, in the
telecommunications field. In addition, 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.
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 ("RSL Management") since November 1995 and Executive Vice
President of RSL Investments Corporation since March 1994. Mr. Schuster joined
Goldman Sachs in 1980, was made a General Partner in 1986 and served as
Treasurer of the firm from 1985 until his retirement from the firm in 1992. 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.
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 systems and global data networks. Prior to
joining British Telecom Australasia, Mr. Coote served in various capacities at
Philips Telecommunications Systems.
Edmond J. Thomas has been Chief Executive Officer and President of RSL USA
since March 1998. From September 1997 until March 1998, Mr. Thomas was the Chief
Operating Officer of Bell Atlantic Global Networks, a division of Bell Atlantic
Corp. From 1994 until 1997, Mr. Thomas was Executive Vice President Science and
Technology of Nynex Corp. ("Nynex") and, from 1991 until 1994, he served as its
Vice President of Research and Development. Mr. Thomas also served as Nynex's
Corporate Director of Advanced Technology from 1986 to 1991. From 1981 until
1986, Mr. Thomas held several positions at New York Telephone. Prior to 1981,
Mr. Thomas served in various capacities at AT&T.
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.
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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 RSL North
America. 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's 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 R.S. Lauder, Gaspar & Co., L.P. ("RSLAG") and the Company.
Mr. Bildirici was a Managing Director of RSLAG from 1996 until recently. 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 1991 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 1991, 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.
Elie C. Wurtman has been Vice President of Emerging Technologies of the
Company since April 1998. Mr. Wurtman co-founded Delta Three, Inc. and has
served as its Chief Executive Officer and President since its inception in May
1996. He is also the founder of Ambient Corporation, a developer of smart card
technology and has been a member of its Board of Directors since November 1995.
From January 1995 until November 1995, Mr. Wurtman was Vice President of
Marketing of TTR Technologies Inc., a software security company. From September
1993 to December 1994, Mr. Wurtman was engaged in private real estate business.
Prior to 1993, Mr. Wurtman served in the Israeli Defense Forces as the Deputy
Commander of the Allenby Bridge border crossing between Israel and Jordan.
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.
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Michael Ashford, Secretary of the Company since May 1998, has been a
manager of Codan Services Limited, Hamilton, Bermuda, a corporate service
company associated with the law firm of Conyers, Dill & Pearman, Hamilton
Bermuda, Bermuda counsel to the Company, since 1989.
Gustavo A. Cisneros has been a director of the Company since March 1997.
For more than five years, Mr. Cisneros, together with other members of his
family or trusts established for their benefit, has owned direct or indirect
beneficial interests in certain 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 has also been the Chairman of the Board
of Directors of Pueblo Xtra International, Inc., a holding company which owns
all of the common stock of Pueblo International, Inc., a company engaged in the
business of operating supermarkets and video rental outlets, since June 1993 and
a Director of Univision Communications Inc., a Spanish-language television
broadcasting company, since May 1994.
Fred H. Langhammer, a director of the Company since September 1997, has
been President of Estee Lauder since 1995, Chief Operating Officer of Estee
Lauder since 1985, and a director of Estee Lauder since January 1996, 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 RJR
Nabisco Holdings Corp., the Cosmetics, Toiletries and Fragrance Association, an
industry group, and the American Institute for Contemporary German Studies at
Johns Hopkins University. He is also a Senior Fellow of the Foreign Policy
Association.
Leonard A. Lauder has been a director of the Company since March 1997.
Mr. Lauder is a principal shareholder and, since 1982, has served as Chief
Executive Officer of Estee Lauder and was 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 A. 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 1985 to 1993. 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. Mr. Trollope has been with Conyers, Dill & Pearman since 1975.
Mr. Trollope has served as a director of CME since June 1994 and also serves as
vice-president and secretary of CME.
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 an Audit Committee (the "Audit Committee").
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EXECUTIVE COMMITTEE
The Executive Committee is composed of Ronald S. Lauder, Itzhak Fisher,
Jacob Z. Schuster and Eugene A. 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
requires 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.
COMPENSATION COMMITTEE
The Compensation Committee is composed of Ronald S. Lauder, Gustavo A.
Cisneros and Eugene A. Sekulow. During a portion of 1997, Itzhak Fisher was a
member of the Compensation Committee. 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
The Audit Committee is currently composed of Ronald S. Lauder, Eugene A.
Sekulow and Fred H. Langhammer. The Audit Committee is 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.
During a portion of 1997, Itzhak Fisher was a member of the Audit Committee.
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The following table summarizes all plan and non-plan compensation awarded
to, earned by or paid to the Company's current Chief Executive Officer and four
other most highly compensated executive officers for services rendered in all
capacities to the Company in the last three fiscal years (together, the "Named
Executive Officers"). See "--Employment Arrangements."
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-------------
ANNUAL AWARDS
COMPENSATION SECURITIES
--------------------------- UNDERLYING
SALARY BONUS(1) OPTIONS/SARS
NAME AND PRINCIPAL POSITION YEAR ($) ($) (NUMBER)
- -------------------------------------------------------------------- ---- ------- -------- -------------
<S> <C> <C> <C> <C>
Itzhak Fisher....................................................... 1997 400,000 650,000 432,856
President and Chief Executive Officer 1996 350,000 150,000 --
1995 250,000 75,000 --
Nir Tarlovsky....................................................... 1997 187,500 300,000 --
Vice President of Business Development 1996 178,000 75,000 --
1995 112,500 37,500 876,000
Richard E. Williams(2).............................................. 1997 240,000 165,000 350,400
President and Chief Executive Officer of RSL Europe 1996 172,000 50,000 --
1995 65,000 -- --
Nesim N. Bildirici(3)............................................... 1997 185,000 300,000 --
Vice President of Mergers and Acquisitions 1996 165,000 75,000 --
1995 81,000 32,000 --
Mark Hirschhorn..................................................... 1997 155,000 232,500 16,206
Vice President--Finance 1996 140,000 50,000 93,294
</TABLE>
(Footnotes on next page)
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(Footnotes from previous page)
- ------------------
(1) Annual bonuses are reported in the year earned, whether paid in that year or
in the following year. Bonuses for 1997 were determined pursuant to the 1997
Performance Plan described below and paid in the first quarter of 1998
following receipt of 1997 audited financial results.
(2) 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.
(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 "--Fiscal
Year-End Option Values" and "--Compensation Committee Interlocks and Insider
Participation."
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 Commission) were awarded to, earned by or paid to the
Named Executive Officers during 1996 or 1997.
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 RSL Communications, Ltd. 1995 Stock
Option Plan (as later amended and restated, the "1995 Plan"). Under the 1995
Plan, the Company's Compensation Committee was authorized to grant options for
up to 2,847,000 shares of Class A Common Stock. As of December 31, 1997, the
Company had granted options to purchase 2,716,617 shares of 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 Company and to attract new employees and
non-employee directors. In connection with the IPO, the 1995 Plan was replaced
by the stock option plans described below. The Company has not granted further
options under the 1995 Plan since the IPO, and will not grant further options
under the 1995 Plan.
1997 STOCK INCENTIVE PLAN
In connection with the IPO, the Company adopted the RSL Communications,
Ltd. 1997 Stock Incentive Plan (the "1997 Plan"). Under the 1997 Plan, the
Company's Compensation Committee is authorized to grant options for up to
3,100,000 shares of Class A Stock. The purposes of the 1997 Plan are to foster
and promote the long-term financial success of the Company and materially
increase shareholder value by (i) motivating superior performance by means of
performance-related incentives, (ii) encouraging and providing for the
acquisition of an ownership interest in the Company by executive officers and
other key employees and (iii) enabling the Company to attract and retain the
services of an outstanding management team upon whose judgment, interest and
special effort the successful conduct of its operations is largely dependent.
The 1997 Plan reflects the Company's view that it is desirable to lengthen the
vesting period and shorten the terms of its options, and to have a "cost
capital" factor included in the pricing of the options.
The 1997 Plan is administered by the Compensation Committee and provides
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 (collectively,
"Awards"). As of the date of the IPO, the number of shares of Class A Common
Stock available for Awards granted under the 1997 Plan during its term was
approximately 7.0% of the total number of shares of Class A Common Stock
outstanding on a fully diluted basis (not including Roll-up Rights). 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. The Company granted to
Itzhak Fisher, pursuant to his new employment agreement and
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contingent on the completion of the Company's IPO, options to acquire 432,856
shares of Class A Common Stock under the 1997 Plan representing 1% of the Common
Stock, on a fully-diluted basis (not including Roll-up Rights). As of September
30, 1998, the Company had granted options to acquire 437,856 shares of Class A
Common Stock under the 1997 Plan and 164,250 shares of restricted stock under
the 1997 Plan which vests over three years. See "--Employment Arrangements." The
Company has also granted "restricted units" and SARs under the 1997 Plan to
certain key members of management. The number of shares of Class A Common Stock
into which these restricted units and SARs may be exercised, which is based on
the relative values of the Company's subsidiaries, cannot be determined at this
time.
1997 PERFORMANCE INCENTIVE COMPENSATION PLAN
In September 1997, prior to the IPO, the Company established the RSL
Communications, Ltd. 1997 Performance Incentive Plan (the "1997 Performance
Plan") to enable the Company and its subsidiaries to attract, retain, motivate
and reward the best qualified executive officers and key employees by providing
them with the opportunity to earn competitive compensation directly linked to
the Company's performance. The 1997 Performance Plan was effective for 1997 and
is effective for each of calendar years 1998, 1999 and 2000, unless extended or
earlier terminated by the Board of Directors. The Compensation Committee may
determine that any bonus payable under the 1997 Performance Plan be paid in
cash, in shares of Class A Common Stock or in any combination thereof, provided
that at least 50% of such bonus is required to be paid in cash. In addition, the
1997 Performance Plan permits a participant to elect to defer payment of his
bonus on terms and conditions established by the Compensation Committee. No more
than 400,000 shares of Class A Common Stock may be issued under the 1997
Performance Plan.
Under the 1997 Performance Plan, bonuses are payable if the Company meets
any one or more of the following performance criteria, which are set annually by
the Compensation Committee: (i) amount of or increase in consolidated EBITDA (as
defined) (which consists of earnings (loss) before interest, income taxes,
depreciation and amortization); (ii) revenues; (iii) earnings per share;
(iv) net income; (v) gross profit margin; (vi) maximum capital expenditures;
(vii) return on equity; and/or (viii) return on total capital.
With respect to calendar year 1997 only, a cash bonus pool of $2,675,000
was established by the Board of Directors and approved by the Company's
shareholders prior to the IPO. The Company achieved the specified performance
targets set by the Compensation Committee for 1997 and, under the 1997
Performance Plan, $650,000 was awarded to the Company's Chief Executive Officer,
Mr. Itzhak Fisher. Of the balance of funds remaining in the bonus pool,
approximately $1,250,000 was awarded to key employees of the Company and its
subsidiaries based upon the recommendation of Mr. Fisher and as approved by the
Compensation Committee and the Board of Directors (including $997,500 paid to
the other Named Executive Officers). The $775,000 balance of the $2,675,000 cash
bonus pool was not paid out. Pursuant to the terms of the 1997 Performance Plan,
the awards were paid promptly following the completion of the audit of the
Company's 1997 financial statements. The Compensation Committee determined that
all such bonuses for 1997 were to be paid in cash.
With respect to calendar years 1998 and thereafter, bonus amounts will 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
96
<PAGE>
the discretion of the Compensation Committee. In addition, the 1997 Performance
Plan permits the Compensation Committee to grant discretionary bonuses to
participants, notwithstanding that a bonus would not otherwise be payable under
the 1997 Performance Plan, to recognize extraordinary individual performance.
The Chief Executive Officer's bonus compensation is based upon an
employment agreement between the Company and Mr. Fisher which provides for
Mr. Fisher's participation in the 1997 Performance Plan as well as other long
term bonus compensation based on the Company's stock performance over time. See
"--Employment Arrangements."
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to grants of stock
options to purchase Class A Common Stock granted to the Named Executive Officers
during the fiscal year ended December 31, 1997. No stock appreciation rights
were granted by the Company to the Named Executive Officers.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------
NUMBER OF % OF TOTAL
SECURITIES OPTION/SARS
UNDERLYING GRANTED TO
OPTIONS/SARS EMPLOYEES EXERCISE OR GRANT DATE
GRANTED IN FISCAL BASE PRICE PRESENT VALUE
NAME (#) YEAR ($/SH) EXPIRATION DATE $ (1)
- ----------------------------------- ----------------- ------------ ----------- --------------- ------------------
<S> <C> <C> <C> <C> <C>
Itzhak Fisher(2)................... 432,856 29.7 22.00 10/5/04 4,297,105
Nir Tarlovsky...................... -- -- -- -- --
Richard E. Williams(3)............. 350,400 24.0 .00457 10/5/07 7,707,325
Mark Hirschhorn(4)................. 16,206 1.1 .00457 1/1/07 344,329
Nesim N. Bildirici................. -- -- -- -- --
</TABLE>
- ------------------
(1) The grant date present value has been calculated as of each grant date:
October 6, 1997, October 3, 1997 and January 1, 1997 for Itzhak Fisher,
Richard E. Williams and Mark J. Hirschhorn, respectively, using a variant of
the Black-Scholes pricing model. In applying the model, the Company assumed
a three-month volatility of 45%, a 5.62% risk-free rate of return and a
10-year option term. Since this model is assumption-based, it may not
accurately determine the options' present value. The true value of the
options, when and if exercised, will depend on the actual market price of
the Class A Common Stock on the date of exercise.
(2) Shares issuable upon the exercise of options granted under the 1997 Plan
pursuant to Mr. Fisher's employment agreement dated September 2, 1997. The
exercise price per share is initially $22.00 and is increased on the first
day of each calendar quarter after the date of grant, compounded annually,
equal to one-quarter of the yield to maturity on U.S. Treasury Securities
having a maturity, at the time of grant of the options, approximately equal
to seven years. Forty percent of the options are exercisable on
December 31, 2000, 70% are exercisable on December 31, 2001 and 100% are
exercisable on December 31, 2002.
(3) Shares of Class A Common Stock issuable upon the exercise of options issued
on October 6, 1997. In connection with an employment agreement dated as of
August 5, 1995 between Mr. Williams and the Company, Mr. Williams was
granted the RSL Europe Option Rights (as defined), which rights were
exchanged for the above-listed options.
(4) Shares of Class A Common Stock issuable upon the exercise of options granted
on January 1, 1997 under the 1995 Plan. The options became fully vested on
January 1, 1998.
97
<PAGE>
FISCAL YEAR-END OPTION VALUES
The following table sets forth information with respect to each exercise of
stock options during the fiscal year ended December 31, 1997 by the Named
Executive Officers and the value at December 31, 1997 of unexercised stock
options held by the Named Executive Officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
VALUE OPTIONS/SARS AT OPTIONS/SARS AT
SHARES ACQUIRED ON REALIZED FY-END (#) FY-END($)(2)
NAME EXERCISE (#) $(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------- ------------------- ------------ --------------------------- ----------------------------
<S> <C> <C> <C> <C>
Itzhak Fisher............ 0 0 0/432,856 0/0
Nir Tarlovsky............ 509,580 13,121,452 0/366,420 0/8,061,073
Richard E. Williams...... 0 0 350,400/0 7,707,325/0
Mark Hirschhorn.......... 0 0 62,196/47,304 1,268,798/990,857
Nesim N. Bildirici....... 202,562 5,215,819 0/344,938 0/7,588,478
</TABLE>
- ------------------
(1) Represents the difference between the closing price of the Class A Common
Stock on the date of exercise (as quoted on The Nasdaq National Market, as
published in the Wall Street Journal) and the option exercise price
multiplied by the number of shares underlying the options exercised.
Mr. Tarlovsky and Mr. Bildirici have continued to hold the shares received
on exercise.
(2) The value of unexercised in-the-money options was calculated by multiplying
the number of underlying shares held by the difference between the closing
price of the Class A Common Stock on December 31, 1997 ($22.00 per share, as
quoted on The Nasdaq National Market, as published in the Wall Street
Journal) and the option exercise price.
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 encourages such directors to make investments in the Class A Common
Stock and compensates such directors for their services to the Company
principally through the grant of stock options and stock awards. The Company
also encourages such directors to hold their shares and options as long as they
are on the Board of Directors (except for transfers for estate and tax planning
and personal liquidity needs).
With respect to the ownership of Class A Common Stock, future directors
generally will be required, prior to joining the Board, to purchase, at the then
fair market value, shares of Class A Common Stock either in the market or, if
trading restrictions apply, from the Company.
DIRECTORS' PLAN
The purposes of RSL Communications 1997 Directors' Compensation Plan (the
"Directors' Plan") are to enable the Company to attract, retain and motivate the
best qualified directors and to enhance a long-term mutuality of interest
between the directors and shareholders of the Company by granting the Directors
shares of, and options to purchase shares of, Class A Common Stock. Under the
Directors' Plan, 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 of the Board of
Directors), 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 in the case of Ronald S. Lauder in his capacity as 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 each
calendar quarter by an amount, compounded annually, equal to one-quarter of the
yield to maturity of United States Treasury Securities having a maturity, at the
time of grant of the options, approximately equal to the term of such options.
Options granted under the Directors' Plan 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
98
<PAGE>
issued under the Directors' Plan is 250,000. As of September 30, 1998, the
Company had granted options to acquire 32,704 shares of Class A Common Stock
under the Directors' Plan.
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 RSL North America has entered into an employment
agreement with Itzhak Fisher, which commenced on October 6, 1997 and will
terminate on December 31, 2002. The employment agreements provide that
Mr. Fisher is to serve as President and Chief Executive Officer of the Company
and RSL North America and specify certain of his other duties and reporting
responsibilities. The Company is obligated to 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 RSL North America is obligated to use its best
efforts to ensure that Mr. Fisher continues to serve as a director of RSL North
America. Under the employment agreements, Mr. Fisher is 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 may 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 also provide that Mr. Fisher is to be a
participant in the 1997 Performance Plan (which generally outlines the bonus
plan for 1997 and future years), and that Mr. Fisher is to receive additional
cash bonuses of $1,500,000 and $1,000,000 if the total return to the Company's
shareholders from the date of the closing of the IPO to December 31, 2000 and
December 31, 2002, respectively, exceeds the return to common shareholders of
(i) the companies included in the peer group or line of business index in the
Company's proxy statement for that period or (ii) if not included in such proxy
statement, a group of companies selected by the Executive and Compensation
Committees as representing investment opportunities comparable to the Company
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
is entitled to a pro-rated bonus if the total return objective is achieved
through the date of such termination. Pursuant to the employment agreements,
upon the closing of the IPO, Mr. Fisher was granted options under the 1997 Plan
to purchase 432,856 shares of Class A Common Stock representing 1.0% of the
outstanding Common Stock on a fully-diluted basis. Forty percent of such options
will be exercisable on December 31, 2000, an additional 30% on December 31,
2001, and an additional 30% on December 31, 2002, 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 also contains noncompetition provisions applicable during the term of
the employment agreement and for one year thereafter. If Mr. Fisher's employment
is terminated by the Company without Cause, or by Mr. Fisher for Good Reason,
the employment agreements provide that Mr. Fisher is 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 is entitled to receive any previously
earned but unpaid salary and any vested benefits. In addition, if Mr. Fisher's
employment is terminated by the Company without Cause or by Mr. Fisher for Good
Reason or upon Mr. Fisher's death or Disability or the expiration of his
employment agreements, Mr. Fisher will be entitled to two demand registrations
of his shares in accordance with the terms of a registration rights agreement
among the Company and certain of its shareholders including Mr. Fisher.
99
<PAGE>
The Company is negotiating new employment agreements with three of its key
employees, Richard Williams, Nesim Bildirici and Nir Tarlovsky, and is
considering entering into new employment agreements with other key executive
officers. The Company has entered into an agreement with Codan Services Limited,
a corporate service company, located in Bermuda, of which Michael Ashford, the
Company's Secretary and a resident of Bermuda, is a manager. Mr. Ashford serves
as the Company's Secretary pursuant to such agreement.
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 most of its Local Operators.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee currently are Ronald S. Lauder,
Gustavo A. Cisneros and Eugene A. Sekulow. During the portion of 1997 prior to
the IPO, Andrew Gaspar, a former Board member who resigned on May 7, 1998, and
Itzhak Fisher were members of the Compensation Committee.
RSL Management, which is wholly-owned by Ronald S. Lauder, the Chairman of
the Board and the principal and controlling shareholder of the Company,
subleases an aggregate of 11,000 square feet of office space to the Company at
an annual rent of $767,000. RSL Management subleases such space from Estee
Lauder. Ronald S. Lauder is a principal shareholder of Estee Lauder, and
Leonard A. Lauder, a director of the Company, is also a principal shareholder
and the Chief Executive Officer of Estee Lauder. Ronald S. Lauder and
Leonard A. Lauder are brothers and Fred H. Langhammer, a director of the
Company, is the President and Chief Operating Officer of Estee Lauder. In
addition, RSL Management provided payroll and benefits services to the Company
for an annual fee of $6,000 for 1997. Jacob Z. Schuster, Chief Financial
Officer, Executive Vice President, Treasurer and a director of the Company, is
the President and Treasurer of RSL Management. In 1996, Mr. Schuster received
compensation only for his services to RSL Management (and such compensation was
paid by RSL Management). In 1997, Mr. Schuster received compensation from RSL
Management and the Company for services provided by him to each of RSL
Management and the Company. Effective January 1, 1998, Mr. Schuster devotes 75%
of his time to the Company and 25% of his time to RSL Management and is being
compensated by each of the Company and RSL Management on that basis.
Ronald S. Lauder, the Chairman of the Board of the Company and the
principal and controlling shareholder of the Company, personally guaranteed the
Company's revolving credit facility with The Chase Manhattan Bank (the
"Revolving Credit Facility") in August 1996. The commitment under the Revolving
Credit Facility was $7.5 million at June 30, 1998, which amount was permanently
reduced to $5 million at July 1, 1998.
As consideration for Mr. Lauder's guarantee of the Revolving Credit
Facility, Mr. Lauder received in September 1996, in the aggregate, the Lauder
Warrants to purchase 459,900 shares of Class B Common Stock of the Company at an
exercise price of $.00457 per share. The Lauder Warrants became exercisable on
October 3, 1997 and expire on October 3, 2007.
The Company entered into a consulting agreement as of September 1, 1995
with Eugene A. Sekulow, a director of the Company. The consulting agreement
expired August 31, 1997. The consulting agreement provided for Mr. Sekulow to
receive a $24,000 annual fee, as well as an annual grant of options to purchase
21,900 shares of Class A Common Stock, for services rendered as a consultant to
the Company.
100
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 lenders under the New Credit Facility are committed (subject to final
documentation), severally, and not jointly, to lend up to $35 million in the
aggregate to the Company. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources." The New
Lenders include: (1) RSL Capital LLC, a New York limited liability company
("RSLC") of which the only member is Ronald S. Lauder, Chairman of the Company,
which committed to lend up to $20 million, (2) Leonard A. Lauder, a director of
the Company and brother of Ronald S. Lauder (or an entity controlled by Leonard
Lauder), who committed to lend up to $5.25 million, (3) Fisher Invesment
Partners, L.P., a Delaware limited partnership the sole general partner of which
is Itzhak Fisher, a director and President and Chief Executive Officer of the
Company, and the sole limited partner of which is the Fisher 1997 Family Trust,
which committed to lend up to $5.25 million, (4) Schuster Family Partners I,
L.P., a Delaware limited partnership, the sole general partner of which is Jacob
Z. Schuster, a director and Executive Vice President, Chief Financial Officer,
Assistant Secretary and Treasurer (Principal Financial Officer) of the Company,
and the limited partners of which are certain of Mr. Schuster's children, which
committed to lend up to $2.0 million, (5) Tarlovsky Investment Partners, L.P., a
Delaware limited partnership, the sole general partner of which is Nir
Tarlovsky, Vice President of Business Development of the Company, and the sole
limited partner of which is the Tarlovsky 1997 Family Trust, which committed to
lend up to $1.0 million, (6) Nesim Bildirici, Vice President of Mergers and
Acquisitions of the Company, who committed to lend up to $750,000 and (7) Elie
Wurtman, Vice President of Emerging Technologies of the Company, who committed
to lend up to $250,000. Amounts borrowed under the New Credit Facility will
accrue interest at LIBOR plus 5% per annum.
The law firm of Conyers, Dill & Pearman, of which Nicolas G. Trollope, a
director of the Company, is a partner, was engaged as the Company's counsel in
Bermuda for the fiscal year ended December 31, 1997 and will continue to be so
engaged for the fiscal year ending December 31, 1998. Mr. Trollope does not
receive compensation as a director; Conyers, Dill & Pearman was paid $47,881 in
1997.
Pursuant to an employment agreement, dated July 31, 1997, between the
Company and Andrew Shields, an executive officer of the Company, the Company
loaned Mr. Shields $100,000 in 1997, to facilitate his relocation to another
state at the Company's request. The principal amount of $100,000 and interest
bearing a rate of 6% is due on August 11, 2002 unless either Mr. Shields sells
shares of Common Stock with an aggregate value equal to or greater than $100,000
or Mr. Shield's employment is terminated, in which cases the note is payable on
demand.
For additional disclosure with respect to certain transactions between the
Company and certain of its directors, see "--Compensation Committee Interlocks
and Insider Participation."
101
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Class A Common Stock and the Class B Common Stock at
November 18, 1998 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 or
Class B Common Stock, (ii) each Director of the Company and each Named Executive
Officer who owns shares of any class of the Company's capital stock, (iii) the
Company's directors and executive officers as a group and (iv) each Selling
Shareholder. Except as indicated under "Selling Shareholders" on the table
below, the Named Executive Officers and Directors of the Company have indicated
that they have no intention as of the date of this Prospectus to register for
sale any of their shares of Common Stock. Nir Tarlovsky, Nesim N. Bildirici,
Richard Williams and Bukfenc, Inc. (the "Selling Shareholders") are the only
shareholders of the Company selling shares in the Offerings. Each Selling
Shareholder has granted the Underwriters an option for 30 days to purchase in
the aggregate up to the number of shares indicated below solely to cover any
over-allotments. None of the 7,000,000 shares of Class A Common Stock offered in
the Offerings are being offered by the Selling Shareholders. 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. Except
where otherwise indicated, the information below regarding post-Offerings share
ownership assumes the Underwriters have not exercised their over-allotment
options.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
-------------------------------------------------------------------------------------------------
CLASS A COMMON STOCK(1)
--------------------------------------------------------------
DIRECTORS, EXECUTIVE CLASS B
OFFICERS AND 5% PRE-OFFERINGS NUMBER POST-OFFERINGS COMMON STOCK
SHAREHOLDERS AND -------------------- BEING --------------------- ---------------------------
SELLING SHAREHOLDERS NUMBER PERCENT OFFERED NUMBER PERCENT NUMBER PERCENT
- -------------------------- --------- ------- --------- --------- ------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Ronald S. Lauder
(3)(4)(5)(6)(7)......... 1,363 * -- 1,363 * 17,134,760 64.0
Itzhak Fisher (3)(8)...... -- * -- -- * 4,171,205 15.8
Leonard A. Lauder
(3)(5)(6)(7)(9)......... 454 * -- 454 * 6,399,831 24.3
RSL Investments
Corporation (3)......... -- * -- -- * 9,348,563 35.5
E/L RSLG Media, Inc.
(3)..................... -- * -- -- * 1,786,350 6.8
Jacob Z. Schuster
(3)(10)................. 41,656 * -- 41,656 * 1,646,559 6.3
Gustavo A. Cisneros
(11).................... 1,409,083 7.6 -- 1,409,083 5.5 -- *
Coral Gate (12)........... 1,408,629 7.6 -- 1,408,629 5.5 -- *
Nir Tarlovsky (13)(14).... 717,804 3.9 50,000 717,804 2.8 270,301 1.0
Nesim N. Bildirici
(14)(15)................ 572,499 3.1 55,555 572,499 2.2 118,513 *
Mark J. Hirschhorn........ 51,605 * -- 51,605 * -- *
Eugene A. Sekulow (16).... 44,254 * -- 44,254 * -- *
Fred H. Langhammer (17)... 12,680 * -- 12,680 * -- *
Richard E. Williams
(14)(18)................ 350,400 1.9 225,000 350,400 1.4 -- *
Nicolas G. Trollope
(19).................... 1,000 * -- 1,000 * -- *
All directors and officers
as a group (20 persons)
(20).................... 3,581,481 18.9 330,555 3,581,481 13.8 26,784,322 100.0
Metro Holding AG (21)..... 3,214,284 17.4 -- 3,214,284 12.6 -- *
Andrew Gaspar
(5)(6)(22).............. 1,863,241 10.1 -- 1,863,241 7.3 -- *
Bukfenc, Inc. (14)(23).... 1,810,633 9.8 200,000 1,810,633 7.1 -- *
Essex Investment (24)..... 1,384,950 7.5 -- 1,384,950 5.4 -- *
<CAPTION>
OVERALL VOTING POWER AND OWNERSHIP OF COMMON STOCK
----------------------------------------------------------------
PRE-OFFERINGS POST-OFFERINGS
DIRECTORS, EXECUTIVE ------------------------------ -------------------------------
OFFICERS % OF % OF
AND 5% SHAREHOLDERS AND VOTING VOTING
SELLING SHAREHOLDERS POWER(2) % OWNERSHIP(2) POWER % OWNERSHIP
- -------------------------- ------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Ronald S. Lauder
(3)(4)(5)(6)(7)......... 59.8 37.8 58.4 32.8
Itzhak Fisher (3)(8)...... 14.8 9.3 14.4 8.1
Leonard A. Lauder
(3)(5)(6)(7)(9)......... 22.7 14.3 22.2 12.4
RSL Investments
Corporation (3)......... 33.2 20.9 32.4 18.0
E/L RSLG Media, Inc.
(3)..................... 6.3 4.0 6.2 3.4
Jacob Z. Schuster
(3)(10)................. 5.9 3.8 5.7 3.3
Gustavo A. Cisneros
(11).................... * 3.1 * 2.7
Coral Gate (12)........... * 3.1 * 2.7
Nir Tarlovsky (13)(14).... 1.2 2.2 1.2 1.9
Nesim N. Bildirici
(14)(15)................ * 1.5 * 1.3
Mark J. Hirschhorn........ * * * *
Eugene A. Sekulow (16).... * * * *
Fred H. Langhammer (17)... * * * *
Richard E. Williams
(14)(18)................ * * * *
Nicolas G. Trollope
(19).................... * * * *
All directors and officers
as a group (20 persons)
(20).................... 94.6 66.4 92.4 57.6
Metro Holding AG (21)..... 1.1 7.2 1.1 6.2
Andrew Gaspar
(5)(6)(22).............. * 4.2 * 3.6
Bukfenc, Inc. (14)(23).... * 4.0 * 3.5
Essex Investment (24)..... * 3.1 * 2.7
</TABLE>
- ------------------
* Less than 1%.
(1) Except as required for the calculation of beneficial ownership pursuant to
Rule 13d-3 under Securities Act, the foregoing does not include
(i) 1,492,625 shares of Class A Common Stock issuable upon the exercise of
outstanding stock options, (ii) 26,328,590 shares of Class A Common Stock
issuable upon the conversion of the shares of Class B Common Stock,
(iii) 459,900 shares of Class A Common Stock issuable upon the conversion
of such shares of Class B Common Stock issuable pursuant to the Lauder
Warrants, (iv) 917,729 shares of Class A Common Stock issuable upon the
exercise of unexercised Warrants, (v) 109,500 shares of restricted stock,
granted pursuant to the Company's 1997 Stock Incentive Plan or (vi) shares
of Class A Common Stock issuable upon exercise of the Roll-Up Rights or
Incentive Units or in the Telegate Exchange. 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.
(2) Represents the percentage of total voting power and the percentage
ownership of the Class A Common Stock and the Class B Common Stock
beneficially owned as of September 30, 1998 by each identified shareholder
and all directors and executive officers as a group. The Class A Common
Stock and the Class B Common Stock are the only authorized classes of the
Company's capital stock with shares outstanding.
(3) The business address of each of the indicated holders of the Company's
securities is 767 Fifth Avenue, New York, New York 10153.
(4) Includes (a) 1,363 shares of Class A Common Stock issuable to Ronald S.
Lauder upon exercise of a like number of options granted to Mr. Lauder
under the Director's Plan, such options vested on October 6, 1998; (b)
261,407 shares of Class B Common Stock owned by RSLAG (see note 5);
(c) 909,090 shares of Class B Common Stock owned by Lauder Gaspar
(Footnotes continued on next page)
102
<PAGE>
(Footnotes continued from previous page)
Ventures LLC ("LGV") (see note 6); (d) 9,348,563 shares of Class B Common
Stock owned by RSL Investments Corporation, a corporation wholly-owned by
Mr. Lauder; (e) 1,786,350 shares of Class B Common Stock owned by EL/RSLG
Media, Inc. ("EL/RSLG") (see note 7); (f) 893,175 shares of Class B Common
Stock owned by RAJ Family Partners L.P., of which Mr. Lauder is a limited
partner and a shareholder of the general partner; (g) 3,476,275 shares of
Class B Common Stock owned directly by Ronald S. Lauder; and (h) 459,900
shares of Class B Common Stock issuable upon exercise of the Lauder
Warrants.
(5) Andrew Gaspar is president of the corporate general partner of RSLAG, which
is being liquidated. Ronald S. Lauder is directly and indirectly the owner
of a majority of the limited partnership interests in RSLAG. The general
partner of RSLAG has executed an irrevocable proxy in favor of Ronald S.
Lauder to vote Ronald S. Lauder's allocable interest in such shares as
directed by him. In addition, Leonard A. Lauder owns limited partnership
interests in RSLAG. Ronald S. Lauder, Leonard A. Lauder and Andrew Gaspar
each disclaim beneficial ownership of some of such shares. The shares of
Class B Common Stock owned by RSLAG which may be deemed to be beneficially
owned by Ronald S. Lauder and Leonard A. Lauder are only included once in
the computation of shares beneficially owned by directors and executive
officers of the group.
(6) Andrew Gaspar is the former managing member of LGV, which is being
liquidated. Ronald S. Lauder is the Liquidating Trustee and a member with a
substantial ownership interest in LGV. The former managing member of LGV
executed an irrevocable proxy in favor of Ronald S. Lauder to vote Ronald
S. Lauder's allocable interest in such shares as directed by him. In
addition, Leonard A. Lauder is a member with a substantial ownership
interest in LGV. Ronald S. Lauder, Leonard A. Lauder and Andrew Gaspar each
disclaim beneficial ownership of some of such shares. The shares of
Class B Common Stock owned by LGV which may be deemed to be beneficially
owned by Ronald S. Lauder and Leonard A. Lauder are only included once in
the computation of shares beneficially owned by directors and executive
officers of the group.
(7) The 1995 Estee Lauder RSL Trust, of which Ronald S. Lauder is a trustee and
the beneficiary, and the 1995 Estee Lauder LAL Trust, of which Leonard A.
Lauder is a trustee and the beneficiary, each own 50% of EL/RSLG's
outstanding common stock. As such, Ronald S. Lauder and Leonard A. Lauder
may each be deemed to beneficially own all of the shares of Class B Common
Stock owned by EL/RSLG. Ronald S. Lauder and Leonard A. Lauder each
disclaim beneficial ownership of some of such shares. Such shares, however,
are only included once in the computation of shares beneficially owned by
directors and executive officers as a group.
(8) Such shares are owned by Fisher Investment Partners, L.P. Mr. Fisher
disclaims beneficial ownership of such shares.
(9) Includes (a) 454 shares of Class A common stock issuable upon the exercise
of a like number of options granted under the Directors' Plan, such options
vested on October 6, 1998; (b) an aggregate of 1,170,497 shares of Class B
Common Stock owned by RSLAG and LGV (see notes 5 and 6); (c) 2,196,558
shares of Class B Common Stock owned directly by Leonard A. Lauder;
(d) 4,866 shares of Class B Common Stock owned by Mr. Lauder's wife; (e)
348,385 shares of Class B Common Stock owned by LAL Family Partners, L.P.,
of which Mr. Lauder is a general partner; (f) 1,786,350 shares of Class B
Common Stock owned by EL/RSLG (see note 7); and (g) 893,175 shares of
Class B Common Stock owned by LWG Family Partners, L.P., a partnership
whose managing partner is a corporation which is one-third owned by
Mr. Lauder. Mr. Lauder disclaims beneficial ownership of the shares of
Class B Common Stock owned by his wife.
(10) Such shares are owned by Schuster Family Partners I, L.P. Mr. Schuster
disclaims beneficial ownership of such shares.
(11) Includes (a) 454 shares of Class A Common Stock issuable upon the exercise
of a like number of options granted under the Directors' Plan, such options
all vest on October 6, 1998; and (b) 1,408,629 shares are owned by Coral
Gate, an investment business company organized under the laws of the
British Virgin Islands, which is beneficially owned by Gustavo A. Cisneros
and his brother, Ricardo Cisneros. The business address for Gustavo
Cisneros is 36 East 61st Street, New York, New York 10021.
(12) Such shares are beneficially owned by Gustavo A. Cisneros and his brother,
Ricardo Cisneros. The business address of Coral Gate is 36 East 61st
Street, New York, New York 10021.
(13) 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 RSL
North America. See "--Management" for more information regarding Mr.
Tarlovsky. The shares of Class B Common Stock shown are owned by Tarlovsky
Investment Partners, L.P., of which Mr. Tarlovsky is the sole general
partner. If the Underwriters' over-allotment options are exercised in full
and Mr. Tarlovsky sells all of his shares offered, Mr. Tarlovsky intends to
convert 50,000 shares of Class B Common Stock into an equal number of
shares of Class A Common Stock. If the Underwriters' over-allotment options
are exercised in full and Tarlovsky Investment Partners sells all of its
shares offered, Mr. Tarlovsky's post-Offerings number of shares of Class A
Common Stock beneficially owned, percent ownership of Class A Common Stock,
number of shares of Class B Common Stock beneficially owned, percent
ownership of Class B Common Stock, percent overall voting power and percent
overall ownership would be 717,804, 2.7%, 220,301, less than 1%, 1.0% and
1.8%, respectively.
(14) Such Selling Shareholder will only sell the shares offered by such Selling
Shareholder in the event the Underwriters exercise their over-allotment
options.
(15) 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. Mr. Bildirici was employed by both RSLAG (see note
5) and the Company from August 1993 to December 1996 and a Managing
Director of RSLAG from 1996 until recently. See "Management" for more
information regarding Mr. Bildirici. If the Underwriters' over-allotment
options are exercised and Mr. Bildirici sells all of his shares offered,
Mr. Bildirici intends to convert 30,555 shares of Class B Common Stock into
an equal number of shares of Class A Common Stock. If the Underwriters'
over-allotment options are exercised in full and Mr. Bildirici sells all of
his shares offered, Mr. Bildirici's post-Offerings number of shares of
Class A Common Stock beneficially owned, percent ownership of Class A
Common Stock, number of shares of Class B Common Stock beneficially owned,
percent ownership of Class B Common Stock, percent overall voting power and
percent overall ownership would be 547,499, 2.1%, 87,958, less than 1%,
less than 1%, 1% and 1.2%, respectively.
(16) Includes (a) 454 shares of Class A Common Stock issuable upon the exercise
of a like number of options granted under the Director's Plan, such options
vested on October 6, 1998, and (b) 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 1995 Plan.
(17) Includes (a) 454 shares of Class A common stock issuable upon the exercise
of a like number of options granted under the Directors' Plan, such options
vested on October 6, 1998; and (b) 12,226 shares of Class A Common Stock
held by Mr. Langhammer directly.
(18) Consists of 350,400 shares of Class A Common Stock issuable upon the
exercise of an equal number of presently exercisable options granted to
Mr. Williams under the 1995 Plan. Richard E. Williams has served as
President and Chief Executive Officer of RSL Europe since August 1995. See
"Management" for more information regarding Mr. Williams. If the
Underwriters' over-allotment options are exercised in full and
Mr. Williams sells all of his shares offered, Mr. Williams post-
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Offerings number of shares of Class A Common Stock beneficially owned,
percent ownership of Class A Common Stock, percent overall voting power and
percent overall ownership would be 125,400, less than 1%, less than 1% and
less than 1%, respectively.
(19) Such shares are owned by The Proverbs Trust, a Bermuda trust, of which
Mr. Trollope and his wife are the trustees and beneficiaries.
(20) Includes 434,609 shares of Class A Common Stock issuable upon the exercise
of an equal number of options granted to certain of the directors and
executive officers as a group and 459,900 shares of Class B Common Stock
issuable upon the exercise of the Lauder Warrants. If the Underwriters'
over-allotment options are exercised and Messrs. Tarlovsky and Bildirici
sell all of their shares offered, Messrs. Tarlovsky and Bildirici intend to
convert an aggregate 80,555 shares of Class B Common Stock into an equal
number of shares of Class A Common Stock. If the Underwriters'
over-allotment options are exercised in full and Messrs. Tarlovsky,
Bildirici and Williams sell all of their shares offered, the post-Offerings
number of shares of Class A Common Stock beneficially owned, percent
ownership of Class A Common Stock, number of shares of Class B Common Stock
beneficially owned, percent ownership of Class B Common Stock, percent
overall voting power and percent overall ownership of all directors and
officers as a group would be 3,331,481, 12.6%, 26,703,767, 100.0%, 92.1%
and 56.4%, respectively.
(21) Such shares are owned by Ligapart, AG, a wholly owned subsidiary of Metro
Holding AG. The address for Metro Holding AG is Neuhofstrasse 4, CH-6340
Baar, Switzerland.
(22) Includes (a) 48,879 shares of Class A Common Stock owned directly by
Mr. Gaspar; (b) 1,810,633 shares of Class A Common Stock owned by Bukfenc,
Inc., a corporation wholly owned by Mr. Gaspar and members of his family
("Bukfenc") (see note 23); and (c) 3,729 shares of Class A Common Stock
owned by Bukfenc, LLC, a limited liability company, of which Mr. Gaspar and
members of his family are the only members. If the Underwriters'
over-allotment options are exercised in full and Bukfenc sells all of its
shares offered, Mr. Gaspar's post-Offerings number of shares of Class A
Common Stock beneficially owned, percent ownership of Class A Common Stock,
percent overall voting power and percent overall ownership would be
1,663,241, 6.3%, less than 1% and 3.2%, respectively. Mr. Gaspar served as
a director and Vice Chairman of the Board of Directors of the Company from
its inception in 1994 until May 1998. The address for Andrew Gaspar is 122
Salem Road, East Hills, New York, NY 11577.
(23) Bukfenc is a corporation wholly owned by Andrew Gaspar and members of his
family. The address for Bukfenc is 122 Salem Road, East Hills, New York, NY
11577. Andrew Gaspar served as a director and Vice Chairman of the Board of
the Company from its inception until May 1998. Mr. Gaspar is the former
managing member of LGV (see note 6). Mr. Gaspar is the president of the
corporate general partner of RSLAG (see note 5). Both LGV and RSLAG are
being liquidated. If the Underwriters' over-allotment options are exercised
in full and Bukfenc sells all of its shares offered, Bukfenc's
post-Offerings number of shares of Class A Common Stock beneficially owned,
percent ownership of Class A Common Stock, percent overall voting power and
percent overall ownership would be 1,610,633, 6.1%, less than 1% and 3.1%,
respectively. LGV and RSLAG each have their business address at 767 Fifth
Avenue, New York, New York 10153. Mr. Gaspar's address is 1301 Avenue of
the Americas, New York, NY 10019.
(24) Information as to the shares owned by Essex Investment Company, an
investment adviser registered under Section 203 of the Investment Advisers
Act of 1940, is as of March 31, 1998, and is taken from a Schedule 13G/A
filed with the Commission on August 8, 1998. The address for Essex
Investment Management Company is 125 High Street, Boston, Massachussetts
02110.
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.
In connection with the initial public offering of Class A Common Stock
consummated in October 1997, the Company revised its capital structure to effect
a 2.19-for-one stock split and to increase the number of authorized shares of
Common Stock and of the Company's Preferred Stock (the "Preferred Stock"). As a
result, the Company is authorized to issue 438,000,000 shares of Common Stock,
which may be issued as shares of Class A Common Stock or Class B Common Stock.
The Company is also authorized to issue 65,700,000 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.
CLASS A COMMON STOCK
As of November 18, 1998, 18,484,529 shares of Class A Common Stock were
issued and outstanding. 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
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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 payment of all debts and other liabilities and after
distribution in full of the preferential amounts to be distributed to holders of
Preferred Stock, if any.
TRANSFER AGENT AND REGISTRAR
The Company's transfer agent and registrar for the Class A Common Stock is
American Stock Transfer & Trust Company.
CLASS B COMMON STOCK
As of November 18, 1998, there were 16 holders of Class B Common Stock and
26,328,590 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 after the payment of any dividends declared but unpaid on any shares of
Preferred Stock then outstanding. The holders of the Class B Common Stock have
no pre-emptive or cumulative voting rights. 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. On liquidation, dissolution or winding up of
the Company, the holders of the Class B Common Stock are entitled to receive,
pari passu with the holders of Class A Common Stock, pro rata the net assets of
the Company remaining after 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, if any.
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.
PREFERRED STOCK
As of the date of this Prospectus, the Company is authorized to issue
65,700,000 shares of Preferred Stock and no such shares are currently
outstanding.
WARRANTS
LAUDER WARRANTS
As consideration for, among other things, his guarantee of the Revolving
Credit Facility, Ronald S. Lauder received warrants to purchase 459,900 shares
of Class B Common Stock of the Company (the "Lauder Warrants"). The exercise
price ($.00457 per share, subject to adjustment), exercise period (through
October 3, 2007) 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.
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WARRANTS ISSUED IN 1996 UNITS OFFERING
In October 1996, the Company issued an aggregate 300,000 Warrants to
purchase shares of Class A Common Stock (the "Warrants"). The Warrants were
issued pursuant to the Warrant Agreement, dated as of October 6, 1996 (the
"Warrant Agreement"), between the Company and The Chase Manhattan Bank, as
warrant agent (the "Warrant Agent").
Each Warrant is evidenced by a certificate and currently 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 prior to the
close of business on October 3, 2007. Warrants that are not exercised by such
date will expire.
As of November 18, 1998, 274,726 shares of Class A Common Stock have been
issued upon exercise of 69,113 Warrants and 917,729 shares of Class A Common
Stock are issuable upon exercise of the 230,875 unexercised Warrants.
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 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.
ANTI-TAKEOVER PROTECTIONS
The voting provisions of the Class B Common Stock and the ability of the
Company to issue 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 provisions 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.
DIFFERENCES IN CORPORATE LAW
The Companies Act 1981 of Bermuda differs in certain respects from laws
generally applicable to United States corporations and their shareholders. Set
forth below is a summary of certain significant provisions of The Companies Act
(including any modifications adopted pursuant to the Company's Bye-Laws)
applicable to the Company, which differ in certain respects from provisions of
Delaware corporate law. The following statements are summaries, and do not
purport to deal with all aspects of Bermuda law that may be relevant to the
Company and its shareholders.
Interested Directors. The Bye-Laws provide that any transaction entered
into by the Company in which a director has an interest is not voidable by the
Company nor can such director be liable to the Company for any profit realized
pursuant to such transaction provided the nature of the interest is disclosed at
the first opportunity at a meeting of directors, or in writing to the directors.
Following disclosure, a director may vote on any matter in which such director
has an interest. Under Delaware law no such transaction would be voidable if
(i) the material facts as to such interested director's relationship or
interests are disclosed or are known to the board of directors and the board in
good faith authorizes the transaction by the affirmative vote of a majority of
the disinterested directors, (ii) such material facts are disclosed or are known
to the stockholders entitled to vote on such transaction and
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the transaction is specifically approved in good faith by vote of the
stockholders or (iii) the transaction is fair as to the corporation as of the
time it is authorized, approved or ratified. Under Delaware law such an
interested director could be held liable for any transaction for which such
director derived an improper personal benefit.
Merger and Similar Arrangements. The Company may acquire the business of
another Bermuda company similarly exempt from Bermuda taxes or a company
incorporated outside Bermuda and carry on such business when it is within the
objects of its Memorandum of Association. The Company may amalgamate with
another Bermuda company or with a company incorporated in another jurisdiction
which permits such a company to amalgamate with a Bermuda company, subject to
shareholder approval. A shareholder may apply to a Bermuda court for a fair
valuation of such shareholder's shares if such shareholder is not satisfied that
fair value has been paid for such shares. The court ordinarily would not
disapprove the transaction on that ground absent evidence of fraud or bad faith.
Under Delaware law, with certain exceptions, any merger, consolidation or sale
of all or substantially all the assets of a corporation must be approved by the
board of directors and a majority of the outstanding shares entitled to vote.
Under Delaware law a stockholder of a corporation participating in certain major
corporate transactions may, under varying circumstances, be entitled to
appraisal rights pursuant to which such stockholder may receive cash in the
amount of the fair market value of the shares held by such stockholder (as
determined by a court or by agreement of the corporation and the stockholder) in
lieu of the consideration such stockholder would otherwise receive in the
transaction. Delaware law does not provide stockholders of a corporation with
voting or appraisal rights when the corporation acquires another business
through the issuance of its stock or other consideration (i) in exchange for the
assets of the business to be acquired, (ii) in exchange for the outstanding
stock of the corporation to be acquired or (iii) in a merger of the corporation
to be acquired with a subsidiary of the acquiring corporation.
Takeovers. Bermuda law provides that where an offer is made for shares of
another company and, within four months of the offer the holders of not less
than 90% of the shares which are the subject of the offer accept, the offeror
may by notice require the nontendering shareholders to transfer their shares on
the terms of the offer. Dissenting shareholders may apply to the court within
one month of the notice objecting to the transfer. The burden is on the
dissenting shareholders to show that the court should exercise its discretion to
enjoin the required transfer, which the court will be unlikely to do unless
there is evidence of fraud or bad faith or collusion as between the offeror and
the holders of the shares who have accepted the offer as a means of unfairly
forcing out minority shareholders. Delaware law provides that a parent
corporation, by resolution of its board of directors and without any shareholder
vote, may merge with any 90% or more owned subsidiary. Upon any such merger,
dissenting stockholders of the subsidiary would have appraisal rights.
Shareholder's Suit. The rights of shareholders under Bermuda law are not
as extensive as the rights of shareholders under legislation or judicial
precedent in many United States jurisdictions. Class actions and derivative
actions are generally not available to shareholders under the laws of Bermuda.
However, the Bermuda courts ordinarily would be expected to follow English case
law precedent, which would permit a shareholder to commence an action in the
name of the Company to remedy a wrong done to the Company where the act
complained of is alleged to be beyond the corporate power of the Company or is
illegal or would result in the violation of the Memorandum of Association and
Bye-Laws. Furthermore, consideration would be given by the court to acts that
are alleged to constitute a fraud against the minority shareholders or where an
act requires the approval of a greater percentage of the Company's shareholders
than actually approved it. The winning party in such an action generally would
be able to recover a portion of attorney's fees incurred in connection with such
action. Class actions and derivative actions generally are available to
stockholders under Delaware law, for among other things, breach of fiduciary
duty, corporate waste and actions not taken in accordance with applicable law.
In such actions, the court has discretion to permit the winning party to recover
attorney's fees incurred in connection with such action.
Indemnification of Directors. The Company may indemnify its directors or
officers in their capacity as such in respect of any loss arising or liability
attaching to them by virtue of any rule of law in respect
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of any negligence, default, breach of duty or breach of trust of which a
director or officer may be quilty in relation to the Company other than in
respect of his own fraud or dishonesty. Under Delaware law, a corporation may
adopt a provision eliminating or limiting the personal liability of a director
to the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for breaches of the director's duty of
loyalty, for acts or omissions not in good faith or which involve intentional
misconduct or knowing violations of law, for improper payment of dividends or
for any transaction from which the director derived an improper personal
benefit. Delaware law has provisions and limitations similar to Bermuda law
regarding indemnification by a corporation of its directors or officers, except
that under Delaware law the statutory rights to indemnification may not be as
limited.
Inspection of Corporate Records. Members of the general public have the
right to inspect the public documents of the Company available at the office of
the Registrar of Companies in Bermuda which will include the Memorandum of
Association (including its objects and powers) and any alteration to the
Memorandum of Association and documents relating to an increase or reduction of
authorized capital. The shareholders have the additional right to inspect the
Bye-Laws, minutes of general meetings and audited financial statements of the
Company, which must be presented to the annual general meeting of shareholders.
The register of shareholders of the Company is also open to inspection by
shareholders without charge, and to members of the public for a fee. The Company
is required to maintain its share register in Bermuda but may establish a branch
register outside Bermuda. The Company is required to keep at its registered
office a register of its directors and officers which is open for inspection by
members of the public without charge. Bermuda law does not, however, provide a
general right for shareholders to inspect or obtain copies of any other
corporate records. Delaware law permits any shareholder to inspect or obtain
copies of a corporation's shareholder list and its other books and records for
any purpose reasonably related to such person's interest as a shareholder.
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 permission of the Bermuda Monetary Authority
does not constitute a guarantee by the Bermuda Monetary Authority as to the
performance or creditworthiness of the Company and in giving such pemission the
Bermuda Monetary Authority will not be liable for the correctness of any
opinions expressed herein.
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.
Owners of shares of Class A Common Stock who are regarded as resident
outside Bermuda for exchange control purposes 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 has it 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
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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 50 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.
CERTAIN RIGHTS TO ACQUIRE CLASS A COMMON STOCK
The Company has granted to a number of minority shareholders of its
subsidiaries (the "Minority Interestholders") options, exercisable on the
occurrence of certain events, to exchange their shares in the respective
subsidiaries for, in certain circumstances, shares of Class A Common Stock or,
in certain circumstances, cash (the "Roll-Up Rights"). In addition, 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. As of the date of this
Prospectus, Roll-Up Rights were held by Minority Interestholders of the
following subsidiaries: RSL USA, RSL Asia, RSL Italy (and its subsidiary
Comesa), RSL Latin America, RSL Austria, RSL Spain, RSL Switzerland, Telecenter
Oy, RSL Belgium and PCM. In most cases, the outstanding Roll-Up Rights become
exercisable, without further condition, in annual installments beginning upon
expiration of a specified period after their respective dates of grant. In
addition, exercisability of certain Roll-Up Rights may be accelerated upon
public offering of Common Stock or a change of control of the Company or its
relevant subsidiary. None of these Roll-Up Rights are currently exercisable,
with the exception of those held by the Minority Interestholders of RSL Latin
America and RSL Austria. The number of shares of Class A Common Stock issuable
upon exercise of the Roll-Up Rights will be based upon valuations of the
minority interests and the Class A Common Stock at the time of exercise and,
consequently can not be determined at this time, but would likely be in the
aggregate material. Based on preliminary valuation studies of the relevant
subsidiaries as of September 30, 1998 and an average of the last reported sale
prices of Class A Common Stock on the Nasdaq National Market during the 30-day
period ending on such date, the outstanding Roll-Up Rights would have been
exercisable on such date for an estimate of between 2,500,000 and 2,750,000
shares of Class A Common Stock in the aggregate.
The Company has also granted to certain employees of its subsidiaries
options to acquire shares of such subsidiaries or similar rights (the "Incentive
Units"), some of which are currently exercisable and to exchange such Incentive
Units for shares of Class A Common Stock or, in certain circumstances, at the
Company's option, cash. All shares of Class A Common Stock issuable upon
exchange of Incentive Units will be issued under the 1997 Plan. The Company
believes that the number of shares of Class A Common Stock issuable upon
exchange of currently exercisable Incentive Units, based on the average closing
price of the Class A Common Stock for the 30 day period prior to July 31, 1998,
will be no more than 400,000. See "Management--Stock Option and Compensation
Plans--1997 Stock Incentive Plan."
In addition, pursuant to the Telegate Exchange, the Company will, in
certain circumstances, be required to issue shares of Class A Common Stock to
Metro Holding and certain affiliates in exchange for their interests in Telegate
Holding, the management holding company for Telegate. See "Business--European
Operations--General." The number of shares of Class A Common Stock issuable in
the Telegate Exchange will be based on a valuation of the Telegate Holding
interests and the Class A Common Stock at the time of the exchange and,
consequently, can not be determined at this time, but would likely be material.
See "Risk Factors--Shares Eligible for Future Sale."
109
<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
CREDIT FACILITIES
Ericsson has provided to certain of the Company's subsidiaries financing
commitments to fund the purchase of additional switches and related equipment.
As of September 30, 1998, such commitments were in the aggregate limited to
approximately $75 million of which approximately $7.3 million 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. In addition, the
Company has a Revolving Credit Facility with The Chase Manhattan Bank and a
revolving credit facility with Coast Business Credit, of which $3.9 million and
$2.8 million, respectively, was available at June 30, 1998 under commitments of
$7.5 million and $10.0 million, respectively. The Commitment under the Revolving
Credit Agreement with Chase Manhattan Bank was permanently reduced to
$5 million at July 1, 1998.
1996 NOTES
GENERAL
On October 3, 1996, the RSL PLC issued $300.0 million of 12 1/4% Senior
Notes pursuant to the Indenture, dated October 3, 1996 (the "1996 Indenture"),
among RSL PLC, the Issuer and The Chase Manhattan Bank, as trustee, which were
exchanged on May 22, 1997 for $300.0 million of substantially identical notes
that had been registered under the Securities Act (the "1996 Notes"), of which
$172.5 million in aggregate principal amount remain outstanding as of the date
of this Prospectus. The 1996 Notes are unconditionally guaranteed by the Issuer.
PRINCIPAL, MATURITY AND INTEREST
The 1996 Notes are limited in aggregate principal amount to $300.0 million
and will mature on October 3, 2006. Interest on the 1996 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 twelve 30-day months. RSL PLC used $102.8 million of the net proceeds of the
1996 Notes 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 1996 Notes. Proceeds from the Pledged Securities may be used by
RSL PLC to make interest payments on the 1996 Notes through November 15, 1999.
RANKING
The 1996 Notes are unsecured senior obligations of RSL PLC, rank pari passu
in right of payment with all existing and future senior obligations of RSL PLC,
and rank senior in right of payment to all future subordinated obligations of
the Issuer.
REDEMPTION
The 1996 Notes are not redeemable prior to November 15, 2001. Thereafter,
the 1996 Notes are subject to redemption at the option of RSL PLC, 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>
110
<PAGE>
COVENANTS
The 1996 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 1996 Notes. The 1996 Indenture permits, under certain
circumstances, the Issuer's subsidiaries to be deemed unrestricted subsidiaries
and thus not subject to the restrictions of the 1996 Indenture.
EVENTS OF DEFAULT
The 1996 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 Issuer or certain of its subsidiaries.
U.S. DOLLAR NOTES
GENERAL
On February 27, 1998, RSL PLC issued (i) $200 million of Senior Notes (the
"Old Senior Notes") pursuant to an Indenture, dated as of February 27, 1998 (the
"Senior Notes Indenture"), between RSL PLC, the Issuer and The Chase Manhattan
Bank, as trustee, and (ii) $328.1 million principal amount at maturity of Senior
Discount Notes (the "Old Discount Notes") pursuant to an Indenture, dated as of
February 27, 1998 (the "Senior Discount Notes Indenture" and, together with the
Senior Notes Indenture, the "U.S. Dollar Notes Indentures"), among RSL PLC, the
Issuer and The Chase Manhattan Bank, as trustee. On June 19, 1998, the Old
Senior Notes were exchanged for $200 million of substantially identical notes
that had been registered under the Securities Act (the "Senior Notes") and on
June 29, 1998, the Old Discount Notes were exchanged for $328.1 million
principal amount at maturity of substantially identical notes that had been
registered under the Securities Act (the "Senior Discount Notes" and, together
with the Senior Notes, the "U.S. Dollar Notes"). The U.S. Dollar Notes are
unconditionally guaranteed by the Issuer.
PRINCIPAL, MATURITY AND INTEREST
The U.S. Dollar Notes are initially limited in aggregate principal amount
at maturity to $528.1 million and will mature on March 1, 2008. Interest on the
Senior Notes accrues at 9 1/8% per annum and is payable semiannually on March 1
and September 1 of each year, commencing September 1, 1998. No interest will be
payable on the Senior Discount Notes prior to September 1, 2003. From and after
March 1, 2003, interest on the Senior Discount Notes will accrue at 10 1/8% on
the principal amount at maturity of such notes and is payable semiannually on
March 1 and September 1 of each year, commencing September 1, 2003. Interest on
the U.S. Dollar Notes is computed on the basis of a 360-day year comprised of
twelve 30-day months.
RANKING
The U.S. Dollar Notes are unsecured senior obligations of RSL PLC and the
Issuer, rank pari passu in right of payment with (i) the 1996 Notes, (ii) the DM
Notes and (iii) all existing and future senior obligations of RSL PLC and the
Issuer, and rank senior in right of payment to all future subordinated
obligations of RSL PLC and the Issuer.
111
<PAGE>
REDEMPTION
The U.S. Dollar Notes are not redeemable prior to March 1, 2003.
Thereafter, the U.S. Dollar Notes are subject to redemption at the option of RSL
PLC, in whole or in part, at the redemption prices (expressed as percentages of
stated principal amount) set forth below plus accrued and unpaid interest
thereon to (but excluding) the applicable redemption date, if redeemed during
the 12-month period beginning on March 1 of the years indicated below:
SENIOR NOTES
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ------------------------------------------------------------------------------------ ----------------
<S> <C>
2003................................................................................ 104.562%
2004................................................................................ 103.042%
2005................................................................................ 101.521%
2006 and thereafter................................................................. 100.000%
</TABLE>
SENIOR DISCOUNT NOTES
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ------------------------------------------------------------------------------------ ----------------
<S> <C>
2003................................................................................ 105.062%
2004................................................................................ 103.375%
2005................................................................................ 101.687%
2006 and thereafter................................................................. 100.000%
</TABLE>
In addition, at any time on or before March 1, 2001, in the event the
Issuer receives net cash proceeds from the public or private sale of its common
stock, RSL PLC (to the extent the Company receives such proceeds and has not
used such proceeds, directly or indirectly, to redeem or repurchase other
securities pursuant to optional redemption provisions) may, at its option, apply
an amount equal to any such net cash proceeds or any portion thereof to redeem
up to 33 1/3% of the aggregate principal amount at maturity of the U.S. Dollar
Notes at a redemption price equal to 109.125% of the principal amount thereof,
in the case of the Senior Notes, and 110.125% of the accreted value, in the case
of the Senior Discount Notes, plus accrued and unpaid interest thereon, if any,
to the date of redemption, provided that at least 66 2/3% of aggregate principal
amount at maturity of the Senior Notes or Senior Discount Notes, as applicable,
remains outstanding immediately after such redemption.
COVENANTS
The U.S. Dollar Notes Indentures restrict, among other things, the
Company's ability to incur additional indebtedness, pay dividends or make
distributions in respect of its capital stock, make investments or certain other
restricted payments, create liens, sell assets, issue or sell capital stock of
certain subsidiaries, enter into transactions with stockholders or affiliates or
effect a consolidation or merger.
EVENTS OF DEFAULT
The U.S. Dollar Notes Indentures contain standard events of default,
including (i) failure to pay principal of (or premium, if any, on) any U.S.
Dollar Note when due, (ii) failure to pay any interest on any U.S. Dollar Note
when due, continued for 30 days, (iii) failure to perform covenants or
agreements under the U.S. Dollar Notes Indentures or the U.S. Dollar Notes, (iv)
cross-defaults against certain other indebtedness, (v) failure to pay more than
$10.0 million of judgments that have not been stayed by appeal and (vi) certain
events of bankruptcy, insolvency or reorganization affecting the Issuer and
certain of its subsidiaries.
112
<PAGE>
DM NOTES
GENERAL
On March 15, 1998, RSL PLC issued DM 296.0 million principal amount at
maturity of 10% Senior Discount Notes (the "Old DM Notes") pursuant to an
Indenture, dated as of March 16, 1998 (the "DM Notes Indenture"), among RSL PLC,
the Issuer and The Chase Manhattan Bank, as trustee. On June 29, 1998, the Old
DM Notes were exchanged for DM 296.0 million principal amount at maturity of
substantially identical notes that had been registered under the Securities Act
(the "DM Notes" and, together with the U.S. Dollar Notes, the "1998 Notes"). The
DM Notes are unconditionally guaranteed by the Issuer.
PRINCIPAL, MATURITY AND INTEREST
The DM Notes are initially limited in aggregate principal amount at
maturity to DM296.0 million (approximately $99.1 million initial accreted value)
and will mature on March 15, 2008. No interest is payable on the DM Notes prior
to September 15, 2003. From and after March 15, 2003, interest on the DM Notes
will accrue on the principal amount at maturity of such notes at the rate of 10%
per annum and is payable semiannually on March 15 and September 15 of each year,
commencing September 15, 2003. Interest is computed on the basis of a 360-day
year comprised of twelve 30-day months.
RANKING
The DM Notes are unsecured senior obligations of RSL PLC and the Issuer,
rank pari passu in right of payment with (i) the 1996 Notes, (ii) the U.S.
Dollar Notes and (iii) all other existing and future senior obligations of RSL
PLC and the Issuer, and rank senior in right of payment to all future
subordinated obligations of RSL PLC and the Issuer.
REDEMPTION
The DM Notes are not redeemable prior to March 15, 2003. Thereafter, the DM
Notes are subject to redemption, at the option of RSL PLC, in whole or in part,
at the redemption prices (expressed as percentages of the principal amount
thereof) set forth below plus accrued interest to but excluding the redemption
date, if redeemed during the 12-month period beginning March 15 of the years
indicated:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ------------------------------------------------------------------------------------ ----------------
<S> <C>
2003................................................................................ 105.000%
2004................................................................................ 103.333%
2005................................................................................ 101.667%
2006 and thereafter................................................................. 100.000%
</TABLE>
In addition, at any time prior to March 15, 2001, in the event the Issuer
receives net cash proceeds from the public or private sale of its common stock,
RSL PLC (to the extent the Company receives such proceeds and has not used such
proceeds, directly or indirectly, to redeem or repurchase other securities
pursuant to optional redemption provisions) may, at its option, apply an amount
equal to any such net cash proceeds or any portion thereof to redeem, from time
to time, DM Notes in a principal amount at maturity of up to an aggregate amount
equal to 33 1/3% of the aggregate principal amount at maturity of the DM Notes,
provided, however, that DM Notes in an amount equal to at least 66 2/3% of the
aggregate principal amount at maturity of the DM Notes remain outstanding
immediately after such redemption.
COVENANTS; EVENTS OF DEFAULT
The DM Notes Indenture contains covenants and provides for events of
default which are identical in all material respects to the covenants and events
of default contained in the U.S. Dollar Notes Indentures.
113
<PAGE>
NEW NOTES
GENERAL
On November 9, 1998, the Company, through RSL PLC, issued the New Notes in
the New Notes Offering, pursuant to an Indenture, dated as of November 9, 1998
(the "New Notes Indenture"), among RSL PLC, the Issuer and The Chase Manhattan
Bank, as Trustee. The Company will be required to exchange the New Notes for
$100 million aggregate principal amount at maturity of substantially identical
notes that will be registered under the Securities Act. The New Notes are
unconditionally guaranteed by the Issuer.
PRINCIPAL, MATURITY AND INTEREST
The New Notes are initially limited in aggregate principal amount at
maturity to $100 million (approximately $94.5 million initial accreted value)
and will mature on November 1, 2008. Interest on the New Notes will accrue on
the principal amount at maturity of such notes at the rate of 12% per annum and
is payable semiannually on November 1 and May 1 of each year, commencing May 1,
1999. Interest is computed on the basis of a 360-day year comprised of twelve
30-day months.
RANKING
The New Notes are unsecured senior obligations of RSL PLC and the Issuer,
rank pari passu in right of payment with (i) the 1996 Notes, (ii) the U.S.
Dollar Notes, (iii) the DM Notes and (iv) all other existing and future senior
obligations of RSL PLC and the Issuer, and rank senior in right of payment to
all future subordinated obligations of RSL PLC and the Issuer.
REDEMPTION
The New Notes are not redeemable prior to November 1, 2003. Thereafter, the
New Notes are subject to redemption, at the option of RSL PLC, in whole or in
part, at the redemption prices (expressed as percentage of the accreted value
thereof) set forth below plus accrued interest to but excluding the redemption
date, if redeemed during the 12-month period beginning November 1 of the years
indicated:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ------------------------------------------------------------------------------------ ----------------
<S> <C>
2003................................................................................ 106%
2004................................................................................ 104%
2005................................................................................ 102%
2006 and thereafter................................................................. 100%
</TABLE>
In addition, at any time prior to November 1, 2001, and in the event the
Issuer receives net cash proceeds from the public or private sale of its common
stock, RSL PLC (to the extent RSL PLC receives such proceeds and has not used
such proceeds, directly or indirectly, to redeem or repurchase other securities
pursuant to optional redemption provided) may, at its option, apply an amount
equal to any such net cash proceeds or any portion thereof to redeem, from time
to time, New Notes in a principal amount at maturity of up to an aggregate
amount equal to 33 1/3% of the aggregate principal amount at maturity of the New
Notes, provided, however, that New Notes in an amount equal to at least 66% of
the aggregate principal amount at maturity of the New Notes remain outstanding
immediately after such redemption.
COVENANTS; EVENTS OF DEFAULT
The New Notes Indenture contains covenants and provides for events of
default which are identical in all material respects to the covenants and of
default contained in the U.S. Dollar Notes Indentures and the DM Notes
Indenture.
114
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Assuming all of the Shares offered hereby by the Company were sold, then as
of November 18, 1998, the Company would have 51,813,119 shares of Common Stock
outstanding, including 25,484,529 shares of Class A Common Stock (26,534,529
shares, if the Underwriters' over-allotment options are exercised in full) and
26,328,590 shares of Class B Common Stock (26,248,035 shares, if the
Underwriters' over-allotment options are exercised in full). Of such shares,
approximately 17,719,396 shares of Class A Common Stock (18,688,841 shares, if
the Underwriters' over-allotment options are exercised in full), including the
shares sold in the Offerings and in the IPO and the shares issued pursuant to
the Warrant Registration, in each case, other than those shares purchased by, or
issued to, affiliates of the Company, would be freely tradeable without
restriction or further registration under the Securities Act. The remaining
outstanding shares of Class A Common Stock and all outstanding shares of Class B
Common Stock would be restricted securities and subject to the volume and other
resale limitations of Rule 144. After a "lock up" period expiring 90 days after
the consummation of the Offerings, to which the Company's executive officers and
directors and certain other shareholders are subject pursuant to the
Underwriting Agreements, all such restricted securities would be eligible for
public sale, subject to the volume and other resale limitations of Rule 144. See
"Underwriting."
The foregoing does not include (i) 1,492,625 shares of Class A Common Stock
issuable upon the exercise of outstanding stock options, (ii) 26,328,590 shares
of Class A Common Stock issuable upon the conversion of the shares of Class B
Common Stock, (iii) 459,900 shares of Class B Common Stock issuable upon
exercise of the Lauder Warrants and 459,900 shares of Class A Common Stock
issuable upon the conversion of such shares of Class B Common Stock,
(iv) 917,729 shares of Class A Common Stock issuable upon exercise of
unexercised Warrants, (v) 109,500 shares of restricted stock, granted pursuant
to the Company's 1997 Stock Incentive Plan or (vi) shares of Class A Common
Stock issuable upon exercise of Roll-Up Rights, Incentive Units, the Telegate
Exchange or New Lender Warrants. See "Management--Stock Option and Compensation
Plans," "--Compensation of Directors--Directors' Plan," "Certain Relationships
and Related Transactions," "Description of Capital Stock--Warrants" and "Certain
Rights to Acquire Class A Common Stock." Upon issuance or vesting of such shares
issuable upon the exercise of options, vesting of stock awards or exercise of
Incentive Units (in each case, other than shares issued to affiliates of the
Company), such shares will be eligible for public sale without restriction. As
required by the registration rights agreement covering the Warrants, the Company
has registered under the Securities Act the shares of Class A Common Stock
issuable upon exercise of the Warrants (the "Warrant Registration") and, upon
issuance, such shares (other than shares issued to affiliates of the Company)
will be eligible for public sale without restriction. Such shares issuable upon
exercise of the Lauder Warrants, Roll-Up Rights or the Telegate Exchange will be
restricted securities and subject to the volume and other resale limitations of
Rule 144.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are required to be aggregated), including an affiliate of the
Company, who has been deemed to have beneficially owned shares for at least one
year, 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 benefically owned shares 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.
115
<PAGE>
Ronald S. Lauder, the Chairman of the Company's Board of Directors and its
largest and controlling shareholder, Itzhak Fisher, President and Chief
Executive Officer of the Company, the other holders of Class B Common Stock,
Coral Gate and the Company have entered into a Registration Rights Agreement
(the "Registration Rights Agreement"), pursuant to which Mr. Lauder has been
granted three demand registration rights exercisable at any time after April 4,
1998 and Mr. Fisher has been 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 or a termination by Itzhak Fisher without
Good Reason (a "Qualified Severance Event"). Messrs. Lauder and Fisher, such
other holders of Class B Common Stock, Coral Gate and such additional holders of
Class A Common Stock as Mr. Lauder and Mr. Fisher may jointly designate to the
Company 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, Mr. 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 (as
defined) would hold less than 70% of the shares of Class A Common Stock held by
them as a group as of the closing date of the IPO. Mr. Lauder, Mr. Fisher and
the other holders of Class B Common Stock may assign their rights under the
Registration Rights Agreement to their respective Family Members, Coral Gate and
Messrs. Gustavo and Ricardo Cisneros (the beneficial owners of Coral Gate) may
assign their rights to Family Members, and Mr. Lauder and Mr. Fisher may assign
their rights to lenders to whom they pledge any of their shares of Class A
Common Stock. The Company has agreed to pay all expenses (other than legal
expenses, underwriting discounts and commissions of the selling shareholders and
taxes payable by the selling shareholders) in connection with any registration
pursuant to the exercise of demand registration rights or piggyback registration
rights under the Registration Rights Agreement and has also agreed to indemnify
such persons against certain liabilities, including liabilities arising under
the Securities Act.
The Company has also granted to Metro Holding one demand registration right
exercisable after March 31, 2001 with respect to the shares of Class A Common
Stock currently beneficially owned by Metro Holding and any shares of Class A
Common Stock acquired pursuant to the Telegate Exchange.
In addition, the Company also has granted to a number of Minority
Interestholders certain piggyback registration rights with respect to shares of
Class A Common Stock issuable upon exercise of their Roll-Up Rights. In general,
if the Company files with the Commission a registration statement on Form S-3
under the Securities Act, which registration statement includes shares being
sold by or for the account of shareholders of the Company, the Company will, at
the option of any such Minority Interestholder who is then a registered owner of
Class A Common Stock and subject to certain limitations, register all or any
portion of such person's shares of Class A Common Stock concurrently with the
registration of such other securities. In addition, on or after the Company
becomes eligible to file a registration statement on Form S-3, Minority
Interestholders in RSL Latin America have demand registration rights with
respect to shares of Class A Common Stock acquired upon exercise of Roll-Up
Rights.
See "Risk Factors--Shares Eligible for Future Sale" for a discussion of the
potential adverse effect on the market price of the Class A Common Stock which
could result from the sale of substantial amounts of Class A Common Stock, or
the availability of shares for future sale.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Debevoise & Plimpton, 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
116
<PAGE>
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 and dividends
from domestic (U.S.) subsidiaries, 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. 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). 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 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.
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<PAGE>
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. In the case of non-corporate taxpayers, long-term capital gains from
the sale of Class A Common Stock will be taxed at a maximum federal rate of 20%.
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. 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 foreign
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 minimize the imposition of the
PHC tax, to the extent such management of its affairs is consistent with its
other business goals.
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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 "lookthrough" 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 ordinary income for such years (if the
Company was a PFIC during such years). The U.S. shareholder
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<PAGE>
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 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.
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. shareholder's 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 to the extent such management
of its affairs is consistent with its other business goals. 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. Recently issued
Treasury Regulations set forth rules on the filing of a protective statement by
a U.S. person who owns stock in a foreign corporation which is reasonably
believed by such person not to be a PFIC. The purpose of this protective
statement is to enable such person to make a retroactive QEF election in the
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<PAGE>
event that such foreign corporation is subsequently determined to be PFIC and to
permit the Internal Revenue Service ("IRS") to make an otherwise barred
assessment of tax under the QEF rules. In the event that the Company should be
determined to have been a PFIC, generally, a U.S. shareholder who has not filed
a protective statement may not make a retroactive QEF election except with the
consent of the IRS which may or may not be granted. Accordingly, U.S.
shareholders should consider with their own U.S. tax advisors whether the filing
of a protective statement with respect to Class A Common Stock in the Company is
advisable.
TAXATION OF NON-U.S. SHAREHOLDERS
A non-U.S. shareholder should not be subject to U.S. federal income tax on
distributions made with respect to, and gains realized from the disposition of,
Class A Common Stock unless such distributions or 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 unless such non-U.S. shareholder is an individual present in the
U.S. for 183 or more days in the taxable year of disposition and certain other
requirements are met.
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 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
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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 final regulations on October 6, 1997
which, among other things, alter the information reporting and backup
withholding rules applicable to non-U.S. shareholders by providing 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 regulations are generally
effective with respect to dividends paid after December 31, 1999. The foregoing
discussion is not intended to be a complete discussion of the provisions of
these regulations, and prospective shareholders are urged to consult their tax
advisors with respect to the effect that these regulations would have on an
investment in Class A Common Stock.
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 $26,500 per annum.
LEGAL MATTERS
The validity of the Class A Common Stock offered hereunder will be passed
upon for the Company by Conyers, Dill & Pearman, Hamilton, Bermuda.
EXPERTS
The Consolidated Financial Statements of RSL Communications, Ltd. as of
December 31, 1996 and 1997 and Consolidated Financial Statements and Financial
Statement Schedules for each of the three years in the period ended
December 31, 1997, and International Telecommunications Group, Ltd.
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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.
SERVICE OF PROCESS AND ENFORCEMENT OF LIABILITIES
The Issuer 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 Issuer
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.
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<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
RSL COMMUNICATIONS, LTD.
Independent Auditors' Report.............................................................................. F-2
Consolidated Balance Sheets as of December 31, 1996 and December 31, 1997................................. F-3
Consolidated Statements of Operations for the Years Ended December 31, 1995, December 31, 1996 and
December 31, 1997....................................................................................... F-4
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1995, December 31, 1996
and December 31, 1997................................................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, December 31, 1996 and
December 31, 1997....................................................................................... F-6
Notes to Consolidated Financial Statements................................................................ F-7
Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 1997 and
September 30, 1998 (unaudited).......................................................................... F-27
Condensed Consolidated Statements of Operations for the Nine Months Ended September 30, 1997 (unaudited) and
September 30, 1998 (unaudited).......................................................................... F-28
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1997 (unaudited) and
September 30, 1998 (unaudited).......................................................................... F-29
Notes to Condensed Consolidated Financial Statements...................................................... F-30
INTERNATIONAL TELECOMMUNICATIONS GROUP LTD. AND SUBSIDIARIES
Independent Auditors' Report.............................................................................. F-35
Consolidated Statement of Operations and Accumulated Deficit for the Nine Months Ended September 30,
1995.................................................................................................... F-36
Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 1995......................... F-37
Notes to Consolidated Financial Statements................................................................ F-38
</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, 1997 and 1996, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. Our audits also included the
consolidated financial statement schedules listed in the Index as Item 16(b) in
Part II. 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, 1997 and 1996, and the results of their
operations and their cash flows for the three years ended December 31, 1997 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
FEBRUARY 18, 1998
F-2
<PAGE>
RSL COMMUNICATIONS, LTD.
CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents....................................................... $104,068 $144,894
Accounts receivable............................................................. 26,479 70,610
Marketable securities--available for sale....................................... 67,828 13,858
Prepaid expenses and other current assets....................................... 3,969 16,073
-------- --------
Total current assets.............................................................. 202,344 245,435
-------- --------
Restricted Marketable Securities--held to maturity................................ 104,370 68,836
-------- --------
Property and Equipment:
Telecommunications equipment.................................................... 29,925 63,998
Furniture, fixtures and other................................................... 5,926 21,583
-------- --------
35,851 85,581
Less accumulated depreciation................................................... (3,513) (13,804)
-------- --------
Property and equipment--net..................................................... 32,338 71,777
-------- --------
Goodwill and other intangible assets--net of accumulated amortization............. 87,605 214,983
-------- --------
Deposits and Other Assets......................................................... 1,312 4,633
-------- --------
Total Assets...................................................................... $427,969 $605,664
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................................................ $ 49,370 $ 94,149
Accrued expenses................................................................ 12,701 49,965
Notes payable................................................................... 6,538 4,604
Deferred revenue................................................................ 3,570 5,368
Other liabilities............................................................... 5,236 8,271
-------- --------
Total current liabilities......................................................... 77,415 162,357
-------- --------
Other Liabilities--noncurrent..................................................... 15,286 --
-------- --------
Long-term Debt--less current portion.............................................. 6,032 --
-------- --------
Senior Notes, 12 1/4% due 2006, net............................................... 296,000 296,500
-------- --------
Capital Lease Obligations--less current portion................................... 12,393 20,108
-------- --------
Total Liabilities................................................................. 407,126 478,965
-------- --------
Commitments and Contingencies
Shareholders' Equity
Common stock, Class A--par value $0.00457; 0 and 10,872,568 issued
and outstanding at December 31, 1996 and 1997, respectively.................. -- 49
Common stock, Class B--par value $0.00457; 10,528,887 and 30,760,726, issued and
outstanding at December 31, 1996 and 1997, respectively...................... 48 141
Common stock Class C--par value $0.00457; no shares issued...................... -- --
Preferred stock par value $0.00457; 65,700,000 shares authorized, 9,243,866 and
0 shares issued and outstanding at December 31, 1996 and 1997,
respectively................................................................. 93 --
Warrants--Common Stock, exercise price of $0.00457.............................. 5,544 5,544
Additional paid-in capital...................................................... 65,064 274,192
Accumulated deficit............................................................. (47,740) (147,939)
Foreign currency translation adjustment......................................... (622) (5,288)
Deferred financing costs........................................................ (1,544) --
-------- --------
Total shareholders' equity........................................................ 20,843 126,699
-------- --------
Total Liabilities and Shareholders' Equity........................................ $427,969 $605,664
======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
RSL COMMUNICATIONS, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
($ AND SHARES IN THOUSANDS, EXCEPT LOSS PER SHARE)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues.......................................................... $ 18,617 $ 113,257 $ 300,796
Operating costs and expenses
Cost of services (exclusive of depreciation and
amortization shown separately below)......................... 17,510 98,461 265,321
Selling, general and administrative expenses.................... 9,639 38,893 94,712
Depreciation and amortization................................... 849 6,655 21,819
-------- ---------- ----------
27,998 144,009 381,852
-------- ---------- ----------
Loss from operations.............................................. (9,381) (30,752) (81,056)
Interest income................................................... 173 3,976 13,826
Interest expense.................................................. (194) (11,359) (39,373)
Other income...................................................... -- 470 6,595
Minority interest................................................. -- (180) 210
Income taxes...................................................... -- (395) (401)
-------- ---------- ----------
Net loss.......................................................... $ (9,402) $ (38,240) $ (100,199)
========= ========== ==========
Loss per share.................................................... $ (1.67) $ (5.13) $ (5.27)
Weighted average number of shares of common stock
outstanding...................................................... 5,641 7,448 19,008
</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 PREFERRED COMMON STOCK
COMMON STOCK COMMON STOCK STOCK WARRANTS ADDITIONAL
-------------- -------------- -------------- -------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
------ ------ ------ ------ ------ ------ ------ ------ ---------- -----------
<S> <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............... -- -- 6,411 29 -- -- -- -- 1,822 --
Net loss............. -- -- -- -- -- -- -- -- -- (9,402)
------ ---- ------ ---- ------ ---- ------ ------ -------- ---------
BALANCE,
December 31, 1995... -- -- 6,411 29 9,244 93 -- -- 15,083 (9,500)
Issuance of warrants
in connection with
Notes Offering...... -- -- -- -- -- -- 657 4,000 -- --
Issuance of warrants
in connection with
shareholder standby
facility and
revolving credit
facility............ -- -- -- -- -- -- 460 1,544 -- --
Issuance of Common
Stock............... -- -- 4,118 19 -- -- -- -- 49,981 --
Foreign Currency
Translation
Adjustment.......... -- -- -- -- -- -- -- -- -- --
Net loss............. -- -- -- -- -- -- -- -- -- (38,240)
------ ---- ------ ---- ------ ---- ------ ------ -------- ---------
BALANCE,
December 31, 1996... -- -- 10,529 48 9,244 93 1,117 5,544 65,064 (47,740)
Issuance of Class A
Common Stock........ 10,873 49 -- -- -- -- -- -- 209,128 --
Conversion of
Preferred Stock In
Exchange for
Class B Common
Stock............... -- -- 20,232 93 (9,244) (93) -- -- -- --
Foreign Currency
Translation
Adjustment.......... -- -- -- -- -- -- -- -- -- --
Amortization of
deferred financing
costs............... -- -- -- -- -- -- -- -- -- --
Net loss............. -- -- -- -- -- -- -- -- -- (100,199)
------ ---- ------ ---- ------ ---- ------ ------ -------- ---------
BALANCE
December 31, 1997... 10,873 $ 49 30,761 $141 -- $ -- 1,117 $5,544 $274,192 $(147,939)
====== ==== ====== ==== ====== ==== ===== ====== ======== =========
<CAPTION>
FOREIGN
CURRENCY DEFERRED
TRANSLATION FINANCING
ADJUSTMENT COSTS TOTAL
------------ --------- ---------
<S> <C> <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) -- (622)
Net loss............. -- -- (38,240)
------------ ------- ---------
BALANCE,
December 31, 1996... (622) (1,544) 20,843
Issuance of Class A
Common Stock........ -- -- 209,177
Conversion of
Preferred Stock In
Exchange for
Class B Common
Stock............... -- -- --
Foreign Currency
Translation
Adjustment.......... (4,666) -- (4,666)
Amortization of
deferred financing
costs............... -- 1,544 1,544
Net loss............. -- -- (100,199)
------------ ------- ---------
BALANCE
December 31, 1997... $ (5,288) $ -- $ 126,699
=========== ======= =========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
RSL COMMUNICATIONS, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net loss.......................................................... $ (9,402) $ (38,240) $ (100,199)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities, net of effects of purchase of
subsidiaries:
Accretion of interest receivable on restricted marketable
securities.................................................. -- (1,562) (5,504)
Depreciation and amortization................................. 848 6,655 21,819
Foreign currency transaction (gain)........................... -- (788) --
Loss on disposal of fixed assets.............................. -- 368 --
Provision for losses on accounts receivable................... 149 2,830 10,908
Reversal of accrued liabilities............................... -- -- (7,000)
Changes in assets and liabilities:
Increase in accounts receivable............................... (2,453) (17,034) (45,069)
Decrease (increase) in deposits and other assets.............. 366 (3,249) (2,929)
Decrease (increase) in prepaid expenses and other current
assets...................................................... 297 (925) (13,196)
Increase in accounts payable and accrued expenses............. 3,511 44,243 56,354
Increase (decrease) in deferred revenue and other current
liabilities................................................. 1,501 4,279 (2,155)
Increase (decrease) in other liabilities...................... 8,737 (7,052) (4,841)
---------- ---------- ----------
Net cash provided by (used in) operating activities............... 3,554 (10,475) (91,812)
---------- ---------- ----------
Cash flows used in investing activities:
Acquisition of subsidiaries..................................... (15,413) (38,552) (77,813)
Purchase of marketable securities............................... -- (82,529) --
Proceeds from marketable securities............................. -- 14,701 54,167
Purchase of restricted marketable securities.................... -- (102,808) --
Proceeds from maturities of restricted marketable securities.... -- -- 41,038
Purchase of property and equipment.............................. (1,124) (15,983) (36,357)
Proceeds from sale of equipment................................. -- 171 144
---------- ---------- ----------
Net cash used in investing activities............................. (16,537) (225,000) (18,821)
---------- ---------- ----------
Cash flows provided by financing activities:
Proceeds from issuance of common and preferred stock and
warrants...................................................... 15,205 50,000 182,160
Underwriting fees and expenses.................................. -- -- (14,618)
Proceeds from notes payable..................................... 3,000 -- --
Payment of notes payable........................................ -- (3,000) (3,348)
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) (9,402)
Principal payments under capital lease obligations.............. (62) (382) (2,757)
---------- ---------- ----------
Net cash provided by financing activities......................... 18,143 335,031 152,035
---------- ---------- ----------
Increase in cash and cash equivalents............................. 5,160 99,556 41,402
Effects of foreign currency exchange rates on cash................ -- (651) (576)
Cash and cash equivalents at beginning of period.................. 3 5,163 104,068
---------- ---------- ----------
Cash and cash equivalents at end of period........................ $ 5,163 $ 104,068 $ 144,894
========== ========== ==========
Supplemental disclosure of cash flows information:
Cash paid for:
Interest...................................................... $ 31 $ 1,639 $ 41,285
========== ========== ==========
Supplemental schedule of noncash investing and financing
activities--
Assets acquired under capital lease obligations................. $ 4,950 $ 7,897 $ 13,060
========== ========== ==========
Issuance of notes to acquire stock.............................. $ -- $ 9,328 $ --
========== ========== ==========
Issuance of warrants for shareholder standby facility........... $ -- $ 1,544 $ --
========== ========== ==========
Issuance of Class A Common Stock................................ $ -- $ -- $ 41,635
========== =========== ==========
Acquisition cost included in current liabilities.................. $ -- $ -- $ 17,929
========== =========== ==========
</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, 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, Belgium, Germany, the Netherlands, Sweden,
Finland, Australia, Venezuela, Italy, Switzerland and Denmark. In 1996,
approximately 60% of the world's international long distance telecommunications
minutes originated in these markets.
2. ACQUISITIONS
1997 Acquisitions/New Operations
Delta Three, Inc.
During 1997, the Company acquired a majority interest in Delta Three, Inc.
("Delta Three"). The Company paid approximately $8.8 million for approximately
72% ownership of the Company and agreed to acquire an additional 26% interest
during 1998. In connection with this transaction, the Company recorded
approximately $3.8 million in goodwill.
Maxitel
In April 1997, RSL Com Europe Ltd ("RSL Europe") acquired a 30.4% interest
in Maxitel, a Portuguese international telecommunications carrier, and has since
increased its ownership interest in Maxitel to 39%. The total investment in
Maxitel is approximately $2.1 million.
Pacific Star Communications Limited
In April 1997, the Company acquired substantially all of the commercial
customer contracts of Pacific Star Communications Limited, an Australian based
company. The Company paid approximately $1.5 million in cash and recorded this
amount as a customer base.
Newtelco
In August 1997, RSL Europe purchased 90% of the stock of Newtelco Telekom
AG ("RSL Austria"), an Austrian start-up telecommunications company for an
$800,000 investment in the company.
RSL Com Italia S.r.l
In August 1997, RSL Europe acquired 85% of the stock in RSL Italy ("RSL
Italy"), an Italian telecommunications reseller. The Company paid approximately
$1.7 million for its investment in RSL Italy.
F-7
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
2. ACQUISITIONS--(CONTINUED)
EZI Phonecard Holdings Pty. Limited
In October 1997, RSL Com Australia Holdings Pty. Ltd. ("RSL Australia")
acquired 85% of EZI Phonecard Holdings Pty. Limited for approximately $200,000
in cash and the assumption of net liabilities of $1.3 million. In connection
with this purchase, RSL Australia recorded approximately $1.5 million of
goodwill.
Call Australia Group
In October 1997, the Company through its wholly-owned subsidiary, RSL
Australia acquired 100% of the issued capital of each of Call Australia Pty.
Ltd., Associated Service Providers Pty. Limited, Digiplus Pty. Limited, Power
Serve Communications Consultants Pty. Limited, Talk 2000 Networks Pty. Limited
and Telephone Bill Pty. Limited (collectively the "Call Australia Group"),
leading Australian switchless resellers, for approximately $24.5 million. In
connection with this purchase, RSL Australia recorded approximately $24.5
million of goodwill.
LDM Systems, Inc.
In October 1997, the Company acquired 100% of the outstanding common stock
of LDM Systems, Inc. ("LDM"). The total purchase price was $14.9 million. In
connection with this acquisition, the Company recorded an equal amount of
goodwill.
Callcom AG fur TeleKommunikation
In December 1997, RSL Europe acquired a 78.5% interest in Callcom AG fur
TeleKommunikation ("RSL Switzerland"). The Company invested approximately $2.1
million in cash in RSL Switzerland for common shares.
European Telecom S.A./N.V.
In December 1997, RSL Europe acquired 90% of European Telecom S.A./N.V.
("RSL Belgium") which in turn owns 100% of European Telecom SARL (RSL
Luxemburg). The Company paid approximately $18.6 million for this acquisition
and recorded an equal amount of goodwill.
1996 Acquisitions/New Operations
Certain Assets of Sprint in France and Germany
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 $7.9 million of goodwill.
Belnet Nederland B.V.
In October 1996, the Company acquired 38,710 shares of Belnet Nederland
B.V. ("Belnet/RSL"), representing 75% of the outstanding stock for
$10.0 million and the assumption of liabilities of $500,000. In 1997, the
Company acquired the remaining shares for approximately $7.3 million. In
F-8
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
2. ACQUISITIONS--(CONTINUED)
connection with the purchase of Belnet/RSL, the Company recorded approximately
$15.6 million of goodwill.
Incom (UK) Limited
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 RSL COM North America, Inc. (formerly
known as International Telecommunications Group, Ltd.) ("RSL North America")
(the "Purchased Shares"). In addition, 3,333 voting shares of RSL North America
currently held by Incom were exchanged for an equal number of non-voting shares.
In connection with this acquisition, the Company recorded approximately $3.8
million of goodwill.
1995 Acquisitions/New Operations
On March 10, 1995, the Company entered into a stock purchase agreement (the
"Agreement") with RSL North America and RSL COM U.S.A., Inc. (formerly known as
International Telecommunications Corporation) ("RSL USA"), pursuant to which the
Company initially purchased from RSL North America 66,667 shares of RSL North
America's Series A convertible preferred stock (which represented 25% of RSL
North America's then outstanding stock, including common and preferred shares)
for $4.8 million. The Company subsequently purchased additional shares of RSL
North America's common stock at various times during 1995, 1996 and 1997 for a
total purchase price of cash, secured notes, issuance of shares and the
assumption of net liabilities aggregating $12.9 million at December 31, 1995,
cumulatively aggregating (inclusive of an aggregate $12.9 million at
December 31, 1995) $25.0 million at December 31, 1996, and cumulatively
aggregating (inclusive of an aggregate $25.0 million at December 31, 1996)
$87.3 million at December 31, 1997, resulting in recorded goodwill in the
aggregate of $85.5 million at December 31, 1997. At December 31, 1995, 1996 and
1997, the Company's ownership interest in RSL North America was 50.1%, 87% and
100%, respectively.
Effective September 1, 1995, RSL North America'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 $7.2 million. In addition,
through March 1997, the Company acquired the remaining outstanding shares.
The total purchase price consisted of approximately $9.5 million, and
assumption of net liabilities of $21.1 million. In connection with the purchase
of Cyberlink, the Company recorded approximately $30.6 million 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% of the Cyberlink Europe shares for approximately $2.1 million
and the assumption of liabilities. The total cash paid was approximately $3.7
million. In connection with the purchase of Cyberlink Europe, the Company
recorded approximately $5.4 million of goodwill.
F-9
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
2. ACQUISITIONS--(CONTINUED)
Accounting Treatment
For all years, the acquisitions, unless otherwise stated, have been
accounted for by the purchase method of accounting and, accordingly, the
purchase prices have been allocated to the assets acquired, primarily fixed
assets and accounts receivable, and liabilities assumed based on their estimated
fair values at the dates of acquisition. The excess of the purchase price over
the estimated fair values of the net assets acquired has been recorded as
goodwill, which is amortized over fifteen years. The valuation of all of the
Company's acquired assets and liabilities from inception through December 31,
1997 is final except for the final valuation to be made of litigation reserves
and carrier liabilities in connection with the LDM acquisition.
The following presents the unaudited pro forma consolidated statements of
operations data of the Company for the years ended December 31, 1996 and 1997 as
though the acquisitions of RSL COM France, RSL COM Germany, Belnet/RSL, LDM,
Call Australia Group, and EZI had occurred on January 1, 1996. All other
acquisitions had insignificant operations prior to the date of acquisition. The
consolidated statements do not necessarily represent what the Company's results
of operations would have been had such acquisitions actually occurred on such
date.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997
----------------- -----------------
(UNAUDITED)
($ IN THOUSANDS, EXCEPT LOSS PER SHARE)
<S> <C> <C>
Revenues...................................................... $ 203,075 $ 371,757
--------- ---------
--------- ---------
Net loss...................................................... $ (40,916) $(103,697)
--------- ---------
--------- ---------
Net loss per share............................................ $ (5.49) $ (5.46)
--------- ---------
--------- ---------
</TABLE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation--The consolidated
financial statements include the accounts of RSL Communications, Ltd. and its
majority-owned subsidiaries from the date of acquisition or commencement of
operations.
For the years ended December 31, 1995 and 1996 the Company has, since the
Company's acquisition or startup of its subsidiaries, included 100% of all of
such subsidiaries' operating losses, because the minority investments in each of
those entities have been reduced to zero as of the relevant year-end dates. For
the year ended December 31, 1997 the Company has included 100% of its wholly
owned subsidiaries' operating losses and the Company recorded minority interest,
an asset representing the Company's minority shareholder's proportionate share
of operating losses for RSL COM Italia, S.r.l., RSL COM Venezuela C.A., RSL COM
Austria A.G., RSL COM Spain S.A., and RSL COM Schweiz AG. In the event
additional capital in any such subsidiary is required to fund operating losses,
the minority shareholders of such subsidiary are contractually obligated to
invest, to the extent necessary to fund the operations, based on their pro rata
ownership of the total outstanding stock of such subsidiary. If a shareholder
does not invest its pro rata amount, then such shareholder's equity interest
will be diluted and the contributing shareholders' equity in such subsidiary
will be increased. The Company believes that all of its minority shareholders
have the financial wherewithal to meet its obligations to the Company with
respect to its proportionate share of operating losses. Each of the Company's
other subsidiaries' operating losses have been recorded in full.
The Company has majority ownership of all of its subsidiaries.
F-10
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
The Company accounts for its 39% investment in Maxitel Servicios e Gestao
de Telecomunicaciones, SA ("Maxitel") using the equity method. During 1997, the
Company formed a joint venture with entities controlled by the Cisneros Group of
Companies to pursue the Company's Latin American expansion. The Company owns 51%
of this joint venture and has, since the joint venture's formation, consolidated
100% of this joint venture and recognized minority interest for 49% of the
operating losses of the joint venture. The receivable for the minority
shareholder's share of the joint venture loss is included in other current
assets.
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. Gains and losses from foreign
currency transactions are included in the consolidated statements of operations
for each respective period, and were not significant in the periods presented.
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.
Accounts Receivable--Accounts receivable are stated net of the allowance
for doubtful accounts of $3,900,000 and $12,000,000 at December 31, 1996 and
1997, respectively. The Company recorded bad debt expense of $149,000,
$2,830,000 and $10,900,000 for the years ended December 31, 1995, 1996 and 1997,
respectively.
Accrued Expenses--Accrued expenses for the years ended December 31, 1996
and 1997 consist primarily of accrued interest, accrued acquisition costs and
accrued transmission costs. Accrued interest as of December 31, 1996 was
$9,447,000. Accrued interest as of December 31, 1997 was not significant.
Marketable Securities--Marketable securities consist principally of U.S.
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
F-11
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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 $9,794,000 for the
years ended December 31, 1995, 1996 and 1997, respectively.
Impairment of Assets--The Company's long-lived assets and identifiable
intangibles are reviewed for impairment whenever events or changes in
circumstances indicate that the net carrying amount may not be recoverable. When
such events occur, the Company measures impairment by comparing the carrying
value of the long-lived asset to the estimated undiscounted future cash flows
expected to result from use of the assets and their eventual disposition. If the
sum of the expected undiscounted future cash flows is less than the carrying
amount of the assets, the Company would recognize an impairment loss. The
impairment loss, if determined to be necessary, would be measured as the amount
by which the carrying amount of the asset exceeds the fair value of the asset.
The Company determined that, as of December 31, 1997 and 1996, there had been no
impairment in the carrying value of the long-lived assets.
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.
Other Intangibles--Other Intangible assets acquired through purchase
acquisitions represent licenses which are being amortized using the
straight-line method over five 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.
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--In accordance with the Company's adoption of SFAS
No. 128, "Earnings Per Share", the loss per common share is calculated by
dividing the loss attributable to
F-12
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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. The adoption of SFAS No. 128,
"Earnings Per Share" did not affect the Company's method of computing the loss
per common share.
EFFECTS OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement is effective for financial statements issued for periods
beginning 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 uses data at the subsidiary level to manage the operations
and the Company will expand its current footnote disclosure to meet this
criteria.
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 U.S. 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.
5. MARKETABLE SECURITIES
A summary of the Company's available for sale marketable securities at
December 31, 1996 and December 31, 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1997
-------------------- --------------------
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Corporate notes........................................ $40,728 $40,678 $ 2,500 $ 2,500
Medium term notes...................................... 10,951 10,938 -- --
Commercial paper....................................... 10,261 10,257 4,390 4,388
Federal agency notes................................... 5,888 5,884 6,968 6,973
------- ------- ------- -------
$67,828 $67,757 $13,858 $13,861
------- ------- ------- -------
------- ------- ------- -------
</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.
F-13
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
5. MARKETABLE SECURITIES--(CONTINUED)
The carrying value of the available for sale marketable securities by
maturity date as of December 31, 1996 and December 31, 1997 is as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
Matures in one year........................................... $57,548 $11,856
Matures after one year through three years.................... 10,280 2,002
------- -------
Total......................................................... $67,828 $13,858
------- -------
------- -------
</TABLE>
Proceeds from the sale of available for sale marketable securities for the
years ended December 31, 1996 and 1997 were $14,701,000 and $27,675,000,
respectively. Gross gains (losses) of $56,000 and ($2,000) were realized on
these sales for the years ended December 31, 1996 and 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
1997 are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1997
--------------------- --------------------
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
--------- -------- --------- -------
<S> <C> <C> <C> <C>
Matures in one year.................................. $ 39,692 $ 39,738 $35,455 $35,522
Matures after one year through three years........... 64,678 65,002 33,381 33,377
--------- -------- ------- -------
Total................................................ $ 104,370 $104,740 $68,836 $68,899
--------- -------- ------- -------
--------- -------- ------- -------
</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 $395,000 for the year ended December 31, 1996 and $401,000 for the
year ended December 31, 1997. As of December 31, 1996 and December 31, 1997, the
Company had net operating loss carryforwards generated primarily in the United
States of approximately $47,000,000 and $147,000,000, respectively. The net
operating loss carryforwards will expire at various dates beginning in 2009
through 2013 if not utilized. The utilization of the net operating loss
carryforwards is subject to certain limitations.
In accordance with SFAS No. 109, the Company has computed the components of
deferred income taxes as of December 31, 1996 and 1997, as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
------------ --------
<S> <C> <C>
Deferred tax assets.............................................. $ 18,800 $ 59,000
Less valuation allowance......................................... (18,800) (59,000)
-------- --------
Net deferred tax assets.......................................... $ -- $ --
-------- --------
-------- --------
</TABLE>
The Company's net operating losses generated the deferred tax assets. At
December 31, 1996 and 1997, a valuation allowance of $18,800,000 and
$59,000,000, respectively, is provided as the realization of the deferred tax
assets are not likely.
F-14
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
7. NOTES PAYABLE AND LONG-TERM DEBT
Senior Notes
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 3.975 Class
A common shares which expire in ten years (collectively, the "Warrants"). The
exercise price of such Warrants is $.00457.
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 $3,500,000 at
December 31, 1996 and December 31, 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 Notes, or a portion thereof, may
also be redeemed upon the consummation of a public equity offering which yields
proceeds in excess of a specified amount.
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 $68,836,000 at December 31, 1996 and December 31,
1997, respectively.
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. Notwithstanding the
foregoing, these indentures do not impose restrictions on RSL's ability to
obtain funds by dividends or loans from its subsidiaries.
At December 31, 1996 and 1997, the Company is in compliance with the above
restrictive covenants.
Credit Facilities
At December 31, 1996 and 1997, the Company had 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. At December 31, 1996, the
Company also had a $35,000,000 shareholder standby facility with the Company's
Chairman.
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 vested over one year, to purchase 459,900 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. The Revolving Credit
Facility bears interest at the rate of LIBOR plus 1%. The Shareholder Standby
Facility, in accordance with the contractual agreement, expired upon receipt of
the net cash proceeds from the initial public offering.
The warrants became exercisable on October 3, 1997 at an exercise price of
$.00457 per share and expire in October 2006.
F-15
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
7. NOTES PAYABLE AND LONG-TERM DEBT--(CONTINUED)
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.
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 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 year ended December 31,
1997, the lines of credit were reduced to $570,000 and $-0-, respectively. The
total amounts outstanding at December 31, 1996 from the above credit lines were
$680,000 and $606,000, respectively, and at December 31, 1997 was $475,000 and
$0-, respectively. The remaining credit line terminates on August 31, 1998.
Borrowings under both of these credit lines are collateralized by a letter of
credit.
The Company, through LDM, has a $10.0 million revolving credit facility.
There was $3.6 million outstanding under this facility at December 31, 1997.
This facility is payable in full on September 30, 2000 and accrues interest at
prime rate plus 2.5% per annum.
Other Financing
In connection with the September 1996 purchase of additional shares of RSL
North America's common stock, the Company issued secured notes totaling
approximately $9,328,000. Such notes and interest were secured by the common
stock acquired, and were payable in annual and quarterly installments,
respectively, and bore interest at the rate of 6%. In 1997, the Company
satisfied the remaining loan obligations with such minority shareholders.
Vendor Financing
At December 31, 1996 and 1997, RSL USA has a series of current notes
payable to different vendors in the amount of $4,282,000 and $976,000,
respectively, which bear interest at the rates from 8% to 14.5%.
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 1997, approximately $39.0 million and $15.8 million was
available, respectively. Borrowings under this agreement are recorded as capital
lease obligations.
F-16
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
7. NOTES PAYABLE AND LONG-TERM DEBT--(CONTINUED)
Long-term debt maturities at December 31, 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED
- ---------------------------------------------------------------------------------
<S> <C>
1998............................................................................. $ 4,604
1999............................................................................. --
2000............................................................................. --
2001............................................................................. --
2002............................................................................. --
2003 and thereafter.............................................................. 300,000
--------
Total............................................................................ 304,604
Less current maturities.......................................................... (4,604)
--------
Long Term Debt and 12 1/4% Senior Notes.......................................... $300,000
--------
--------
</TABLE>
RSL's notes payable had fair values that approximated their carrying
amounts at December 31, 1996. At December 31, 1997, the Senior Notes had a fair
value of aproximately $330,000,000. The increase in fair value is primarily due
to changes in the interest rate environment. The remainder of the notes had fair
values which approximated their carrying amounts.
Interest expense on the above notes was approximately $461,000, $10,457,000
and $37,136,000 for the years ended December 31, 1995, 1996 and 1997,
respectively.
8. GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets at December 31, 1996 and 1997 consist of the following
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
------------ --------
<S> <C> <C>
Goodwill......................................................... $ 79,732 $213,527
Deferred financing costs......................................... 10,988 11,655
Other Intangibles................................................ 626 3,331
-------- --------
91,346 228,513
Less accumulated amortization.................................... (3,741) (13,530)
-------- --------
Intangible assets--net........................................... $ 87,605 $214,983
-------- --------
-------- --------
</TABLE>
Amortization expense for the years ended December 31, 1995, 1996 and 1997
was $548,000, $3,193,000 and $9,980,000, respectively.
9. SHAREHOLDERS' EQUITY
Common Stock
During 1996, the Company issued 4,117,522 shares of Class B Common Stock
for cash aggregating $50,000,000. During 1995, 6,411,365 shares of Class B
Common Stock were issued for $1,851,000.
On September 30, 1997, the Company revised 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 shares 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 438,000,000 shares and
(iii) increase the number of authorized shares of its Preferred Stock to
65,700,000. The holders of the Class A
F-17
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
9. SHAREHOLDERS' EQUITY--(CONTINUED)
Common Stock are entitled to one vote per share, and the holders of the Class B
Common Stock are entitled to ten votes per share.
On September 30, 1997, the Company commenced an initial public offering of
8,280,000 shares of its Class A Shares. The aggregate offering price of the
8,280,000 shares of Class A Common Stock sold in the equity offering to the
public was $182,160,000, with net proceeds to the Company of $167,542,000.
In June 1997, RSL North America's founder and former Chairman elected to
exchange his shares in RSL North America, a subsidiary of the Company, for
shares in the Company. Accordingly, the Company issued 1,457,094 of the Class A
Common Stock, par value $0.00457 per share, of the Company in exchange for
15,619 shares of common stock of RSL North America and recorded approximately
$32,575,000 for each of additional paid in capital and goodwill.
During 1997, the Company issued 712,142 shares of Class A Common Stock upon
the exercise of options.
During 1997, in connection with the acquisition of certain minority
interests, the Company issued 411,105 shares of Class A 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 ranked senior to the Company's common stock as to dividends and a
liquidation preference of $1.00 per share. Each share was convertible at the
holder's option into 2.19 shares of Class B Common Stock. All preferred shares
were automatically converted into the Company's Class B Common Stock as the
public offering yielded proceeds in excess of $25,000,000, in accordance with
the terms of the Preferred Stock agreement. Dividends, at the rate of 8%, were
cumulative. Upon conversion of the shares of the preferred stock, the cumulative
dividends were deemed to be cancelled and waived upon conversion. The cumulative
amount of such dividends was approximately $16,000.
10. CAPITAL LEASE OBLIGATIONS
Future minimum annual payments applicable to assets held under capital
lease obligations for years subsequent to December 31, 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED
- --------------------------------------------------------------
<S> <C>
1998.......................................................... $ 7,189
1999.......................................................... 8,346
2000.......................................................... 6,528
2001.......................................................... 4,018
2002.......................................................... 3,373
2003 and thereafter........................................... 625
-------
Total minimum lease obligations............................... 30,079
Less interest................................................. (6,542)
-------
Present value of future minimum lease obligations............. 23,537
Less current portion, included in other current liabilities... (3,429)
-------
Long-term lease obligations at December 31, 1997.............. $20,108
-------
-------
</TABLE>
F-18
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
10. CAPITAL LEASE OBLIGATIONS--(CONTINUED)
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 $13,225,000 and $26,632,000 at
December 31, 1996 and 1997, respectively. The related accumulated depreciation
was $825,000 and $2,557,000, 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 reduced the outstanding commitment
amount under the Revolving Credit Facility to $15,000,000 at December 31, 1996
and $7,500,000 at December 31, 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 4,117,522 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.
Nesim N. Bildirici, a director and the Vice President of Mergers and
Acquisitions of the Company, was 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 a majority of
Mr. Bildirici's salary. During the years ended December 31, 1996 and 1997, the
Company reimbursed RSLAG approximately $130,000 and $287,000, 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, subleases an aggregate of 11,000 square feet of
office space to the Company at an annual rent of $767,000 per annum. RSL
Management subleases such space from The Estee Lauder Companies Inc. ("Estee
Lauder"). Ronald S. Lauder is also a principal shareholder of Estee Lauder and
Leonard A. Lauder, a director of the Company, is the Chief Executive Officer of
Estee Lauder. 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 January 2002
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 $1,555,000
for the years ended December 31, 1995, 1996 and 1997, respectively. The
aggregate commitment for annual future salaries pursuant to the employment
agreements at December 31, 1997, excluding bonuses, is
F-19
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
11. RELATED PARTY TRANSACTIONS--(CONTINUED)
approximately $1,371,000, $1,098,000, $615,000, $550,000 and $600,000 for 1998,
1999, 2000, 2001, and 2002, respectively.
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 plan, which are based on a percentage
of the employee's annual compensation subject to certain limitations, were not
significant for the years ended December 31, 1996 and 1997.
13. STOCK OPTION PLANS
1995 Stock Option Plan
In April 1995, the Company established an Incentive Stock Option Plan (as
amended and restated, the "1995 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 1995 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 2,847,000 shares of Class A
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, unless a different vesting schedule is designated by the committee.
Further, the options granted under the 1995 Plan terminate on the tenth
anniversary of the date of grant. A total of 2,716,617 options have been granted
under this plan. The Company will not grant further options under the 1995 Plan.
1997 Stock Incentive Plan
During 1997, the Company established the 1997 Stock Incentive Plan (the
"1997 Plan") to attract and motivate key employees of the Company. The 1997 Plan
is administered by the Committee. The 1997 Plan provides for the grant of the
incentive and non-incentive stock options, stock appreciation rights, restricted
stock, and various combinations thereof. The maximum number of shares of
Class A Common Stock available under the 1997 Plan is 3,100,000, with no more
than 500,000 options or stock appreciation rights to be granted to any one
participant in a calendar year. The options vest over a three-year period,
unless a different vesting schedule is designated by the Committee. A total of
432,856 options have been granted under this plan.
1997 Performance Incentive Compensation Plan
During 1997, the Company established the 1997 Performance Incentive
Compensation Plan (the "1997 Performance Plan") to reward employees for superior
performance. Awards under the 1997 Performance Plan may be made to key employees
recommended by the Chief Executive Officer, selected by the Committee and
approved by the Board of Directors. The 1997 Performance Plan provides for the
grant of up to 400,000 shares of Class A Common Stock.
F-20
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
13. STOCK OPTION PLANS--(CONTINUED)
1997 Directors' Compensation Plan
During 1997, the Company adopted the 1997 Directors' Compensation Plan (the
"1997 Directors' Plan"). During the ten year term of the 1997 Directors' Plan,
each non-employee Director will be granted options to acquire a number of
Class A Common Stock with an aggregate fair market value on the date of grant
equal to $50,000, except for the Chairman and the Vice Chairman of the Board,
whose grants have a fair market value of $75,000 and $150,000, respectively. The
1997 Directors' Plan provides for the grant of up to 250,000 shares of Class A
Common Stock. The options vest over a five-year period, subject to certain
acceleration provisions. A total of 17,046 options have been granted under this
plan.
The exercise price of stock options granted under the 1997 Performance
Incentive Compensation Plan and 1997 Directors' Compensation Plan (the "1997
Plans") initially will equal the fair market value of the Class A Common Stock
on the date of the grant and will be increased quarterly based on the yield to
maturity of United States Treasury securities having a maturity approximately
equal to the term of such options.
The Company records stock option grants under the 1997 Stock Incentive
Plan, the 1997 Plans based on the fair market value of the underlying security
on the date of grant. The Company used the expected life of the underlying
security to calculate the fair market value of such security. At each quarter,
the Company compares the index option price to the fair market value of stock at
such quarter, and determines whether any compensation expense should be
recorded. At December 31, 1997, the first measurement date, the indexed exercise
prices for all of the options granted under the 1997 Plans were above the fair
market value of the Class A Common Stock on such date. Accordingly, no
compensation or other expense was recorded for the grant of such stock options
for 1997.
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
OPTIONS EXERCISE PRICE EXERCISE PRICE
--------- -------------- --------------
<S> <C> <C> <C>
Outstanding at January 1, 1995
Granted............................................ 1,423,500 $ 0.000457 $ 0.000457
Exercised.......................................... -- -- --
Rescinded/Canceled................................. -- -- --
--------- -------------- ----------
Outstanding at December 31, 1995..................... 1,423,500 0.000457 0.000457
Granted............................................ 283,824 1.60-2.51 1.73
Exercised.......................................... -- -- --
Rescinded/Canceled................................. -- -- --
--------- -------------- ----------
Outstanding at December 31, 1996..................... 1,707,324 0.000457-2.51 0.29
Granted............................................ 1,459,195 .00457-22.00 10.44
Exercised.......................................... 712,142 .000457 .000457
Rescinded/Canceled................................. -- -- --
--------- -------------- ----------
Outstanding at December 31, 1997..................... 2,454,377 $.000457-22.00 $ 6.41
--------- -------------- ----------
--------- -------------- ----------
<CAPTION>
WEIGHTED
RESERVED FOR AVERAGE
EXERCISABLE FUTURE GRANTS EXERCISE PRICE
----------- ------------- -----------------
<S> <C> <C> <C>
December 31, 1995..................................... -- 766,500 $ --
December 31, 1996..................................... 177,701 482,676 0.000457
December 31, 1997..................................... 459,607 3,430,481 0.44
</TABLE>
F-21
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
13. STOCK OPTION PLANS--(CONTINUED)
The following table summarizes information concerning the remaining options
granted under the 1997 Plans outstanding as of December 31, 1997.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------------------- -----------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
NUMBER AVERAGE REMAINING NUMBER OF AVERAGE
RANGE OF OF SHARES EXERCISE CONTRACTUAL SHARES EXERCISE
EXERCISE PRICES OUTSTANDING PRICES LIFE EXERCISABLE PRICES
- ------------------------------------------- ----------- --------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.000457 711,358 $0.000457 7.83 -- $ --
$ 0.00457 590,584 $ 0.00457 9.66 350,400 $0.00457
$ 1.60 - $ 2.51 283,824 $ 1.73 8.73 109,207 $ 1.83
$12.142 - $22.00 868,611 $ 17.53 7.98 -- $ --
--------- -------
2,454,377 459,607
--------- -------
--------- -------
</TABLE>
SFAS Statement No. 123, "Accounting for Stock Based Compensation" ("SFAS
No. 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, a volatility
factor of approximately 0.45 was used for options granted on or after the date
of the initial public offering and the minimum value method was used for options
granted prior to the date of the initial public offering, as there was no market
for the Company's common stock in which to measure the 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
1997, respectively: risk-free interest rates between 5.63% and 5.95%; 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 18 and 72 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,
--------------------------------
1995 1996 1997
------- -------- ---------
<S> <C> <C> <C>
Net loss
As reported.................................................... $(9,402) $(38,240) $(100,199)
Pro forma...................................................... $(9,404) $(38,315) $(118,176)
Net loss per common share:
As reported.................................................... $ (1.67) $ (5.13) $ (5.27)
Pro forma...................................................... $ (1.67) $ (5.14) $ (6.22)
Weighted average fair value of options granted during the
Period......................................................... $0.0002 $ 0.26 $ 12.32
</TABLE>
F-22
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
14. COMMITMENTS AND CONTINGENCIES
At December 31, 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>
YEAR ENDED
- ---------------------------------------------------------------------------------
<S> <C>
1998............................................................................. $ 4,018
1999............................................................................. 3,621
2000............................................................................. 3,285
2001............................................................................. 2,798
2002............................................................................. 2,172
2003 and thereafter.............................................................. 1,427
--------
$ 17,321
--------
--------
</TABLE>
Rent expense on the above leases for the years ended December 31, 1995,
1996 and 1997 was $210,000, $2,276,000, and $3,842,000, 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
- ---------------------------------------------------------------------------------
<S> <C>
1998............................................................................. $ 10,842
1999............................................................................. 8,592
2000............................................................................. 8,087
2001............................................................................. 6,000
2002............................................................................. 5,330
--------
$ 38,851
--------
--------
</TABLE>
Rent expense for the year ended December 31, 1997 was approximately
$9,100,000.
Commitments and Contingencies--The Company is involved in various claims
that arose in the ordinary course of its acquired business, and certain claims
that arose in the ordinary course of its business. The expected settlements from
certain of 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 1997, the Company successfully amended such transmission
capacity agreements. The resulting settlement of approximately $7,000,000 has
been recorded as Other Income.
The Company is a party to separate stockholder agreements with certain
minority stockholders of its subsidiaries, pursuant to which the Company has
granted put rights with roll-up right provisions ("put rights"). These
agreements restrict the sale of the minority stockholders' interest to any
person or entity other than the Company and in certain cases require the Company
to purchase these interests in certain of the Company's subsidiaries. Certain of
the minority stockholders have the option to require the Company to purchase
their interests at any time in exchange for cash or Class A Common Stock (in
most instances, at the sole discretion of the Company) and have the right to
require the Company to purchase their interests in whole or in part at various
times through December 31, 2005 or upon cessation of such stockholder's
employment with the Company for any reason. Generally, the minority
F-23
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
14. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
stockholder remains employed by the Company and receives a salary and a
performance based bonus. The Company has issued put rights to substantially all
of its subsidiaries' minority stockholders at the time the Company acquired a
majority shareholding in the entity acquired or formed. Such put rights were
issued to create an incentive for the Company's minority shareholders to
maximize the long term value of their respective subsidiaries and to provide
liquidity to the shareholders at the time of exercise.
The Company's issuance of put rights did not at the time of grant provide
the recipient of such rights with any tangible value other than the right to put
their minority shares to the Company, in a value for value exchange (fair value
of the minority shares of the subsidiary for fair value of Class A Common Stock
or cash), in most instances, at the sole discretion of the Company. Solely for
the purpose of illustration, if all such options were in effect on December 31,
1997, the Company's aggregate purchase obligation is estimated to be
approximately $65 million.
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 will be financed under the Company's
existing $50.0 million facility provided by one of the Company's primary
equipment vendors.
Letters of Credit--The Company has outstanding letters of credit
aggregating $550,000 and $6,047,000 at December 31, 1996 and 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 marketable
securities, certificates of deposit, and the Revolving Credit Facility and are
classified as current assets.
15. SIGNIFICANT CUSTOMER
For the years ended December 31, 1997 and 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-24
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
16. OPERATING DATA BY GEOGRAPHIC AREA
The following table provides certain geographic data on the Company's
operations for the years ended December 31, 1995, 1996 and 1997 (in thousands).
<TABLE>
<CAPTION>
OPERATING IDENTIFIABLE
REVENUE INCOME (LOSS) ASSETS
-------- ------------- ------------
<S> <C> <C> <C>
Year ended December 31, 1995
US..................................................................... $ 18,461 $ (6,969) $ 37,760
Europe................................................................. 156 (538) 1,953
Corporate.............................................................. -- (1,874) 13,359
-------- --------- --------
$ 18,617 $ (9,381) $ 53,072
-------- --------- --------
-------- --------- --------
Year ended December 31, 1996
US..................................................................... $ 85,843 $ (11,702) $ 54,509
Europe................................................................. 27,414 (13,438) 50,147
Corporate.............................................................. -- (5,612) 323,313
-------- --------- --------
$113,257 $ (30,752) $427,969
-------- --------- --------
-------- --------- --------
Year ended December 31, 1997
US..................................................................... $194,518 $ (26,119) $118,363
Europe................................................................. 73,653 (35,905) 106,746
Asia and Others........................................................ 32,625 (3,430) 58,905
Corporate.............................................................. -- (15,602) 321,650
-------- --------- --------
$300,796 $ (81,056) $605,664
-------- --------- --------
-------- --------- --------
</TABLE>
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, marketable securities 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 December 31,
1996 and 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 certain of 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, certain operations and available credit facilities,
identical to the financial statements of RSL PLC (in thousands).
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1997
-------------------- --------------------
<S> <C> <C>
Current Assets.................................................... $306,104 $212,568
Non-current Assets................................................ 120,761 324,118
Current Liabilities............................................... 74,948 122,672
Non-current Liabilities........................................... 394,556 557,448
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997
-------------------- --------------------
<S> <C> <C>
Net Revenue....................................................... $113,257 $266,142
Net Loss.......................................................... (34,309) (95,824)
</TABLE>
F-25
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
18. SUBSEQUENT EVENTS
In January 1998, the Company purchased 90% of Telecenter Oy, a Finnish
agent customer base. The Company paid approximately $10.0 million in cash with a
purchase price adjustment based on future results to be calculated in two years.
On February 8, 1998, the Board of Directors authorized the issuance of
$200,000,000 Senior Notes (collectively, "1998 Notes") due 2008 and Senior
Discount Notes (collectively, "1998 Discount Notes") with a discounted value of
approximately $200,000,000.
Such issuance is expected to occur on February 23, 1998. Both the 1998
Notes and the 1998 Discount Notes are guaranteed as to payment of principal and
interest by RSL Communications, Ltd.
19. SUPPLEMENTAL FINANCIAL INFORMATION
The following table sets forth selected unaudited quarterly financial
information for the years ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT LOSS PER SHARE)
YEAR ENDED DECEMBER 31, 1997 FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues...................................................... $ 42,168 $ 67,193 $ 83,243 $108,192
-------- -------- -------- --------
-------- -------- -------- --------
Net loss...................................................... $(19,147) $(21,570) $(27,342) $(32,140)
-------- -------- -------- --------
-------- -------- -------- --------
Loss per share................................................ $ (1.82) $ (1.90) $ (2.28) $ (0.77)
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average number of shares of common stock
outstanding................................................. 10,541 11,378 11,998 41,633
-------- -------- -------- --------
-------- -------- -------- --------
YEAR ENDED DECEMBER 31, 1996
Revenues...................................................... $ 15,864 $ 23,900 $ 30,458 $ 43,035
-------- -------- -------- --------
-------- -------- -------- --------
Net loss...................................................... $ (4,789) $ (7,489) $ (8,431) $(17,531)
-------- -------- -------- --------
-------- -------- -------- --------
Loss per share................................................ $ (0.75) $ (1.17) $ (1.31) $ (1.66)
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average number of shares of common stock
outstanding................................................. 6,411 6,411 6,426 10,541
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
20. SUBSEQUENT EVENTS (UNAUDITED)
On February 27, 1998, RSL PLC consummated concurrent offerings of
$200,000,000 9 1/8% Senior Notes due 2008 and $328,084,000 ($200,000,000 initial
accreted value) 10 1/8% Senior Discount Notes due 2008. The notes are guaranteed
by RSL.
On March 16, 1998, RSL PLC consummated an offering of DM296,000,000
(approximately $99,100,000 initial accreted value) 10% Senior Discount Notes due
2008. These notes are guaranteed by RSL.
On April 3, 1998 the Company redeemed $90,000,000 of the original aggregate
principal amount of the Notes with the net proceeds of the initial public
offering.
In April, 1998, the Company entered into an agreement with CBS Corporation
("CBS") pursuant to which the Company agreed to acquire the business of
Westinghouse Communications ("WestComm"), a division of CBS, for a cash purchase
price of approximately $90,000,000.
F-26
<PAGE>
RSL COMMUNICATIONS, LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
<S> <C> <C>
ASSETS
Cash and Cash Equivalents........................................................ $144,894 $ 82,196
Accounts Receivable, Net......................................................... 70,610 185,744
Securities--Available for Sale................................................... 13,858 --
Prepaid Expenses and Other Current Assets........................................ 16,073 85,379
-------- -----------
Total Current Assets............................................................. 245,435 353,319
-------- -----------
Restricted Marketable Securities--Held to Maturity............................... 68,836 30,579
Property and Equipment........................................................... 85,581 227,526
Less: Accumulated Depreciation................................................... (13,804) (32,069)
Investment in Unconsolidated Subsidiaries........................................ -- 35,458
Goodwill and Other Intangibles, Net.............................................. 214,983 516,856
Deposits and Other Assets........................................................ 4,633 35,380
-------- -----------
Total Assets................................................................... $605,664 $ 1,167,049
-------- -----------
-------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts Payable and Other Liabilities........................................... $154,324 $ 364,260
Short-term Debt.................................................................. 8,033 17,700
-------- -----------
Total Current Liabilities........................................................ 162,357 381,960
-------- -----------
Long-term Debt................................................................... 20,108 21,197
Senior Notes and Senior Discount Notes, Net...................................... 296,500 697,570
Other Liabilities--Noncurrent.................................................... -- 48,303
-------- -----------
Total Liabilities................................................................ 478,965 1,149,030
-------- -----------
Other Shareholders' Capital...................................................... 274,638 322,209
Accumulated Deficit.............................................................. (147,939) (304,190)
-------- -----------
Total Shareholders' Equity....................................................... 126,699 18,019
-------- -----------
Total Liabilities and Shareholders' Equity..................................... $605,664 $ 1,167,049
-------- -----------
-------- -----------
</TABLE>
See notes to condensed consolidated financial statements.
F-27
<PAGE>
RSL COMMUNICATIONS, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR LOSS PER SHARE)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1997 1998
------------- -------------
<S> <C> <C>
Revenues......................................................................... $ 192,604 $ 564,118
Operating costs and expenses
Cost of Services (exclusive of depreciation and amortization shown
separately below)........................................................... (171,203) (462,181)
Selling, general and administrative expenses................................... (62,085) (147,494)
Depreciation and amortization.................................................. (14,367) (43,282)
--------- ---------
(247,655) (652,957)
--------- ---------
Loss from operations............................................................. (55,051) (88,839)
Interest income.................................................................. 9,947 13,239
Interest expense................................................................. (28,910) (51,646)
Other income (expense)-net....................................................... 6,572 445
Foreign exchange loss............................................................ -- (10,621)
Minority interest................................................................ (212) 4,322
Income taxes..................................................................... (405) (726)
Loss in equity interest of unconsolidated subsidiaries........................... -- (1,625)
--------- ---------
Loss before extraordinary item................................................... (68,059) (135,451)
Extraordinary item............................................................... -- (20,800)
--------- ---------
Net loss after extraordinary item................................................ $ (68,059) $(156,251)
--------- ---------
--------- ---------
Loss per share of common stock before extraordinary item......................... $ (2.16) $ (3.17)
Loss per share of common stock after extraordinary item.......................... $ (2.16) $ (3.66)
</TABLE>
See notes to condensed consolidated financial statements.
F-28
<PAGE>
RSL COMMUNICATIONS, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1997 1998
-------- ---------
<S> <C> <C>
Net loss............................................................................... $(68,059) $(156,251)
Depreciation and amortization.......................................................... 14,367 43,279
Working capital change and other....................................................... (6,751) (3,395)
-------- ---------
Net cash used in operations....................................................... (60,443) (116,367)
-------- ---------
Acquisitions of subsidiaries........................................................... (26,828) (271,162)
Purchase of property and equipment..................................................... (14,267) (99,882)
Proceeds from marketable securities.................................................... 43,735 13,858
Proceeds from maturities of restricted securities...................................... 22,665 18,750
Proceeds from sales of restricted securities........................................... -- 21,889
Other.................................................................................. -- 3,775
-------- ---------
Net cash provided by (used in) investing activities............................... 25,305 (312,772)
-------- ---------
Proceeds from issuance of 1998 Notes................................................... -- 499,090
Payment of offering cost............................................................... -- (5,647)
Retirement of 1996 Notes............................................................... -- (127,493)
Proceeds from notes payable............................................................ -- 3,189
Payment of notes payable............................................................... (13,542) --
Proceeds from issuance of Class A shares............................................... -- 538
Other.................................................................................. (1,434) (2,666)
-------- ---------
Net cash (used in) provided by financing activities............................... (14,976) 367,011
-------- ---------
(Decrease) increase in cash and cash equivalents....................................... (50,114) (62,128)
Effects of foreign currency on cash and cash equivalents............................... (1,248) (570)
Cash and cash equivalents at beginning of period....................................... 104,068 144,894
-------- ---------
Cash and cash equivalents at end of period............................................. $ 52,706 $ 82,196
-------- ---------
-------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid for interest................................................................. $ 23,185 $ 22,561
-------- ---------
-------- ---------
SUPPLEMENTAL SCHEDULE OF NON-
CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of Class A Common Stock....................................................... $ 32,582 $ 8,712
-------- ---------
-------- ---------
Assets acquired under capital lease obligations........................................ $ 12,568 $ 4,986
-------- ---------
-------- ---------
Acquisition of distribution rights..................................................... $ -- $ 45,000
-------- ---------
-------- ---------
</TABLE>
See notes to condensed consolidated financial statements.
F-29
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
1. BASIS OF PRESENTATION
The condensed consolidated financial statements of which these notes are
part have been prepared by RSL Communications, Ltd. ("RSL") and RSL
Communications PLC, a wholly owned subsidiary of RSL ("RSL PLC" and, together
with RSL and their direct and indirect subsidiaries, the "Company"), pursuant to
the rules and regulations of the Securities and Exchange Commission (the
"Commission"). Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations; however, in the opinion of management of the Company, the Condensed
Consolidated Financial Statements include all adjustments, consisting only of
normal recurring accruals, necessary to present fairly the financial information
for such periods. These Condensed Consolidated Financial Statements should be
read in conjunction with the Consolidated Financial Statements of RSL and the
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
2. PRIVATE PLACEMENT OF NOTES AND EXCHANGE OFFER AND EXTRAORDINARY ITEM
On February 27, 1998, RSL PLC completed concurrent offerings (the "1998
U.S. Offerings") of $200.0 million principal amount of 9 1/8% Senior Notes due
2008 and $328.1 million principal amount at maturity ($200.0 million initial
accreted value) of 10 1/8% Senior Discount Notes due 2008 (together, the "1998
U.S. Notes"). The 1998 U.S. Offerings generated gross proceeds to the Company of
$400.0 million. On March 16, 1998, RSL PLC completed an offering (the "1998 DM
Offering," and together with the 1998 U.S. Offerings, the "Offerings") of 182.0
million Deutsche Mark denominated 10% Senior Discount Notes due 2008 (the "1998
DM Notes," and together with the 1998 U.S. Notes, the "1998 Notes"). The 1998 DM
Offering generated proceeds to the Company of $99.1 million. The 1998 Notes and
the 12 1/4% Senior Notes due 2006 (the "1996 Notes") of RSL PLC are collectively
referred to herein as the "Notes". The Notes are fully and unconditionally
guaranteed as to payment of principal, interest and any other amounts thereof by
RSL.
In connection with the Offerings, RSL PLC entered into Registration Rights
Agreements for the benefit of the holders of the 1998 Notes (the "Registration
Rights Agreements"), pursuant to which RSL PLC agreed to offer to exchange the
1998 Notes for substantially identical notes registered under the Securities
Act. In May 1998, in accordance with the Registration Rights Agreements, RSL and
RSL PLC offered for exchange the 1998 Notes for substantially identical notes
registered under the Securities Act. The Company's Registration Statement on
Form S-4 (Registration No.333-49857) filed with the Commission with respect to
such offering was declared effective by the Commission on May 12, 1998.
In April 1998, the Company used approximately $101.0 million of the net
proceeds from its initial public offering of shares of Class A Common Stock (the
"IPO") in 1997 to redeem (the "Equity Clawback") $90.0 million of the 1996 Notes
at a premium of $11.0 million, as permitted under the 1996 Indenture. In April
1998, the Company used approximately $43.1 million to redeem (the "Buyback")
$37.5 million of the 1996 Notes at a premium of $5.6 million, as permitted under
the 1996 Indenture. The redemption premiums, and part of the discount and
offering cost were expensed in the amount of $20.8 million in the second quarter
of 1998 as an extraordinary item.
3. REGISTRATION OF SHARES
In March 1998, the Company registered 1,152,715 shares of Class A Common
Stock to be issued pursuant to the terms of a warrant agreement governing the
Warrants (the "Warrant Registration") and 300,000 shares of Class A Common Stock
to be sold by Bukfenc, Inc. a corporation wholly owned by Andrew Gaspar, former
Vice Chairman of the Company, and members of his family (the "Selling
F-30
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998--(CONTINUED)
3. REGISTRATION OF SHARES--(CONTINUED)
Shareholder") (which necessarily assumes the conversion by the Selling
Shareholder of an identical number of shares of Class B Common Stock). The
Warrant Registration was required pursuant to a registration rights agreement
entered into in connection with the private offering (the "1996 Units Offering")
of 300,000 units (the "Units") each consisting of (i) $1,000 principal amount of
12 1/4% Senior Notes due 2006 and (ii) one warrant to purchase 3.975 shares of
Class A Common Stock of RSL (each a "Warrant").
In August 1998, the Company filed a registration statement for a public
offering by the Company and certain of its shareholders of shares of Class A
Common Stock (the "Pending Registration").
4. EFFECTS OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS
No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosure About
Segments of an Enterprise and Related Information." The Company adopted SFAS
No. 130 during the nine month period ended September 30, 1998. The Company has
determined to present the data on a geographical basis for SFAS No. 131.
SFAS No. 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, it has no impact on the
Company's net income. Comprehensive income includes both net income and other
comprehensive income. Other comprehensive loss for the nine months ended
September 30, 1998 and September 30, 1997 of $6.7 million and $1.2 million,
respectively, represented foreign currency translation adjustment. Accumulated
other comprehensive loss included in the accompanying condensed consolidated
balance sheet as of September 30, 1998 and September 30, 1997 was $12.0 million
and $1.8 million, respectively, consisting of the accumulated foreign currency
translation adjustment.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards for derivative instruments and hedging activities. Generally, it
requires that an entity recognized all derivatives as either an asset or
liability and measure those instruments at fair value, as well as identify the
conditions for which a derivative may be specifically designed as a hedge. The
Company does not have any derivative instruments.
5. NET LOSS PER SHARE
Net loss per share is computed on the basis of the weighted average number
of common shares outstanding during the period. The average number of shares
outstanding for the nine month period ended September 30, 1997 have been
presented retroactively to give effect to the Company's recapitalization in
September 1997.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1997 1998
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Weighted average number of shares of
common stock outstanding.....................................................
31,541 42,740
</TABLE>
Diluted income (loss) per share amounts are not presented because the
inclusion of these amounts would be anti-dilutive.
F-31
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998--(CONTINUED)
6. ACQUISITIONS
In January 1998, RSL Finland purchased 90% of the equity of Telecenter OY,
an independent sales agent in Finland, for approximately $30.5 million.
In March 1998, RSL COM Australia Pty. Ltd., a subsidiary of the Company,
acquired the customer base of First Direct Communications Pty, Limited and Link
Telecommunications Pty Ltd., two switchless mobile telecommunications resellers,
for approximately $18 million.
In April 1998, the Company entered into an agreement with CBS Corporation
("CBS") pursuant to which the Company agreed to acquire the business of
Westinghouse Communications ("WestComm"), a division of CBS, for a cash purchase
price of approximately $90.0 million (the "WestComm Acquisition") plus the
assumption of certain liabilities amounting to less than $5.0 million. WestComm
provides both voice telephony and data services (including frame relay and
TCP/IP networks) to a customer base consisting primarily of small to medium size
businesses in the United States. WestComm operates six switches strategically
located in the United States and employs approximately 280 people. The
transaction closed in July 1998.
In May 1998, RSL Sweden purchased 100% of the equity of Tele 2001, a
Swedish Telecommunications reseller, for approximately $1.0 million.
In June 1998, the Company entered into an agreement with British Columbia
Railway Company pursuant to which the Company agreed to acquire (the "Westel
Acquisition") 100% of Westel Telecommunications Ltd. ("Westel") for a cash
purchase price of approximately $36.7 million. Westel offers a broad range of
enhanced telecommunications services (including long distance, data, private
line and Internet access) to a customer base consisting primarily of commercial
and residential customers located in British Columbia. The Westel Acquisition
closed on July 31, 1998. The Company accounts for the Westel Acquisition under
the purchase method of accounting.
In connection with the Westel Acquisition and in compliance with the
Canadian Telecommunications Act (the "Telecom Act"), the Company agreed to
transfer (the "MK Network Transfer") Westel's "telecommunications facilities"
(as defined in the Telecom Act) to MK Telecom Network Inc. ("MK Network"), an
entity in which the Company owns a 46.7% beneficial interest, for a purchase
price of approximately $6.5 million, the net realizable value of the assets
transferred to MK Network (such assets were purchased in the Westel
acquisition). The MK Network Transfer was effective as of July 31,
1998. The Company recorded its investment in MK Network as an equity investment
which was completed through a transfer of assets, which were recorded at the
Company's historical cost basis (which also approximates net realizable value).
The assets transferred consist of telecommunications microwave facilities.
Neither Westel nor MK Network and their respective owners are related parties.
In July 1998, RSL Italy acquired 75% of the equity of Comesa, a
telecommunications company located in Northern Italy, for approximately
$1.0 million.
In July 1998, RSL COM France purchased 100% of the equity of Geovox SARL, a
prepaid calling card company operating in Paris, France for approximately
$6.5 million.
In July 1998, RSL Austria acquired 100% of the equity of TC Telecom GmbH, a
telecommunications reseller located in Austria, for approximately $1.1 million.
In August 1998, the Company acquired the business of Motorola Tel.co
("Motorola Tel.co") in the United Kingdom, Germany and Belgium from Motorola
Inc. for approximately $68.1 million. Motorola Tel.co resells wireless services
and related products in these countries to a base of over 360,000
F-32
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998--(CONTINUED)
6. ACQUISITIONS--(CONTINUED)
subscribers. This transaction significantly increases the number of direct
customer relationships in Europe and will allow the Company to cross-sell long
distance and wireless services.
All of the above acquisitions have been accounted for by the purchase
method of accounting and, accordingly, the purchase price has been allocated to
the assets acquired based on their estimated fair value at the date of
acquisition and is being amortized using the straight-line method over fifteen
years.
The valuation of the above acquired assets and liabilities, including
goodwill, is final at September 30, 1998.
In May 1998, the Company acquired for approximately $33.6 million a 49.86%
ownership interest in Telegate Holding GmbH ("Telegate Holding"), which holds a
54.55% ownership interest in Telegate AG ("Telegate"), resulting in a 27.19%
economic interest in Telegate. Telegate is a directory information provider in
Germany. The Company is accounting for the investment using the equity method of
accounting. The investment was included in investment in unconsolidated
subsidiaries and had been adjusted for the Company's pro-rata allocable loss.
In connection with this transaction, the Company granted to Metro Holding,
a minority shareholder of Telegate Holding, the right (the "Telegate Put
Option") to exchange its shares in Telegate Holding, representing 25% on a fully
diluted basis of the shares of Telegate, for Class A Common Stock of the
Company. The Telegate Put Option is only exercisable if Telegate has a positive
EBITDA (as defined) for a three month period ending on or before May 31, 1999
and if any class of securities of Telegate is not, at such time, publicly
traded. If the Telegate Put Option is exercised, at such time, the equity values
of Telegate Holding and the Company would be determined. The exercise of the
Telegate Put Option will require the Company to begin accounting for Telegate as
a majority controlled consolidated subsidiary. The Company will also be
required, at such time, to commence a fair value study to determine the
allocation of its purchase price for the additional Telegate Holding shares,
between the proportionate net assets acquired and liabilities assumed.
Currently, there has been no accounting treatment applied to the Telegate Put
Option.
In June 1998, the Company entered into a marketing and distribution
services agreement with Metro Holding AG ("Metro Holding"), the management
holding company for Metro AG, one of the largest retailers in Europe. Under this
agreement, Metro Holding will assist the Company in promoting, marketing,
selling and distributing the Company's services through Metro AG's wholesale and
retail operations in Europe. This arrangement is designed to provide the Company
access to Metro AG's extensive distribution network and customer base (which
includes a large number of small and medium-sized businesses) and is expected to
significantly accelerate the Company's penetration into key European markets. In
connection with its alliance with the Company, Metro Holding initially acquired
in April 1998 a 12.5% equity interest in RSL Europe. In June 1998, Metro Holding
converted all of its interest in RSL Europe into 1,607,142 shares of Class A
Common Stock (based on value for value) and purchased an equal number of
Class A Common Stock from certain shareholders of the Company. In the aggregate,
Metro Holding acquired approximately 7.2% of the outstanding stock of the
Company, which it is required to hold until at least April 1, 2001. The Company
has recorded in the financial statements the issuance of equity at fair
market value, $45 million, based on the quoted market value of the Company's
stock at the time of the transaction, and has recorded the distribution rights
as an asset in a like amount which is being amortized over the five-year life of
the agreement.
The Company has provided its Austrian subsidiary's minority shareholder
with the right to acquire additional shareholdings upon the occurrence of
certain events. If this shareholder chooses to exercise his option, it will
cause him to make a pro rata investment into the Company based on an independent
valuation of the Company at the time notice to exercise is presented to the
Company. The value of this option is not material.
F-33
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998--(CONTINUED)
7. SUMMARIZED FINANCIAL INFORMATION FOR RSL PLC
The following presents summarized financial information of RSL PLC as of
September 30, 1998 and as of December 31, 1997. RSL PLC had no independent
operations other than serving solely as a foreign holding company for the
Company's North American and European operations. The Notes issued by RSL PLC
are fully and unconditionally guaranteed by RSL. RSL has not presented separate
financial statements and other related disclosure concerning RSL PLC because
management has determined that such information is not material to shareholders
or holders of the Notes. RSL's financial statements are, except for RSL's
capitalization, Delta Three operations, Asia/Pacific Rim operations, Latin
American operations, corporate overhead expenses and available credit
facilities, identical to the financial statements of RSL PLC.
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Current Assets................................................................. $212,568 $ 302,699
Non-current Assets............................................................. 324,118 737,064
Current Liabilities............................................................ 122,672 349,782
Non-current Liabilities........................................................ 557,448 938,967
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1997 1998
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Net Revenue...................................................................... $ 178,711 $ 473,482
Net Loss......................................................................... (58,243) (138,506)
</TABLE>
8. SUBSEQUENT EVENTS
In October 1998, the Company obtained from a group of its officers and
directors and affiliates thereof (the "New Lenders") commitments for up to $35
million of revolving credit (the "New Credit Facility"), subject to the
negotiation and execution of final documentation. Amounts borrowed under the New
Credit Facility will accrue interest at LIBOR plus 5% per annum. RSL PLC will be
the borrower and RSL will guarantee any obligations of RSL PLC under the New
Credit Facility. The commitments of the New Lenders under the New Credit
Facility will expire on the earlier of January 15, 2000 and the date of any
change of control of RSL.
In October 1998 and November 1998, the Company filed amendments No. 1, No.
2 and No. 3, respectively, to the registration statement for the Pending
Registration.
In November 1998, RSL PLC issued (the "New Offering") $100 million
aggregate principal amount at maturity of 12% Senior Notes due 2008 (the "New
Notes"). The New Notes generated proceeds to the Company of approximately
$90.5 million. The New Notes are fully and unconditionally guaranteed as to
payment of principal, interest and any other amounts thereof by RSL.
F-34
<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-35
<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
Operating Costs and Expenses
Cost of Services............................................................................... 24,614,337
Selling, General and Administrative Expenses................................................... 6,299,188
------------
30,913,525
------------
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-36
<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-37
<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 ("RSL
North America") 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, RSL North America's subsidiary International
Telecommunications Corporation ("RSL USA") (collectively, "RSL North America")
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
Operating Costs and Expenses
Cost of services......................................... 37,087,243
Selling, general and administrative expenses............. 23,555,216
------------
60,642,459
------------
Loss from operations....................................... (20,138,287)
Interest income............................................ 56,148
Interest expense........................................... (738,496)
------------
Net loss................................................... $(20,820,635)
------------
------------
</TABLE>
F-38
<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-39
<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.
RSL North America'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-40
<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-41
<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
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. ...........................................
Lehman Brothers Inc.............................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated..............
Morgan Stanley & Co. Incorporated...............................
Warburg Dillon Read LLC, a subsidiary of UBS AG.................
----------
Total ..................................................... 5,250,000
----------
----------
</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 underwriters.
The Company and the Selling Shareholders have 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 1,750,000 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.
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 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.
U-1
<PAGE>
The Company and the Selling Shareholders have granted the U.S. Underwriters
an option exercisable for 30 days after the date of this Prospectus to purchase
up to an aggregate of additional shares 389,584 and 397,916 shares,
respectively, solely to cover over-allotments, if any. The over-allotment option
from the Selling Shareholders must be exercised in full, on a pro rata basis,
before the over-allotment option from the Company is exercised. 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 5,250,000 shares of Class A
Common Stock offered hereby. The Company and the Selling Shareholders have
granted the International Underwriters a similar option to purchase up to an
aggregate of 129,861 additional shares and 132,639 shares, respectively.
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 90 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 stock option plans contemplated by or existing on the date of,
or upon the conversion or exchange of convertible or exchangeable securities
outstanding as of the date of, the 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.
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 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 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 broker-dealers in respect of the securities sold in the
Offerings may be reclaimed by the Underwriters if such shares of Class A Common
Stock are repurchased by the Underwriters 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.
The Class A Common Stock trade on the Nasdaq National Market under the
symbol "RSLCF."
Certain of the Underwriters and their affiliates have provided from time to
time, and expect to provide in the future, investment banking and general
financing and banking services to the Company and its affiliates, for which such
Underwriters have received and will receive customary fees and commissions.
The Company and the Selling Shareholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act.
U-2
<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>
Available Information........................................... 3
Summary......................................................... 5
Risk Factors.................................................... 10
Use of Proceeds................................................. 20
Price Range of Class A Common Stock............................. 20
Dividend Policy................................................. 20
Dilution........................................................ 21
Capitalization.................................................. 22
Selected Consolidated Financial Data............................ 23
Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 25
Business........................................................ 39
Management...................................................... 90
Certain Relationships and Related Transactions.................. 101
Principal and Selling Shareholders.............................. 102
Description of Capital Stock.................................... 104
Certain Rights to Acquire Class A Common Stock.................. 109
Description of Certain Indebtedness............................. 110
Shares Eligible for Future Sale................................. 115
Certain United States Federal Income Tax Considerations......... 116
Certain Bermuda Tax Considerations.............................. 122
Legal Matters................................................... 122
Experts......................................................... 122
Service of Process and Enforcement of Liabilities............... 123
Index to Consolidated Financial Statements...................... F-1
Underwriting.................................................... U-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
7,000,000 SHARES
RSL COMMUNICATIONS, LTD.
CLASS A COMMON SHARES
(PAR VALUE $.00457 PER SHARE)
------------------
[RSLCOM LOGO]
------------------
GOLDMAN, SACHS & CO.
LEHMAN BROTHERS
MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
WARBURG DILLON READ LLC
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
The information contained
herein is subject to amendment
and completion.
ALTERNATE PAGE
SUBJECT TO COMPLETION DATED NOVEMBER 24, 1998
7,000,000 SHARES
RSL COMMUNICATIONS, LTD.
[RSLCOM LOGO]
CLASS A COMMON SHARES
(PAR VALUE $.00457 PER SHARE)
----------------------
Of the 7,000,000 Class A common shares, par value $.00457 per share (the
"Class A Common Stock"), of RSL Communications, Ltd. (the "Issuer") offered
hereby, 1,750,000 shares are being offered in an international offering outside
the United States (the "International Offering") and 5,250,000 shares are being
offered in a concurrent United States offering (the "U.S. Offering" and,
together with the International Offering, the "Offerings"). The public offering
price per share and the underwriting discount per share will be identical for
both Offerings. See "Underwriting."
The 7,000,000 shares of Class A Common Stock offered are being sold by the
Issuer. The Selling Shareholders will only sell shares pursuant to the
Underwriters' over-allotment options described herein. See "Principal and
Selling Shareholders". The Issuer will not receive any of the proceeds from the
sale of shares being sold by the Selling Shareholders. Upon consummation of the
Offerings, officers, directors and other affiliates of the Issuer will
beneficially own shares having approximately 92.4% of the voting power of the
Issuer's outstanding Common Stock (as defined below) (approximately 92.1% of the
voting power of the Issuer's Common Stock if the over-allotment options are
exercised in full). See "Principal and Selling Shareholders".
The Class A Common Stock is listed on the Nasdaq Stock Market's National
Market (the "Nasdaq National Market") under the symbol "RSLCF." Application will
be made to the Nasdaq National Market to list the shares of Class A Common Stock
offered herein (the "Shares") upon notice of issuance. The last reported sale
price of a share of Class A Common Stock on the Nasdaq National Market on
November 20, 1998 was $25 1/4.
As of the date of this Prospectus, the Issuer 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. See "Description of Capital
Stock."
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE CLASS A COMMON STOCK.
----------------------
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>
PROCEEDS TO
INITIAL PUBLIC UNDERWRITING THE PROCEEDS TO
OFFERING PRICE DISCOUNT(1) ISSUER(2) SELLING SHAREHOLDERS
-------------- ------------ ------------ --------------------
<S> <C> <C> <C> <C>
Per Share....................................... $ $ $ $
Total(3)........................................ $ $ $ $
</TABLE>
- ------------------
(1) The Issuer and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting estimated expenses of $3,000,000 payable by the Issuer.
(3) The Selling Shareholders and the Issuer have granted the International
Underwriters an option for 30 days to purchase up to an additional 132,639
shares and 129,861 shares, respectively, at the offering price per share,
less the underwriting discount, solely to cover any over-allotments.
Additionally, the Selling Shareholders and the Issuer have granted the U.S.
Underwriters a similar option with respect to an additional 397,916 shares
and 389,584 shares, respectively, as part of the concurrent U.S. Offering.
See "Principal and Selling Shareholders." The Issuer will not receive any of
the proceeds from the sale of the shares of Class A Common Stock by the
Selling Shareholders. If such options are exercised in full, the total
initial public offering price, underwriting discount, proceeds to the Issuer
and proceeds to the Selling Shareholders 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 the shares will be ready for delivery in New York, New York on or about
, 1998, against payment therefor in immediately available
funds.
GOLDMAN SACHS INTERNATIONAL
LEHMAN BROTHERS
MERRILL LYNCH INTERNATIONAL
MORGAN STANLEY DEAN WITTER
WARBURG DILLON READ
----------------------
The date of this Prospectus is , 1998.
<PAGE>
[ALTERNATE PAGE]
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, 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.....................................
Lehman Brothers International (Europe)..........................
Merrill Lynch International.....................................
Morgan Stanley & Co. International Limited......................
UBS AG..........................................................
----------
Total ..................................................... 1,750,000
----------
----------
</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 underwriters.
The Company and the Selling Shareholders have 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
5,250,000 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.
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 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.
U-1
<PAGE>
[ALTERNATE PAGE]
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 and the Selling Shareholders have granted the International
Underwriters an option exercisable for 30 days after the date of this Prospectus
to purchase up to an aggregate of 129,861 additional shares and 132,639 shares,
respectively, solely to cover over-allotments, if any. The over-allotment option
from the Selling Shareholders must be exercised in full, on a pro rata basis,
before the over-allotment option from the Company is exercised. 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
1,750,000 shares of Class A Common Stock offered hereby. The Company and the
Selling Shareholders have granted the U.S. Underwriters a similar option to
purchase up to an aggregate of 389,584 additional shares and 397,916 shares,
respectively.
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 90 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 stock option plans contemplated by or existing on the date of,
or upon the conversion or exchange of convertible or exchangeable securities
outstanding as of the date of, the 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 pass 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) Order 1996 of Great Britain or is a
peron 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 offering price.
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 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 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 broker-dealers in respect of the securities sold in the
Offerings may be reclaimed by the Underwriters if such shares of Class A Common
Stock are repurchased by the
U-2
<PAGE>
[ALTERNATE PAGE]
Underwriters 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.
The Class A Common Stock trade on the Nasdaq National Market under the
symbol "RSLCF."
Certain of the Underwriters and their affiliates have provided from time to
time, and expect to provide in the future, investment banking and general
financing and banking services to the Company and its affiliates, for which such
Underwriters have received and will receive customary fees and commissions.
The Company and the Selling Shareholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act.
U-3
<PAGE>
ALTERNATE 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>
Available Information........................................... 3
Summary......................................................... 5
Risk Factors.................................................... 10
Use of Proceeds................................................. 20
Price Range of Class A Common Stock............................. 20
Dividend Policy................................................. 20
Dilution........................................................ 21
Capitalization.................................................. 22
Selected Consolidated Financial Data............................ 23
Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 25
Business........................................................ 39
Management...................................................... 90
Certain Relationships and Related Transactions.................. 101
Principal and Selling Shareholders.............................. 102
Description of Capital Stock.................................... 104
Certain Rights to Acquire Class A Common Stock.................. 109
Description of Certain Indebtedness............................. 110
Shares Eligible for Future Sale................................. 115
Certain United States Federal Income Tax Considerations......... 116
Certain Bermuda Tax Considerations.............................. 122
Legal Matters................................................... 122
Experts......................................................... 122
Service of Process and Enforcement of Liabilities............... 123
Index to Consolidated Financial Statements...................... F-1
Underwriting.................................................... U-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
7,000,000 SHARES
RSL COMMUNICATIONS, LTD.
CLASS A COMMON SHARES
(PAR VALUE $.00457 PER SHARE)
------------------
[RSLCOM LOGO]
------------------
GOLDMAN SACHS INTERNATIONAL
LEHMAN BROTHERS
MERRILL LYNCH INTERNATIONAL
MORGAN STANLEY DEAN WITTER
WARBURG DILLON READ
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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, are estimated as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee............................ $ 74,635
NASD filing fee................................................................ 25,800
Printing and Engraving......................................................... 500,000*
Counsel Fees and Expenses...................................................... 750,000*
Accountants' Fees and Expenses................................................. 100,000*
Transfer Agent and Registrar Fees and Expenses................................. 100,000*
Nasdaq Listing Fee............................................................. 75,000
Miscellaneous.................................................................. 1,374,565*
----------
Total..................................................................... $3,000,000
----------
----------
</TABLE>
- ------------------
* Estimated
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Bermuda law and the Registrant's Memorandum of Association and
bye-laws, the directors, secretary and other officers for the time being of the
Registrant and the liquidator or trustees (if any) for the time being acting in
relation to any of the affairs of the Registrant and every one of them, and
their heirs, executors and administrators, shall be indemnified and secured
harmless out of the assets of the Registrant from and against all actions,
costs, charges, losses, damages and expenses which they or any of them, their
heirs, executors or administrators, shall or may incur or sustain by or by
reason of any act done, concurred in or omitted in or about the execution of
their duty, or supposed duty, or in their respective offices or trusts, and none
of them shall be answerable for the acts, receipts, neglects or defaults of the
others of them or for joining in any receipts for the sake of conformity, or for
any bankers or other persons with whom any moneys or effects belonging to the
Registrant shall or may be lodged or deposited for safe custody, or for
insufficiency or deficiency of any security upon which any moneys of or
belonging to the Registrant shall be placed out on or invested, or for any other
loss, misfortune or damage which may happen in the execution of their respective
offices or trusts, or in relation thereto, provided that this indemnity shall
not extend to any matter in respect of any fraud or dishonesty which may attach
to any of said persons.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following discussion does not give effect to the recapitalization
effected by the Registrant in connection with the initial public offering of its
Class A Common Shares (the "IPO").
In July 1996, RSL BVI was amalgamated into the Registrant. Subsequently,
the Registrant increased the number of authorized shares of each class 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
II-1
<PAGE>
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 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 RSL North America held by
Mr. Piluso. The issuance of such shares was exempt from registration under the
Securities Act pursuant to Section 4(2) thereof.
The following discussion does give effect to the recapitalization effected
by the Registrant in connection with its IPO.
In October 1996, the Company and RSL Communications PLC, a wholly owned
subsidiary of the Company ("RSL PLC"), completed an offering (the "1996 Units
Offering") of 300,000 units (the "Units"), each Unit consisting of (i) $1,000
principal amount of 12 1/4% Senior Notes due 2006 of the Note Issuer
(unconditionally guaranteed by the Company) and (ii) one warrant to purchase
3.975 shares of Class A Common Stock (the "Warrants"). The Units were sold for
an aggregate purchase price of $300.0 million. The placement agents for the 1996
Units Offering consisted of Morgan Stanley & Co. Incorporated, Bear, Stearns &
Co. Inc. and Dillon, Read & Co. Inc. The aggregate commissions were
approximately $9.0 million. The Units were not registered under the Securities
Act in reliance on Rule 144A of the Securities Act and were sold only to
"qualified institutional buyers" and to a limited number of "institutional
accredited investors."
In connection with the IPO, the Registrant issued to certain members of
management and original shareholders of certain of the Registrant's subsidiaries
an aggregate of 411,105 shares of Class A Common Stock in exchange for shares of
certain of the Registrant's subsidiaries held by such persons. The issuance of
such shares is exempt from registration under the Securities Act pursuant to
Section 4(2) thereof.
In February 1998, RSL PLC completed an offering (the "U.S. Dollar Notes
Offering") of $200.0 million 9 1/8% Senior Notes due 2008 and $328.1 million of
10 1/8% Senior Discount Notes due 2008 of the Note Issuer (the "U.S. Dollar
Notes") and unconditionally guaranteed by the Registrant pursuant to an
indenture governing the U.S. Dollar Notes. The placement agents for the U.S.
Dollar Notes Offering consisted of Goldman, Sachs & Co., Merril Lynch & Co.,
Chase Securities, Inc., J.P. Morgan & Co., and SBC Warburg Dillon Read Inc. The
aggregate commissions were approximately $12.0 million. The U.S. Dollar Notes
were sold to "qualified institutional buyers" in the U.S. and were not
registered under the Securities Act in reliance on Rule 144A of the Securities
Act.
II-2
<PAGE>
In March 1998, RSL PLC completed an offering (the "German Debt Offering")
of DM296.0 million (approximately $99.1 million of proceeds at issuance) face
amount at maturity 10% Senior Discount Notes due 2008 (the "German Notes")
unconditionally guaranteed by the Registrant pursuant to an indenture governing
the German Notes. The placement agents for the German Debt Offering consisted of
Goldman, Sachs & Co oHG and Merril Lynch International. The aggregate
commissions were approximately $3.0 million. The German Notes were sold outside
the U.S. to non-U.S. persons in reliance on Regulation S under the Securities
Act and through their respective selling agents, Goldman, Sachs & Co. and
Merrill Lynch & Co., and in the United States only to "qualified institutional
buyers" in reliance on Rule 144A under the Securities Act.
In April 1998, pursuant to an Agreement and Plan of Merger (the "Merger"),
between the Company, Delta Three, Inc. ("Delta Three"), Jacob Davidson
("Davidson"), and Pioneer Management Services LLC ("Pioneer," and together with
Davidson, the "Delta Shareholders"), Delta Three was merged into a wholly-owned
subsidiary of the Company. As a result of the Merger, the Company (i) received
1,750,000 shares of Delta Three, (ii) paid to each Delta Shareholder a total
cash payment of $438,500 and (iii) issued to each Delta Shareholder 187,299
shares of the Company's Class A common stock. The shares were issued pursuant to
a private placement exemption under Section 4(2) of the Securities Act.
In July 1998, the Registrant issued to Metro Holding AG 1,607,142 shares of
the Registrant's Class A Common Shares in exchange for 142,857 common shares of
RSL COM Europe, Ltd., a subsidiary of the Registrant. The issuance of such
shares was exempt from registration under the Securities Act pursuant to Section
4(2) thereof.
In October 1998, the Registrant issued to Arnold Goodstein 32,269 shares of
the Registrant's Class A Common Stock in exchange for 19.7375 shares of RSL COM
PrimeCall, Inc., a subsidiary of the Registrant. The issuance of such shares was
exempt from registration under the Securities Act pursuant to Section 4(2)
thereof.
On November 9, 1998, the Company, through RSL PLC, issued $100 million
aggregate principal amount at maturity of 12% Senior Notes due 2008 (the "New
Notes") unconditionally guaranteed by the Registrant pursuant to an indenture
governing the New Notes. The placement agent for the offering of the New Notes
is Goldman, Sachs & Co. The aggregate commissions were approximately $3.0
million. The New Notes were sold outside the U.S. to non-U.S. persons in
reliance on Regulation S under the Securities Act and in the U.S. only to
"qualified institutional buyers" in reliance on Rule 144A under the Securities
Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ------------------------------------------------------------
<S> <C> <C>
+++++1.1 -- Underwriting Agreement (U.S. Version).
+++++1.2 -- Underwriting Agreement (International Version).
*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 -- Form of Class A Common Share Certificate.
+++++5.1 -- Opinion of Conyers, Dill & Pearman.
*10.1 -- 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.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ------------------------------------------------------------
<S> <C> <C>
*10.2 -- Notes Registration Rights Agreement, dated October 3, 1996,
by and among RSL Communications PLC, RSL Communications,
Ltd. and the Placement Agents.
*10.3 -- 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.
*10.4 -- Collateral Pledge and Security Agreement, dated October 3,
1996, by and among RSL Communications PLC and Trustee.
++++10.6 -- Exchange and Registration Rights Agreement, dated as of
February 27, 1998, among RSL Communications PLC, RSL
Communications, Ltd., Goldman, Sachs & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Chase Securities Inc.,
J.P. Morgan Securities Inc., and SBC Warburg Dillon Read Inc.
++++10.7 -- Note Deposit Agreement, dated as of February 27, 1998, among
RSL Communications PLC, RSL Communications, Ltd. and The
Chase Manhattan Bank as Book-Entry Depositary.
++++10.8 -- Note Deposit Agreement, dated as of February 27, 1998, among
RSL Communications PLC, RSL Communications, Ltd. and The
Chase Manhattan Bank as Book-Entry Depositary.
++++10.9 -- Indenture, dated as of February 27, 1998, by RSL
Communications PLC and RSL Communications, Ltd. to The Chase
Manhattan Bank as Trustee.
++++10.10 -- Indenture, dated as of February 27, 1998, by RSL
Communications PLC and RSL Communications, Ltd. to The Chase
Manhattan Bank as Trustee.
++++10.11 -- Exchange and Registration Rights Agreement, dated as of
February 27, 1998, among RSL Communications PLC, RSL
Communications, Ltd. and Goldman, Sachs & Co., oHG and
Merrill Lynch International.
++++10.12 -- Note Deposit Agreement, dated as of March 16, 1998, by and
between RSL Communications PLC and The Chase Manhattan Bank
as Book-Entry Depositary.
++++10.13 -- Indenture, dated as of March 16, 1998, by RSL Communications
PLC and RSL Communications, Ltd. to The Chase Manhattan Bank
as Trustee.
*10.14 -- Warrant Agreement, dated October 3, 1996, between RSL
Communications, Ltd., as Issuer, and The Chase Manhattan
Bank, as warrant agent.
*10.15 -- Warrant Registration Rights Agreement, dated October 3,
1996, between RSL Communications, Ltd., as issuer, and The
Chase Manhattan Bank, as warrant agent.
*10.16 -- Amendment to the Revolving Credit Facility, dated August 20,
1996, from The Chase Manhattan Bank to RSL Communications, Inc.
*10.17 -- Amendment to the Revolving Credit Facility, dated
September 10, 1996, from The Chase Manhattan Bank to RSL
Communications, Ltd.
*10.18 -- Subordinated Promissory Note, dated September 10, 1996, from
RSL Communications, Ltd. to Ronald S. Lauder.
*10.19 -- Warrant for 210,000 shares of Class B Common Stock of RSL
Communications, Ltd. issued to Ronald S. Lauder on
September 10, 1996.
*10.20 -- Standby Facility Agreement, dated October 1, 1996, by and
between RSL Communications, Ltd. and Ronald S. Lauder.
*10.21 -- Consulting Agreement, dated September 15, 1995, between
Eugene Sekulow and RSL Communications, Inc.
*10.22 -- Amendment to Consulting Agreement, dated August 8, 1996,
between Eugene Sekulow and RSL Communications, Ltd.
*10.23 -- RSL Communications, Ltd.'s 1995 Amended and Restated Stock
Option Plan.
*10.24 -- Employment Agreement, dated September 15, 1995, between
Itzhak Fisher and International Telecommunications Group, Ltd.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ------------------------------------------------------------
<S> <C> <C>
*10.25 -- Employment Agreement, dated September 15, 1995, between
Itzhak Fisher and RSL Communications Inc.
*10.26 -- Employment Agreement, dated April 1, 1995, between Nir
Tarlovsky and International Telecommunications Group, Ltd.
*10.27 -- Employment Agreement, dated April 1, 1995, between Nir
Tarlovsky and RSL Communications Inc.
*10.28 -- Employment Agreement, dated August 9, 1995, between RSL COM
Europe Limited and Richard Williams.
*10.29 -- Memorandum of Agreement, dated July 30, 1996, between
International Telecommunications Corporation and Codetel.
*10.30 -- General Purchase Agreement, dated September 14, 1995,
between Ericsson Inc. and International Telecommunications
Corporation.
*10.31 -- Lease Agreement between AB LM Ericsson Finans and
International Telecommunications Corporation.
*10.32 -- Lease Agreement, dated April 10, 1996, between RSL COM
Europe Ltd. and AB LM Ericsson Finans.
*10.33 -- Lease Agreement, dated December 30, 1996, between RSL COM
Europe Ltd. and AB LM Ericsson Finans.
*10.34 -- Loan and Security Agreement, dated September 8, 1995,
between Cyberlink Inc. and CoastFed Business Credit
Corporation.
*10.35 -- Accounts Collateral Security Agreement, dated September 8,
1995, between Cyberlink Inc. and CoastFed Business Credit
Corporation.
*10.36 -- Equipment Collateral Security Agreement, dated September 8,
1995, between Cyberlink Inc. and CoastFed Business Credit
Corporation.
*10.37 -- Security Stock Pledge Agreement, dated September 8, 1995,
between CoastFed Business Credit Corporation and Cyberlink Inc.
*10.38 -- Security Agreement, dated September 8, 1995, between
CoastFed Business Credit Corporation and Cyberlink-California
Inc.
*10.39 -- Security Agreement, dated September 8, 1995, between
CoastFed Business Credit Corporation and Cyberlink-Nevada Inc.
*10.40 -- Asset Purchase Agreement, dated as of May 8, 1996, by and
between RSL COM France S.A. and Sprint Telecommunications
France Inc.
*10.41 -- 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.
*10.42 -- Transition Services Agreement, dated May 8, 1996, by and
between Sprint Communications Company L.P. and RSL COM
France S.A.
*10.43 -- 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.
*10.44 -- Transition Services Agreement, dated May 8, 1996, by and
between Global One Communications World Operations, Limited
and RSL COM France S.A.
*10.45 -- Asset Purchase Agreement, dated as of May 8, 1996, by and
among Siena Vermogensverwaltungs-GmbH, Sprint
Telecommunication Services GmbH and Sprint Fon Inc.
*10.46 -- Transition Services Agreement, dated May 8, 1996, by and
among Sprint Telecommunication Services GmbH, Sprint Fon
Inc. and Siena Vermogensverwaltungs-GmbH.
*10.47 -- Transition Services Agreement, dated May 8, 1996, by and
between Sprint Communications Company L.P. and RSL COM
Deutschland GmbH.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ------------------------------------------------------------
<S> <C> <C>
*10.48 -- 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.
*10.49 -- Transition Services Agreement, dated May 8, 1996, by and
between Global One Communications World Operations, Limited
and Siena Vermogensverwaltungs-GmbH.
*10.50 -- Asset Purchase Agreement, August 12, 1996, by and between
RSL COM UK Limited and Incom (UK) Ltd.
*10.51 -- Stock Purchase Agreement, dated July 3, 1996, between RSL
Communications Limited, Charles Piluso and International
Telecommunications Group, Ltd.
*10.52 -- Secured Promissory Note, dated September 9, 1996, from RSL
Communications PLC to Charles Piluso.
*10.53 -- Stock Pledge and Security Agreement, dated September 9, 1996
between RSL Communications PLC, Charles Piluso and Fletcher,
Heald & Hildreth, P.L.C.
*10.54 -- 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.
*10.55 -- Stock Purchase Agreement, dated September 9, 1996, between
RSL Communications PLC, Richard Rebetti, Jr. and
International Telecommunications Group, Ltd.
*10.56 -- Secured Promissory Note, dated September 9, 1996, from RSL
Communications PLC to Richard Rebetti.
*10.57 -- Stock Pledge and Security Agreement, dated September 9,
1996, between RSL Communications PLC, Richard Rebetti, Jr.
and Fletcher, Heald & Hildreth, P.L.C.
*10.58 -- Agreement and Plan of Reorganization, dated September 9,
1996, among RSL Communications PLC, RSL Communications, Ltd.
and Charles Piluso.
*10.59 -- Tax Agreement, dated September 9, 1996, between RSL
Communications PLC, RSL Communications, Ltd. and Charles
Piluso.
*10.60 -- Stock Purchase Agreement, dated September 22, 1995, by and
between RSL Communications, Inc. and Charles Piluso.
*10.61 -- Stock Purchase Agreement, dated September 22, 1995, by and
between Richard Rebetti and RSL Communications, Inc.
*10.62 -- Amendment to the Stock Purchase Agreement, dated
September 22, 1995, between and among International
Telecommunications Group, Ltd., International
Telecommunications Corporation and RSL Communications, Inc.
*10.63 -- Stock Purchase Agreement, dated March 10, 1995, between RSL
Communication, Inc., International Telecommunications Group,
Ltd. and International Telecommunications Corporation.
*10.64 -- 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.
*10.65 -- Indemnity Agreement, dated March 10, 1995, between and among
International Telecommunications Group, Ltd., International
Telecommunications Corporation and RSL Communications, Inc.
*10.66 -- Sublease, dated July 18, 1996, between RSL Communications,
Ltd. and RSL Management Corporation.
*10.67 -- Lease, dated as of January 15, 1997, between Longstreet
Associates L.P. and RSL COM U.S.A., Inc.
*10.68 -- Employment Agreement, dated January 31, 1997, between Roland
T. Mallcott and RSL Communications, Ltd.
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ------------------------------------------------------------
<S> <C> <C>
*10.69 -- Amendment of Lease, dated as of December 6, 1995, between
Hudson Telegraph Associates and International
Telecommunications Corporation.
**10.70 -- 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.
**10.71 -- Stockholders' Agreement, dated July 23, 1997, by and among
Delta Three, Inc., RSL Communications, Ltd., and the other
shareholders of Delta Three, Inc.
*****10.72 -- Delta Three, Inc. Services Agreement.
**10.73 -- Employment Agreement, dated July 31, 1997, between Andrew C.
Shields and RSL Communications, Ltd.
**10.74 -- Shareholders Agreement, dated October 10, 1996, between RSL
COM Europe, Limited, Gerard van Leest and Belnet Nederland
B.V.
+10.75 -- RSL Communications, Ltd. 1997 Performance Incentive Plan.
+10.76 -- RSL Communications, Ltd. 1997 Stock Incentive Plan.
**10.77 -- Lease Agreement, dated June 19, 1997 for property at 430
Park Avenue, New York, New York.
**10.78 -- Stock Purchase Agreement of Delta Three, Inc.
**10.79 -- Employment Agreement, dated September 2, 1997, between
Itzhak Fisher and RSL Communications, Ltd.
**10.80 -- Employment Agreement, dated September 2, 1997, between
Itzhak Fisher and International Telecommunications Group, Ltd.
+10.81 -- RSL Communications Ltd. 1997 Directors' Compensation Plan.
**10.82 -- Registration Rights Agreement, dated September 2, 1997,
among RSL Communications, Ltd., Ronald S. Lauder, Itzhak
Fisher and Coral Gate Investments Ltd.
**10.83 -- International Telecommunication Services Agreement, dated
July 1, 1995, between International Telecommunications
Corporation and TELECOM Denmark.
**10.84 -- International Telecommunication Operating Agreement, dated
July 15, 1995 between Telenor Carrier Services A.S. and
International Telecommunications Corporation.
**10.85 -- International Telecommunication Services Agreement, dated
May 10, 1994, between Mercury Communications Limited and
International Telecommunications Corporation.
**10.86 -- Agreement Concerning Voice Distribution of International
Telephony Traffic, undated, between Unisource Carrier
Services AG and International Telecommunications Corporation.
**10.87 -- International Telecommunications Service Agreement, dated
May 31, 1994, between Compania Dominicana De Telefonos, C.
Por A. and International Telecommunications Corporation.
**10.88 -- Second Supplementary Agreement to the UK-Netherlands 14
Cable System Construction & Maintenance Agreement, effective
February 18, 1997, among the parties on the Annex thereto.
**10.89 -- Fourth Supplementary Agreement to the ODIN Construction and
Maintenance Agreement, dated October 24, 1996, among the
parties on the Annex thereto.
**10.90 -- Second Supplementary Agreement to Antillas I Construction &
Maintenance Agreement, dated February 13, 1997, among the
parties on the Annex thereto.
**10.91 -- Canus I Cable System Indefeasible Right of Use Agreement and
Financing Agreement, dated June 4, 1996, between Optel
Communications, Inc. and International Telecommunications
Corporation.
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ------------------------------------------------------------
<S> <C> <C>
**10.92 -- Cantat-3 Cable System Indefeasible Right of Use Agreement
and Financing Agreement, dated March 12, 1996, between
Teleglobe Cantat-3 Inc. and International Telecommunications
Corporation.
**10.93 -- PTAT-1 Submarine System Indefeasible Right of Use Agreement,
dated May 12, 1994, between Private Transatlantic
Telecommunications System, Inc. and International
Telecommunications Corporation.
**10.94 -- Third Supplementary Agreement to the TAT-12/TAT-13 Cable
Network Construction and Maintenance Agreement, dated
October 17, 1995, among the parties on the Annex thereto.
*10.95 -- 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.
+++10.95 -- Asset Purchase Agreement, dated as of April 23, 1998, by and
between CBS Corporation and RSL COM U.S.A., Inc.
*****10.96 -- Restated Umbrella Agreement, dated as of June 26, 1998,
among Motorola Limited, SA Motorola NV, Motorola Electronic
GmbH, Motorola SA and RSL Communications, Ltd.
+++++10.97 -- Share Subscription, Share Option and Shareholders Agreement,
dated June 10, 1998, among RSL COM Europe Ltd., RSL
Communications, Ltd. and Metro Holding AG.
+++++10.98 -- Marketing and Distribution Services Agreement, dated as of
June 10, 1998, between RSL Com Europe Ltd. and Metro Holding
AG.
+++++10.99 -- Exchange Agreement, dated July 22, 1998, among Ligapart AG,
Metro Holding AG and RSL Communications, Ltd.
+++++10.100 -- Amended and Restated Share Subscription, Share Option and
Shareholders Agreement, dated July 22, 1998, among RSL COM
Europe Ltd., RSL Communications, Ltd. and Metro Holding AG.
+++++10.101 -- Share Purchase Agreement, dated June 24, 1988, between
British Columbia Railway Company and RSL Com Holdings
Canada, Inc.
+++++10.102 -- Note Deposit Agreement, dated November 9, 1998, among RSL
Communications PLC, RSL Communications, Ltd. and The Chase
Manhattan Bank as Book-Entry Depositary.
+++++10.103 -- Indenture, dated November 9, 1998, by RSL Communications PLC
and RSL Communications, Ltd. to The Chase Manhattan Bank as
Trustee.
+++++10.104 -- Exchange and Registration Rights Agreement, dated
November 9, 1998, among RSL Communications, Ltd. and Goldman
Sachs & Co.
+++++21.1 -- Subsidiaries of the Company.
****23.1 -- Consent of Deloitte & Touche LLP (included on page II-11).
+++++23.3 -- Consent of Conyers, Dill & Pearman.
24.1 -- Powers of Attorney (included in the signature pages to the
Registration Statement).
****27.1 -- Financial Data Schedule.
</TABLE>
- ------------------
* Incorporated by reference to Registrant's Registration Statement on Form
S-4 (Registration No. 333-25749).
** Incorporated by reference to Registrant's Registration Statement on Form
S-1 (Registration No. 333-34281)
*** Confidential Treatment was granted by the Commission with respect to
certain information contained in this exhibit.
(Footnotes continued on next page)
II-8
<PAGE>
(Footnotes continued from previous page)
**** Incorporated by reference to Registrant's Registration Statement on
Form S-1 (Registration No. 333-62325).
***** Incorporated by reference to the Registrant's report on Form 8-K dated
August 25, 1998.
+ Incorporated by reference to Registrant's Registration Statement on Form
S-8 (Registration No. 333-40085)
++ Incorporated by reference to Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997.
+++ Incorporated by reference to the Registrant's report on Form 8-K/A dated
August 12, 1998.
++++ Incorporated by reference to Registrant's Registration Statement on Form
S-1 (Registration No. 333-46125).
+++++ Incorporated by reference to Amendment No. 3 to Registrant's Registration
Statement on Form S-1 (Registration No. 333-62325).
(b) Financial Statement Schedules:
As of 1996 and 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).
ITEM 17. UNDERTAKINGS
1. The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liabiltiy under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
2. Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that, in the opinion of the Commission, such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 4 to the 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 24th day of November, 1998.
RSL COMMUNICATIONS, LTD.
By: /s/ Itzhak Fisher
-------------------------------------
ITZHAK FISHER
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 4 to 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* DIRECTOR AND CHAIRMAN OF THE NOVEMBER 24, 1998
- ---------------------------- BOARD OF DIRECTORS
(RONALD S. LAUDER)
/s/ Itzhak Fisher DIRECTOR, PRESIDENT AND NOVEMBER 24, 1998
- ---------------------------- CHIEF EXECUTIVE OFFICER
(ITZHAK FISHER) (PRINCIPAL EXECUTIVE OFFICER)
/s/ Jacob Z. Schuster* DIRECTOR, EXECUTIVE VICE NOVEMBER 24, 1998
- ---------------------------- PRESIDENT, CHIEF FINANCIAL
(JACOB Z. SCHUSTER) OFFICER, ASSISTANT SECRETARY
AND TREASURER (PRINCIPAL
FINANCIAL OFFICER)
/s/ Mark J. Hirschhorn* VICE PRESIDENT-FINANCE, NOVEMBER 24, 1998
- ---------------------------- GLOBAL CONTROLLER AND
(MARK J. HIRSCHHORN) ASSISTANT SECRETARY
(CONTROLLER AND PRINCIPAL
ACCOUNTING OFFICER)
/s/ Gustavo A. Cisneros* DIRECTOR NOVEMBER 24, 1998
- ---------------------------
(GUSTAVO A. CISNEROS)
/s/ Fred H. Langhammer* DIRECTOR NOVEMBER 24, 1998
- ---------------------------
(FRED H. LANGHAMMER)
/s/ Leonard A. Lauder* DIRECTOR NOVEMBER 24, 1998
- ---------------------------
(LEONARD A. LAUDER)
/s/ Eugene Sekulow* DIRECTOR NOVEMBER 24, 1998
- ---------------------------
(EUGENE SEKULOW)
/s/ Nicolas G. Trollope* DIRECTOR NOVEMBER 24, 1998
- ---------------------------
(NICOLAS G. TROLLOPE)
*By:/s/ Itzhak Fisher ATTORNEY-IN-FACT NOVEMBER 24, 1998
- ---------------------------
(ITZHAK FISHER)
</TABLE>
II-10
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 4 to the Registration Statement of
RSL Communications, Ltd. on Form S-1 (Registration No. 333-62325) of our report
dated February 18, 1998 relating to the consolidated financial statements and
financial statement schedules of RSL Communications, Ltd. and subsidiaries and
of our report dated March 14, 1997 relating to the consolidated financial
statements of International Telecommunications Group Ltd. and subsidiaries,
appearing in the Prospectus.
We also consent to the reference to us under the headings "Summary of Selected
Consolidated Financial Data", "Selected Consolidated Financial Data" and
"Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
New York, New York
November 24, 1998
II-11
<PAGE>
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF
RSL COMMUNICATIONS PLC
CONDENSED BALANCE SHEETS
AS OF DECEMBER 31,
($ IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997
----------------- -------------
<S> <C> <C>
ASSETS
Cash and Cash Equivalents............... $ 103,613 $ 129,380
Accounts Receivable, Net................ 26,476 53,966
Marketable Securities, Available For
Sale.................................. 67,828 13,858
Prepaid Expenses and Other Current
Assets................................ 3,817 15,364
--------- ---------
Total Current Assets.................. 201,734 212,568
Restricted Marketable Securities, Held
to Maturity........................... 104,370 68,836
Property and Equipment, Net............. 31,941 64,649
Goodwill and Other Intangible Assets,
Net................................... 87,605 188,813
Deposits and Other Assets............... 1,215 1,820
--------- ---------
Total Assets.......................... $ 426,865 $ 536,686
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Accounts Payable and Other
Liabilities........................... $ 68,006 $ 112,835
Short-Term Debt......................... 6,942 9,837
--------- ---------
Total Current Liabilities............. 74,948 122,672
Long-Term Debt.......................... 18,263 19,917
Senior Notes, 12 1/4% Due 2006.......... 300,000 300,000
Other Liabilities, Non-Current.......... 76,293 237,531
--------- ---------
Total Liabilities..................... 469,504 680,120
Shareholders' Deficiency................ (42,639) (143,434)
--------- ---------
Total Liabilities and Shareholders'
Deficiency......................... $ 426,865 $ 536,686
--------- ---------
--------- ---------
</TABLE>
S-1
<PAGE>
SCHEDULE I (CONTINUED)
RSL COMMUNICATIONS PLC
CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31,
($ IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997
------------ ----------
<S> <C> <C>
Revenues..................................... $113,257 $266,142
Operating costs and expenses
Cost of Services (exclusive of depreciation
and amortization)....................... 98,461 235,150
Expenses................................... 41,619 100,118
-------- --------
140,080 335,268
-------- --------
Loss from Operations......................... (26,823) (69,126)
Interest Expense............................. (7,384) (39,576)
Interest Income.............................. -- 13,565
Other (Expense) Income--Net.................. 473 (375)
Minority Interest............................ (180) 88
Income Taxes................................. (395) (400)
-------- --------
Net Loss................................ $(34,309) $(95,824)
-------- --------
-------- --------
</TABLE>
S-2
<PAGE>
SCHEDULE I (CONTINUED)
RSL COMMUNICATIONS PLC
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31
($ IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997
--------- --------
<S> <C> <C>
Net Loss............................................................................... $ (34,309) $(95,824)
Depreciation and amortization.......................................................... 6,618 20,270
Working capital change and other....................................................... 16,911 (15,909)
--------- --------
Net cash used in operating activities............................................. (10,780) (91,463)
--------- --------
Purchases of Property and Equipment.................................................... (15,983) (29,866)
Acquisitions of Subsidiaries........................................................... (38,552) (50,814)
Purchase of Marketable Securities...................................................... (82,529) --
Proceeds from Marketable Securities.................................................... 14,701 41,038
(Purchase of) Proceeds from Maturities of Restricted Marketable Securities............. (102,808) 54,167
Other.................................................................................. 171 144
--------- --------
Net cash (used in) provided by investing activities............................... (225,000) 14,669
--------- --------
Proceeds from notes payable............................................................ 300,000 --
Advances from Parent................................................................... 51,362 118,999
Offering Cost and Other................................................................ (11,969) (15,653)
--------- --------
Net cash provided by financing activities......................................... 339,393 103,346
--------- --------
Net increase in cash.............................................................. 103,613 26,552
Effect of Foreign Currency on Cash................................................ -- (785)
Cash and cash equivalents at beginning of period.................................. -- 103,613
--------- --------
Cash and cash equivalents at end of period........................................ $ 103,613 $129,380
--------- --------
--------- --------
</TABLE>
S-3
<PAGE>
SCHEDULE II
SCHEDULE OF VALUATION ALLOWANCES
($ IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
JANUARY 1, COSTS AND OTHER DECEMBER 31,
1997 EXPENSES ACCOUNTS DEDUCTIONS 1997
---------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Bad debt provision... $ 3,881 $ 10,908 $ -- $ (2,456) $ 12,333
<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... $ 1,596 $ 2,829 $ -- $ (544) $ 3,881
<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... $ -- $ 149 $ 1,447 $ -- $ 1,596
</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. ("RSL North America"). The Company began
consolidating RSL North America effective with its acquisition of interests
in RSL North America in September 1995.
S-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- -------- ------------------------------------------------------------ ----------
<S> <C> <C>
1.1 -- Underwriting Agreement (U.S. Version).
1.2 -- Underwriting Agreement (International Version).
*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 -- Form of Class A Common Share Certificate.
5.1 -- Opinion of Conyers, Dill & Pearman.
*10.1 -- 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.
*10.2 -- Notes Registration Rights Agreement, dated October 3, 1996,
by and among RSL Communications PLC, RSL Communications,
Ltd. and the Placement Agents.
*10.3 -- 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.
*10.4 -- Collateral Pledge and Security Agreement, dated October 3,
1996, by and among RSL Communications PLC and Trustee.
++++10.6 -- Exchange and Registration Rights Agreement, dated as of
February 27, 1998, among RSL Communications PLC, RSL
Communications, Ltd., Goldman, Sachs & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Chase Securities Inc.,
J.P. Morgan Securities Inc., and SBC Warburg Dillon Read
Inc.
++++10.7 -- Note Deposit Agreement, dated as of February 27, 1998, among
RSL Communications PLC, RSL Communications, Ltd. and The
Chase Manhattan Bank as Book-Entry Depositary.
++++10.8 -- Note Deposit Agreement, dated as of February 27, 1998, among
RSL Communications PLC, RSL Communications, Ltd. and The
Chase Manhattan Bank as Book-Entry Depositary.
++++10.9 -- Indenture, dated as of February 27, 1998, by RSL
Communications PLC and RSL Communications, Ltd. to The Chase
Manhattan Bank as Trustee.
++++10.10 -- Indenture, dated as of February 27, 1998, by RSL
Communications PLC and RSL Communications, Ltd. to The Chase
Manhattan Bank as Trustee.
++++10.11 -- Exchange and Registration Rights Agreement, dated as of
February 27, 1998, among RSL Communications PLC, RSL
Communications, Ltd. and Goldman, Sachs & Co., oHG and
Merrill Lynch International.
++++10.12 -- Note Deposit Agreement, dated as of March 16, 1998, by and
between RSL Communications PLC and The Chase Manhattan Bank
as Book-Entry Depositary.
++++10.13 -- Indenture, dated as of March 16, 1998, by RSL Communications
PLC and RSL Communications, Ltd. to The Chase Manhattan Bank
as Trustee.
*10.14 -- Warrant Agreement, dated October 3, 1996, between RSL
Communications, Ltd., as Issuer, and The Chase Manhattan
Bank, as warrant agent.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- -------- ------------------------------------------------------------ ----------
<S> <C> <C>
*10.15 -- Warrant Registration Rights Agreement, dated October 3,
1996, between RSL Communications, Ltd., as issuer, and The
Chase Manhattan Bank, as warrant agent.
*10.16 -- Amendment to the Revolving Credit Facility, dated
August 20, 1996, from The Chase Manhattan Bank to RSL
Communications, Inc.
*10.17 -- Amendment to the Revolving Credit Facility, dated
September 10, 1996, from The Chase Manhattan Bank to RSL
Communications, Ltd.
*10.18 -- Subordinated Promissory Note, dated September 10, 1996, from
RSL Communications, Ltd. to Ronald S. Lauder.
*10.19 -- Warrant for 210,000 shares of Class B Common Stock of RSL
Communications, Ltd. issued to Ronald S. Lauder on
September 10, 1996.
*10.20 -- Standby Facility Agreement, dated October 1, 1996, by and
between RSL Communications, Ltd. and Ronald S. Lauder.
*10.21 -- Consulting Agreement, dated September 15, 1995, between
Eugene Sekulow and RSL Communications, Inc.
*10.22 -- Amendment to Consulting Agreement, dated August 8, 1996,
between Eugene Sekulow and RSL Communications, Ltd.
*10.23 -- RSL Communications, Ltd.'s 1995 Amended and Restated Stock
Option Plan.
*10.24 -- Employment Agreement, dated September 15, 1995, between
Itzhak Fisher and International Telecommunications Group,
Ltd.
*10.25 -- Employment Agreement, dated September 15, 1995, between
Itzhak Fisher and RSL Communications Inc.
*10.26 -- Employment Agreement, dated April 1, 1995, between Nir
Tarlovsky and International Telecommunications Group, Ltd.
*10.27 -- Employment Agreement, dated April 1, 1995, between Nir
Tarlovsky and RSL Communications Inc.
*10.28 -- Employment Agreement, dated August 9, 1995, between RSL COM
Europe Limited and Richard Williams.
*10.29 -- Memorandum of Agreement, dated July 30, 1996, between
International Telecommunications Corporation and Codetel.
*10.30 -- General Purchase Agreement, dated September 14, 1995,
between Ericsson Inc. and International Telecommunications
Corporation.
*10.31 -- Lease Agreement between AB LM Ericsson Finans and
International Telecommunications Corporation.
*10.32 -- Lease Agreement, dated April 10, 1996, between RSL COM
Europe Ltd. and AB LM Ericsson Finans.
*10.33 -- Lease Agreement, dated December 30, 1996, between RSL COM
Europe Ltd. and AB LM Ericsson Finans.
*10.34 -- Loan and Security Agreement, dated September 8, 1995,
between Cyberlink Inc. and CoastFed Business Credit
Corporation.
*10.35 -- Accounts Collateral Security Agreement, dated September 8,
1995, between Cyberlink Inc. and CoastFed Business Credit
Corporation.
*10.36 -- Equipment Collateral Security Agreement, dated September 8,
1995, between Cyberlink Inc. and CoastFed Business Credit
Corporation.
*10.37 -- Security Stock Pledge Agreement, dated September 8, 1995,
between CoastFed Business Credit Corporation and Cyberlink
Inc.
*10.38 -- Security Agreement, dated September 8, 1995, between
CoastFed Business Credit Corporation and
Cyberlink-California Inc.
*10.39 -- Security Agreement, dated September 8, 1995, between
CoastFed Business Credit Corporation and Cyberlink-Nevada
Inc.
*10.40 -- Asset Purchase Agreement, dated as of May 8, 1996, by and
between RSL COM France S.A. and Sprint Telecommunications
France Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- -------- ------------------------------------------------------------ ----------
<S> <C> <C>
*10.41 -- 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.
*10.42 -- Transition Services Agreement, dated May 8, 1996, by and
between Sprint Communications Company L.P. and RSL COM
France S.A.
*10.43 -- 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.
*10.44 -- Transition Services Agreement, dated May 8, 1996, by and
between Global One Communications World Operations, Limited
and RSL COM France S.A.
*10.45 -- Asset Purchase Agreement, dated as of May 8, 1996, by and
among Siena Vermogensverwaltungs-GmbH, Sprint
Telecommunication Services GmbH and Sprint Fon Inc.
*10.46 -- Transition Services Agreement, dated May 8, 1996, by and
among Sprint Telecommunication Services GmbH, Sprint Fon
Inc. and Siena Vermogensverwaltungs-GmbH.
*10.47 -- Transition Services Agreement, dated May 8, 1996, by and
between Sprint Communications Company L.P. and RSL COM
Deutschland GmbH.
*10.48 -- 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.
*10.49 -- Transition Services Agreement, dated May 8, 1996, by and
between Global One Communications World Operations, Limited
and Siena Vermogensverwaltungs-GmbH.
*10.50 -- Asset Purchase Agreement, August 12, 1996, by and between
RSL COM UK Limited and Incom (UK) Ltd.
*10.51 -- Stock Purchase Agreement, dated July 3, 1996, between RSL
Communications Limited, Charles Piluso and International
Telecommunications Group, Ltd.
*10.52 -- Secured Promissory Note, dated September 9, 1996, from RSL
Communications PLC to Charles Piluso.
*10.53 -- Stock Pledge and Security Agreement, dated September 9, 1996
between RSL Communications PLC, Charles Piluso and Fletcher,
Heald & Hildreth, P.L.C.
*10.54 -- 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.
*10.55 -- Stock Purchase Agreement, dated September 9, 1996, between
RSL Communications PLC, Richard Rebetti, Jr. and
International Telecommunications Group, Ltd.
*10.56 -- Secured Promissory Note, dated September 9, 1996, from RSL
Communications PLC to Richard Rebetti.
*10.57 -- Stock Pledge and Security Agreement, dated September 9,
1996, between RSL Communications PLC, Richard Rebetti, Jr.
and Fletcher, Heald & Hildreth, P.L.C.
*10.58 -- Agreement and Plan of Reorganization, dated September 9,
1996, among RSL Communications PLC, RSL Communications, Ltd.
and Charles Piluso.
*10.59 -- Tax Agreement, dated September 9, 1996, between RSL
Communications PLC, RSL Communications, Ltd. and Charles
Piluso.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- -------- ------------------------------------------------------------ ----------
<S> <C> <C>
*10.60 -- Stock Purchase Agreement, dated September 22, 1995, by and
between RSL Communications, Inc. and Charles Piluso.
*10.61 -- Stock Purchase Agreement, dated September 22, 1995, by and
between Richard Rebetti and RSL Communications, Inc.
*10.62 -- Amendment to the Stock Purchase Agreement, dated
September 22, 1995, between and among International
Telecommunications Group, Ltd., International
Telecommunications Corporation and RSL Communications, Inc.
*10.63 -- Stock Purchase Agreement, dated March 10, 1995, between RSL
Communication, Inc., International Telecommunications Group,
Ltd. and International Telecommunications Corporation.
*10.64 -- 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.
*10.65 -- Indemnity Agreement, dated March 10, 1995, between and among
International Telecommunications Group, Ltd., International
Telecommunications Corporation and RSL Communications, Inc.
*10.66 -- Sublease, dated July 18, 1996, between RSL Communications,
Ltd. and RSL Management Corporation.
*10.67 -- Lease, dated as of January 15, 1997, between Longstreet
Associates L.P. and RSL COM U.S.A., Inc.
*10.68 -- Employment Agreement, dated January 31, 1997, between Roland
T. Mallcott and RSL Communications, Ltd.
*10.69 -- Amendment of Lease, dated as of December 6, 1995, between
Hudson Telegraph Associates and International
Telecommunications Corporation.
**10.70 -- 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.
**10.71 -- Stockholders' Agreement, dated July 23, 1997, by and among
Delta Three, Inc., RSL Communications, Ltd., and the other
shareholders of Delta Three, Inc.
**,***10.72 -- Delta Three, Inc. Services Agreement.
**10.73 -- Employment Agreement, dated July 31, 1997, between Andrew C.
Shields and RSL Communications, Ltd.
**10.74 -- Shareholders Agreement, dated October 10, 1996, between RSL
COM Europe, Limited, Gerard van Leest and Belnet Nederland
B.V.
+10.75 -- RSL Communications, Ltd. 1997 Performance Incentive Plan.
+10.76 -- RSL Communications, Ltd. 1997 Stock Incentive Plan.
**10.77 -- Lease Agreement, dated June 19, 1997 for property at 430
Park Avenue, New York, New York.
**10.78 -- Stock Purchase Agreement of Delta Three, Inc.
**10.79 -- Employment Agreement, dated September 2, 1997, between
Itzhak Fisher and RSL Communications, Ltd.
**10.80 -- Employment Agreement, dated September 2, 1997, between
Itzhak Fisher and International Telecommunications Group,
Ltd.
+10.81 -- RSL Communications Ltd. 1997 Directors' Compensation Plan.
**10.82 -- Registration Rights Agreement, dated September 2, 1997,
among RSL Communications, Ltd., Ronald S. Lauder, Itzhak
Fisher and Coral Gate Investments Ltd.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- -------- ------------------------------------------------------------ ----------
<S> <C> <C>
**10.83 -- International Telecommunication Services Agreement, dated
July 1, 1995, between International Telecommunications
Corporation and TELECOM Denmark.
**10.84 -- International Telecommunication Operating Agreement, dated
July 15, 1995 between Telenor Carrier Services A.S. and
International Telecommunications Corporation.
**10.85 -- International Telecommunication Services Agreement, dated
May 10, 1994, between Mercury Communications Limited and
International Telecommunications Corporation.
**10.86 -- Agreement Concerning Voice Distribution of International
Telephony Traffic, undated, between Unisource Carrier
Services AG and International Telecommunications
Corporation.
**10.87 -- International Telecommunications Service Agreement, dated
May 31, 1994, between Compania Dominicana De Telefonos, C.
Por A. and International Telecommunications Corporation.
**10.88 -- Second Supplementary Agreement to the UK-Netherlands 14
Cable System Construction & Maintenance Agreement, effective
February 18, 1997, among the parties on the Annex thereto.
**10.89 -- Fourth Supplementary Agreement to the ODIN Construction and
Maintenance Agreement, dated October 24, 1996, among the
parties on the Annex thereto.
**10.90 -- Second Supplementary Agreement to Antillas I Construction &
Maintenance Agreement, dated February 13, 1997, among the
parties on the Annex thereto.
**10.91 -- Canus I Cable System Indefeasible Right of Use Agreement and
Financing Agreement, dated June 4, 1996, between Optel
Communications, Inc. and International Telecommunications
Corporation.
**10.92 -- Cantat-3 Cable System Indefeasible Right of Use Agreement
and Financing Agreement, dated March 12, 1996, between
Teleglobe Cantat-3 Inc. and International Telecommunications
Corporation.
**10.93 -- PTAT-1 Submarine System Indefeasible Right of Use Agreement,
dated May 12, 1994, between Private Transatlantic
Telecommunications System, Inc. and International
Telecommunications Corporation.
**10.94 -- Third Supplementary Agreement to the TAT-12/TAT-13 Cable
Network Construction and Maintenance Agreement, dated
October 17, 1995, among the parties on the Annex thereto.
*10.95 -- 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.
+++10.95 -- Asset Purchase Agreement, dated as of April 23, 1998, by and
between CBS Corporation and RSL COM U.S.A., Inc.
*****10.96 -- Restated Umbrella Agreement, dated as of June 26, 1998,
among Motorola Limited, SA Motorola NV, Motorola Electronic
GmbH, Motorola SA and RSL Communications, Ltd.
10.97 -- Share Subscription, Share Option and Shareholders Agreement,
dated June 10, 1998, among RSL COM Europe Ltd., RSL
Communications, Ltd. and Metro Holding AG.
10.98 -- Marketing and Distribution Services Agreement, dated as of
June 10, 1998, between RSL Com Europe Ltd. and Metro
Holding AG.
10.99 -- Exchange Agreement, dated July 22, 1998, among Ligapart AG,
Metro Holding AG and RSL Communications, Ltd.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- -------- ------------------------------------------------------------ ----------
<S> <C> <C>
10.100 -- Amended and Restated Share Subscription, Share Option and
Shareholders Agreement, dated July 22, 1998, among RSL COM
Europe Ltd., RSL Communications, Ltd. and Metro Holding AG.
10.101 -- Share Purchase Agreement, dated June 24, 1988, between
British Columbia Railway Company and RSL Com Holdings
Canada, Inc.
10.102 -- Note Deposit Agreement, dated November 9, 1998, among RSL
Communications PLC, RSL Communications, Ltd. and The Chase
Manhattan Bank as Book-Entry Depositary.
10.103 -- Indenture, dated November 9, 1998, by RSL Communications PLC
and RSL Communications, Ltd. to The Chase Manhattan Bank as
Trustee.
10.104 -- Exchange and Registration Rights Agreement, dated
November 9, 1998, among RSL Communications, Ltd. and Goldman
Sachs & Co.
21.1 -- Subsidiaries of the Company.
****23.1 -- Consent of Deloitte & Touche LLP (included on page II-11).
23.3 -- Consent of Conyers, Dill & Pearman (included in Exhibit 5.1
hereto).
24.1 -- Powers of Attorney (included in the signature pages to the
Registration Statement).
****27.1 -- Financial Data Schedule.
</TABLE>
- ------------------
* Incorporated by reference to Registrant's Registration Statement on
Form S-4 (Registration No. 333-25749).
** Incorporated by reference to Registrant's Registration Statement on
Form S-1 (Registration No. 333-34281)
*** Confidential Treatment was granted by the Commission with respect to
certain information contained in this exhibit.
**** Incorporated by reference to Registrant's Registration Statement on
Form S-1 (Registration No. 333-62325).
***** Incorporated by reference to the Registrant's report on Form 8-K
dated August 14, 1998.
+ Incorporated by reference to Registrant's Registration Statement on
Form S-8 (Registration No. 333-40085)
++ Incorporated by reference to Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997.
+++ Incorporated by reference to Registrant's Report on Form 8-K/A dated
August 12, 1998.
++++ Incorporated by reference to Registrant's Registration Statement on
Form S-1 (Registration No. 333-46125).
