<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 27, 1998.
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------
RSL COMMUNICATIONS, LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
BERMUDA 4813 N/A
(STATE OR OTHER (PRIMARY STANDARD (I.R.S.EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION CODE NUMBER)
ORGANIZATION) ----------------------
CLARENDON HOUSE
CHURCH STREET
HAMILTON HM CX BERMUDA
(441) 295-2832
(ADDRESS AND TELEPHONE
NUMBER OF
REGISTRANT'S PRINCIPAL
EXECUTIVE OFFICES)
----------------------
ITZHAK FISHER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
RSL COMMUNICATIONS, N. AMERICA, INC.
767 FIFTH AVENUE, SUITE 4300
NEW YORK, NY 10153
(212) 317-1800
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
----------------------
Copies to:
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
----------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
-------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
-------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
-------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
----------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED PRICE(1) REGISTRATION FEE
<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.
----------------------
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.
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- --------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: one to be
used in connection with a U.S. offering of shares of Common Stock (the 'U.S.
Prospectus') and one to be used in connection with a concurrent international
offering of shares of Common Stock (the 'International Prospectus'). The U.S.
Prospectus and the International Prospectus are identical except that they
contain different front and back cover pages and different descriptions of the
plan of distribution (contained under the caption 'Underwriting' in each of the
U.S. and International Prospectuses). The form of U.S. Prospectus is included
herein and is followed by those pages to be used in the International Prospectus
which differ from, or are in addition to, those in the U.S. Prospectus. Each of
the pages for the International Prospectus included herein is labeled 'Alternate
Page for International Prospectus.'
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED AUGUST 27, 1998
SHARES
[LOGO OF RSLCOM] RSL COMMUNICATIONS, LTD.
CLASS A COMMON SHARES
(PAR VALUE $.00457 PER SHARE)
----------------------
Of the Class A common shares, par value $.00457 per share (the
'Class A Common Stock'), of RSL Communications, Ltd. (the 'Issuer') offered
hereby, shares are being offered in the United States (the 'U.S.
Offering') and 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 indentical for both Offerings.
See 'Underwriting.'
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
, 1998 was $ .
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 15 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
OFFERING PRICE DISCOUNT(1) ISSUER(2)
-------------- ------------ ------------
<S> <C> <C> <C>
Per Share.............................................................. $ $ $
Total(3)............................................................... $ $ $
</TABLE>
- ------------------
(1) The Issuer and the Selling Shareholders 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 $ payable by the Issuer.
(3) The Selling Shareholders have granted the U.S. Underwriters an option for 30
days to purchase up to an additional shares of Class A Common Stock
at the offering price per share, less the underwriting discount, solely to
cover any over-allotments. Additionally, the Selling Shareholders have
granted the International Underwriters a similar option with respect to an
additional shares of Class A Common Stock 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 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>
[COLOR GRAPHICS]
[ADJACENT PAGES WILL HAVE MAPS SHOWING THE COMPANY'S NETWORK]
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 install switches in the identified markets.
* The Company intends to lease international circuits in the identified
markets.
** The Company has signed non-binding agreements with local entities in the
identified markets to install Internet gateways.
*** A single operating agreement applies to each of these countries.
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.'
2
<PAGE>
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 the public reference facilities maintained by the Commission at
Jucidiary 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. Copies of such material can be obtained at prescribed rates from
the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549. The SEC 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 SEC.
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 permited 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 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
3
<PAGE>
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, JUNE 30, JUNE 30, AUGUST 24,
CURRENCY 1995 1996 1997 1997 1998 1998
- --------------------- ------------ ------------ ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Austrian Shilling.... (1) (1) 12.63 (1) 12.69 12.63
Australian Dollar.... (1) 1.26 1.54 1.33 1.61 1.72
Belgian Franc........ (1) (1) (1) (1) 37.20 37.02
British Pound........ 0.65 0.58 0.61 0.60 0.60 0.61
Danish Krone......... (1) (1) 6.85 6.63 6.89 6.84
Dutch Guilder........ (1) 1.74 2.03 1.96 2.04 2.02
Finnish Markka....... 4.37 4.60 5.45 5.19 5.49 5.46
French Franc......... 4.95 5.19 6.01 5.87 6.06 6.02
German Mark.......... 1.44 1.54 1.80 1.74 1.81 1.80
Italian Lira......... (1) (1) 1,769.91 (1) 1,782.00 1,770.00
Spanish Peseta....... (1) (1) 152.33 (1) 153.46 152.39
Swedish Krona........ 6.64 6.89 7.94 7.73 7.98 8.24
Swiss Franc.......... (1) (1) 1.4613 (1) 1.52 1.50
Venezuelan Bolivar... (1) (1) 504.29 (1) 553.30 576.62
</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 was obtained from industry publications and has not
been independently verified by the Company. Certain of the information contained
in this Prospectus, including information with respect to the Company's plans
and strategy for its business and related financing, are forward-looking
statements. For a discussion of important factors that could cause actual
results to differ materially from the forward-looking statements, see 'Risk
Factors.'
THE COMPANY
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 was formed in 1994 by Ronald S. Lauder
and Itzhak Fisher, and has since grown rapidly through acquisitions, strategic
investments, joint ventures and alliances, as well as through the start-up of
its own operations in key markets. The Company currently has revenue generating
operations in 19 countries. These countries accounted for approximately 68% of
all international long distance telecommunications minutes originated worldwide
in 1996.
The Company's consolidated revenues were $300.8 million for the year ended
December 31, 1997 and $298.2 million for the six months ended June 30, 1998, as
compared to $109.4 million for the six months ended June 30, 1997. The Company's
consolidated gross margins were 11.8% for the year ended December 31, 1997 and
increased to 15.5% for the six months ended June 30, 1998, as compared to 11.5%
for the six months ended June 30, 1997.
The international long distance public switched telecommunications market,
consisting of telephone calls between countries, generated an estimated $61.3
billion in revenue and 70.0 billion minutes of use in 1996 and is currently
recognized as one of the fastest growing and most profitable segments of the
long distance telecommunications industry. The Company currently has
significantly less than a 1% share of this market. International long distance
minutes are projected to grow between approximately 11% and 17% per annum
through the year 2000, with growth supported by (i) the continued deregulation
of telecommunications markets throughout the world, (ii) increased capacity,
improved quality and lower operating costs attributable to technological
improvements, (iii) the expansion of telecommunications infrastructure and (iv)
the globalization of the world's economies and free trade. International
settlement rates (the rates paid to other carriers to terminate an international
call), as well as the costs for leased transmission capacity, have declined over
the past five years and are expected to continue to decline. In addition, the
trend towards deregulation is expected to further reduce carriers' costs of
originating and terminating calls by allowing carriers in some jurisdictions to
interconnect with the domestic public switched telephone network ('PSTN') in a
deregulated market. However, these are forward-looking statements and there can
be no assurances in this regard.
The Company intends to capitalize on the opportunity presented in this
market by creating a low-cost, facilities-based global network that provides
high quality telecommunications services by (i) expanding its existing network
infrastructure, 'RSL-NET,' through investment in fiber connecting key
destinations, and (ii) developing innovative marketing and distribution channels
to reach a broad range of customers. In addition, the Company will continue to
enter new markets through acquisitions, joint ventures or strategic alliances to
expand its global reach.
5
<PAGE>
ADVANCED AND LOW COST NETWORK INFRASTRUCTURE
The core of the Company's operations is RSL-NET, its integrated digital
telecommunications network, which is designed to minimize the overall
transmission costs of carrying telecommunications traffic while maintaining high
('toll') quality. RSL-NET is comprised of (i) the Company's owned switching
facilities, known as points of presence ('POPs'), which currently consist of 14
international telephony gateway switches and 16 national switches in the
countries in which the Company operates, all of which are, or are in the process
of being, directly or indirectly linked, (ii) ownership interests in 26 fiber
optic cable systems and inter-city fiber routes between selected cities, (iii)
operating agreements to exchange traffic directly with telecommunications
carriers in other countries, (iv) transmission capacity leased from other
carriers and satellite providers and (v) Internet protocol ('IP') gateways
jointly developed with L.M. Ericsson A.B. ('Ericsson'). Where transmission
facilities are available and ownership of such facilities is cost effective and
warranted by the Company's traffic patterns, the Company has replaced, and will
continue to replace, leased transmission facilities with ownership interests in
submarine and terrestrial facilities and to purchase ownership interests in
inter-city fiber routes in additional markets. The connection of the Company's
switching facilities allows the Company to bypass third party carriers and
reduce the costs of transporting the international portion of a call. The
Company also utilizes alternative transmission technologies such as packetized
voice and IP telephony in order to minimize its operating costs. See
'Business--Network' and '--IP Telephony Operation-- General' and '--Delta Three
Operations.'
BROAD MARKETING AND DISTRIBUTION CHANNELS
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 Company's local operations in each country ('Local Operators'). The Company
continually seeks innovative ways to expand the scope of its marketing channels
and enhance its ability to identify and retain customers. For example, the
Company has recently entered into a strategic alliance (described below) with
Metro Holding AG ('Metro Holding'), the management holding company for Metro AG,
the largest retailer in Europe, with 750 operating units in 18 European
countries. The Company has capitalized, and will continue to capitalize, on
cross selling opportunities as it adds new customer bases and products through
acquisitions and strategic alliances. Following its acquisition of Motorola
Tel.co (described below), 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 its existing customers. The Company
also plans to introduce a universal brand image to create worldwide name
recognition for the Company.
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.
NORTH AMERICA
The Company began operations in 1995 in the United States, 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.
The Company's U.S. operations have grown rapidly. Revenues from the
Company's U.S. operations, generated principally from carriers, commercial
accounts and pre-paid calling cards, increased to $159.9 million for the six
months ended June 30, 1998 from $69.9 million for the six months ended June 30,
1997.
6
<PAGE>
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 in the
United States. WestComm's six national switches, and the Company's New York and
Los Angeles switches, are strategically located in cities in which more than 50%
of all U.S. long distance traffic originates. 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. This development should further enhance the gross
margin of the Company's North American operations. In August 1998, the Company
acquired Westel Telecommunications, Ltd. ('Westel') from British Columbia
Railway Company for approximately $38 million. Westel is a telecommunications
company that provides regional switched voice and data, long distance and
Internet access throughout British Columbia. Also in August 1998, the Company,
together with its joint venture partner in Mexico, acquired switches and fiber
optic cable covering 14 cities in Mexico, which are expected to be fully
installed by September 30, 1998.
EUROPE
The Company began European operations in 1996, when most member states of
the European Union ('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 four most deregulated European markets
where deregulation has occurred, 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 purchased, or is in the process of purchasing, its own international
transmission facilities directly, instead of entering 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. 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.
Revenues from the Company's European operations, generated principally from
commercial accounts and pre-paid calling cards, increased to $84.0 million for
the six months ended June 30, 1998 from $32.3 million for the six months ended
June 30, 1997. For the six months ended June 30, 1998, the Company's European
operations contributed 28.2% of the Company's total revenues, as compared to
29.5% for the six months ended June 30, 1997 but the Company expects the
Company's European operations to contribute a larger percentage of the Company's
total revenues after giving effect to the Motorola Tel.co acquisition.
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, the
management holding company for Metro AG, the largest retailer 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 has acquired
approximately 7.2% of the outstanding stock of the Company, which it is required
to hold until at least April 1, 2001.
7
<PAGE>
In June 1998, the Company agreed to acquire the business of Motorola Tel.co
('Motorola Tel.co') from Motorola Inc. for approximately $100.0 million.
Motorola Tel.co is a reseller of wireless services and related products in
Europe with operations in the United Kingdom, France, Germany and Belgium and
has a base of over 475,000 subscribers. The Company intends to cross-sell its
fixed wire and other traditional long distance services to the Motorola Tel.co
customer base and Motorola Tel.co's wireless services to the Company's existing
customers. The Company has recently completed the acquisition of Motorola
Tel.co's operations in the United Kingdom, Germany and Belgium and is awaiting
receipt of various required approvals in France.
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. Revenues from the Company's Australian operations increased to $54.1
million for the six months ended June 30, 1998 from $7.2 million for the six
months ended June 30, 1997, primarily as a result of various acquisitions
completed since April 1997.
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, a privately held conglomerate 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.
OPERATIONAL AND OWNERSHIP DATA
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>
COMPANY'S DATE OF
PERCENTAGE ACQUISITION OR COMMENCEMENT OF
COUNTRY OPERATING ENTITY OWNERSHIP START-UP DATE(1) OPERATIONS(2)
- ------------------- --------------------------------------- ---------- ---------------- ---------------
<S> <C> <C> <C> <C>
United States RSL COM U.S.A., Inc.................... 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) 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, SA................... 39 % April 1997 November 1997
Italy RSL COM Italia S.r.l................... 99.3%(3)(4) August 1997 December 1997
Venezuela RSL COM Venezuela C.A.................. 51 %(5) August 1997 May 1992
Austria RSL COM Austria AG..................... 90 %(3)(6) 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 %(7) December 1997 June 1998
Canada RSL COM Canada Holdings, Inc........... 100 % July 1998 March 1993
Mexico RSL COM Mexico, S.A.................... 41 %(3)(5) December 1998 December 1998
</TABLE>
(Footnotes on next page)
8
<PAGE>
(Footnotes from previous page)
- ------------------
(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 therein. 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 timely 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.
(3) Minority shareholders have certain rights to acquire Class A Common Stock.
Any such exchange 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) In July 1998, as a consequence of a capital increase in RSL Com Italy S.r.l.
('RSL Italy') that was funded by the Company but not by the minority
shareholder of RSL Italy, the Company's interest in RSL Italy was increased
to 99.3%. The minority shareholder, however, has the right, which the
Company expects will be exercised, to fund its portion of such a capital
increase for a certain period of time. The exercise of such right in full
would then decrease the Company's ownership interest in RSL Italy to 85%.
(5) 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.
(6) 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% upon the receipt by RSL Austria of certain subsidies
from the Austrian government. RSL Austria has recently received such
subsidies, and the Company is in the process of evaluating the number of
shares of RSL Austria required to be issued to such Minority Interestholder.
(7) European Telecom S.A./N.V. ('RSL Belgium'), a 90% owned subsidiary of the
Company, owns 100% of European Telecom SARL.
COMPANY STRATEGY
The Company's strategic objective is to create a low-cost, facilities-based
global network that provides high quality international telecommunications
services to small and medium-sized businesses in key markets. The key elements
of the Company's strategy to achieve this objective are as follows:
FOCUS ON PROVIDING INTERNATIONAL LONG DISTANCE SERVICES
The international long distance public switched telecommunications market
is currently recognized as one of the fastest growing and most profitable
segments of the long distance industry. The Company provides a broad array of
international and domestic services, but focuses on providing services to end-
users which generate significant calling traffic between countries to capitalize
on (i) the continued growth of international traffic and (ii) the margin
opportunity created by the high end-user rates currently maintained by PTTs and
other dominant carriers.
ENHANCE DISTRIBUTION CHANNELS
The Company has developed a wide range of marketing and distribution
channels in order to expand its customer base, particularly in its target market
of small to medium-sized businesses. The Company's marketing and distribution
channels include direct sales forces, telemarketing organizations, agents and
resellers, and marketing alliances with service providers, such as Internet
service providers and wireless service providers. The Company has been
innovative in seeking marketing partners to better identify potential customers
and penetrate markets on a cost-efficient basis, such as through its alliance
with Metro Holding. In addition, in Australia, the United Kingdom, Germany and
Belgium, the Company has commenced efforts to cross-sell fixed wire services to
its wireless subscribers and wireless services to its fixed wire-customers and
in the United States the Company intends to cross sell data services to certain
of its existing customers.
DEVELOP A COST COMPETITIVE GLOBAL NETWORK
By integrating its current and future POPs into RSL-NET, the Company
believes that it will be able to originate, transport and terminate traffic
utilizing its own network, thereby bypassing the high costs associated with the
transport of the international portion of a call through a third party carrier.
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 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
9
<PAGE>
facilities where such facilities become available and if such investments are
cost effective and warranted by traffic patterns.
TARGET SMALL AND MEDIUM-SIZED BUSINESSES
The Company focuses on offering high quality products and services to small
and medium-sized businesses that originate in excess of $500 in international
telephone calls per month. The Company believes that this segment offers
significant market opportunities because it has traditionally been underserved
by the major global telecommunications carriers and the PTTs. The Company
believes that in most markets, small and medium-sized businesses account for a
significant percentage of international calling traffic. In addition, the
Company continues to offer services to carriers to most effectively utilize its
network. Through offering a broad range of interrelated services combined with a
commitment to high quality customer service, the Company seeks to strengthen its
direct relationships with a diverse and rapidly growing customer base and build
customer loyalty.
ESTABLISH OPERATIONS IN KEY MARKETS
The Company establishes operations in markets that (i) originate or
terminate significant levels of international traffic and (ii) are, or are in
the process of being, deregulated. The Company has structured its Local
Operators to be managed independently and expects its Local Operators to be
separately profitable, while benefiting from the centralized strategic,
financial and network support provided by the Company.
ENTER MARKETS EARLY
The Company enters new markets ahead of full deregulation in order to gain
competitive advantages over carriers which attempt to enter a market after
deregulation is complete. These advantages include (i) the development of
multiple sales and distribution channels and the establishment of a customer
base prior to widespread competition, (ii) the early acquisition of experienced
management, including technical and marketing personnel, and (iii) the
achievement of name recognition as one of the early competitors to the incumbent
PTTs.
PURSUE STRATEGIC ACQUISITIONS AND ALLIANCES
The Company intends to enter additional markets and expand its operations
through acquisitions, joint ventures, strategic alliances and the establishment
of net operations. The Company is continuously reviewing acquisition
opportunities, and seeks to acquire control of businesses with an established
customer base, compatible operations, licenses to operate as an international
carrier, experience with additional or emerging telecommunications products and
technologies and/or experienced management. In addition, the Company seeks to
enter into strategic alliances which the Company believes will enhance its
ability to expand and grow its business. Examples include the Company's joint
venture with the Cisneros Group and strategic alliances with each of Metro
Holding and Ericsson, the acquisition of Delta Three, Inc. ('Delta Three') and
the recent acquisitions of Motorola Tel.co, WestComm and Westel.
LEVERAGE EXPERTISE OF MANAGEMENT TEAM
The Company has strengthened its management team by attracting experienced
management from the telecommunications industry to enhance its regional
management expertise and to facilitate the integration of its regional
operations. Many of its key managers have had significant experience with
incumbent providers, as well as 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.
10
<PAGE>
EXPAND ON-LINE AND IP TELEPHONY SERVICE OFFERINGS
Through its subsidiary, Delta Three, the Company intends to continue to
expand its IP telephony service offering by increasing its investment in
Internet gateway servers and increasing its sales and marketing channels. Delta
Three's IP telephony offering is based on utilizing IP protocol as a
transmission standard for voice communications over the public Internet as well
as private intranets, extranets and dedicated leased lines, at substantially
reduced transmission and termination costs. One of the services offered by Delta
Three allows customers to place long distance and international phone calls
using standard telephones, without requiring any additional equipment. Delta
Three also currently 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, the Company plans to develop value added
services on the Web 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.'
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
subsidiary for, in certain circumstances, shares of the 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 COM U.S.A., Inc. ('RSL USA'), RSL COM Australia
Holdings Pty. Limited ('RSL Australia'), RSL Italy (and its subsidiary Comesa
Telecom S.r.l.), RSL Latin America, RSL Austria, RSL Communications Spain, S.A.
('RSL Spain'), RSL COM Schweiz AG ('RSL Switzerland'), Telecenter Oy (a
subsidiary of RSL COM Finland Oy), RSL Belgium and PCM Communicaciones S.A. de
C.V. ('PCM'). 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.
The Company has also granted to certain employees of its subsidiaries
options to acquire subsidiary shares 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.
In addition, under certain circumstances the Company may be required to
issue to Metro Holding and certain affiliates shares of Class A Common Stock
(the 'Telegate Exchange Shares') in exchange for interests in Telegate AG
('Telegate'), Europe's third largest directory information provider. See
'Business--European Operations--General.' The number of shares of Class A Common
Stock issuable in such exchange will be based on a valuation of the Telegate
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 Sales.'
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).
11
<PAGE>
THE OFFERINGS
<TABLE>
<S> <C>
Class A Common Stock offered by the
Company(1):
U.S. Offering........................... shares
International Offering.................. shares
Total................................ shares
Common Stock to be Outstanding after the
Offerings(1):
Class A Common Stock(2)................. shares
Class B Common Stock(3)................. shares
Total................................ shares
Use of Proceeds........................... Of the proceeds to be received by the Company from the Offerings, the
Company intends to use (i) approximately $ 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 gateways, (ii) approximately
$ for strategic merger and acquisition activities in the
telecommunications industry, including certain potential acquisitions
which the Company currently is pursuing, and (iii) approximately
$ for the funding of the Company's operating losses.
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) Assumes the Underwriters' over-allotment options granted by the Selling
Shareholders are not exercised. See 'Underwriting.' If the Underwriters
exercise such over-allotment options in full, the number of shares of Class
A Common Stock sold in the U.S. Offering and the International Offering will
be and , respectively. The Company will not receive any proceeds
from the sale of shares by the Selling Shareholders.
(2) Does not include (i) 1,597,230 shares of Class A Common Stock issuable upon
the exercise of outstanding stock options, (ii) 26,874,795 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 (as defined herein) and 459,900 shares of Class A
Common Stock issuable upon the conversion of such shares of Class B Common
Stock, (iv) 917,927 shares of Class A Common Stock issuable on exercise of
the Warrants (as defined herein), (v) 164,250 shares of restricted stock
granted pursuant to the Company's 1997 Stock Incentive Plan and (vi) shares
issuable upon exercise of Roll-Up Rights and Incentive Units and the
Telegate Exchange Shares. 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.
RISK FACTORS
See 'Risk Factors' beginning on page 15 for a discussion of certain risks
that should be considered in connection with an investment in the Class A Common
Stock offered hereby.
12
<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 six month periods ended June 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 have been prepared on the same basis as the audited
Consolidated Financial Statements and include all adjustments, which consist
only of normal recurring adjustments, necessary for a fair presentation of the
financial position and the results of operations for these periods. Operating
results for the six months ended June 30, 1998 are not necessarily indicative of
the results that may be expected for the full year. The Company has experienced
rapid growth over the periods set forth below, which 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 Financial Statements and the
related notes included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED
-------------------------------------------------- JUNE 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 $ 109,361 $ 298,202
Cost of services................... (4,923) (17,510) (98,461) (265,321) (96,797) (251,865)
----------- ---------- ---------- ---------- ---------- -----------
Gross profit (loss)................ (221) 1,107 14,796 35,475 12,564 46,337
Selling, general and administrative
expense.......................... (2,395) (9,639) (38,893) (94,712) (38,213) (79,817)
Depreciation and amortization...... (240) (849) (6,655) (21,819) (8,960) (21,124)
----------- ---------- ---------- ---------- ---------- -----------
Loss from operations............... (2,856) (9,381) (30,752) (81,056) (34,609) (54,604)
Interest income.................... -- 173 3,976 13,826 7,124 10,834
Interest expense................... (225) (194) (11,359) (39,373) (19,252) (33,330)
Other income (expense)............. -- -- 470 6,595(2) 6,606(2) (1,504)
Minority interest.................. -- -- (180) 210 (229) 2,728
Income taxes....................... -- -- (395) (401) (357) (634)
----------- ---------- ---------- ---------- ---------- -----------
Net loss before extraordinary
item............................. (3,081) (9,402) (38,240) (100,199) (40,717) (76,510)
Extraordinary item(3).............. -- -- -- -- -- (20,800)
----------- ---------- ---------- ---------- ---------- -----------
Net loss after extraordinary
item............................. $(3,081) $ (9,402) $ (38,240) $ (100,199) $ (40,717) $ (97,310)
----------- ---------- ---------- ---------- ---------- -----------
----------- ---------- ---------- ---------- ---------- -----------
Loss per share before extraordinary
item(3)(4)....................... $(15.41) $ (1.67) $ (5.13) $ (5.27) $ (3.72) $ (1.82)
Loss per share after extraordinary
item(3)(4)....................... $(15.41) $ (1.67) $ (5.13) $ (5.27) $ (3.72) $ (2.32)
Weighted average number of shares
of Common Stock outstanding(4)... 200 5,641 7,448 19,008 10,957 42,021
OTHER FINANCIAL DATA:
EBITDA(5).......................... $(2,616) $ (8,532) $ (23,807) $ (52,432) $ (19,272) $ (32,256)
Capital expenditures(6)............ 1,126 6,074 23,880 49,417 13,870 41,801
Cash (used in) provided by
operating activities............. (1,987) 3,554 (10,475) (91,812) (45,247) (108,205)
Cash (used in) provided by
investing activities............. (478) (16,537) (225,000) (18,821) 26,862 (85,136)
Cash (used in) provided by
financing activities............. 2,888 18,143 335,031 152,035 (2,807) 368,571
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, 1998
-----------------------------
ACTUAL AS ADJUSTED(7)
----------- --------------
($ IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...................... $ 319,613 $
Securities available for sale.................. 33,631 33,631
Restricted marketable securities(8)............ 51,885 51,885
Total assets................................... 985,388
Short-term debt, current portion of long-term
debt, and current portion of capital lease
obligations(9)............................... 12,917
Long-term debt and capital lease
obligations(9)............................... 702,458
Shareholders' equity........................... 31,399
</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,
Incentive Units and the Telegate Exchange Shares are not included in the
loss per share calculation as their effect is anti-dilutive.
(5) EBITDA consists of loss before interest, income taxes, extraordinary item,
depreciation and amortization. EBITDA is provided because it is a measure
commonly used in the telecommunications industry. It is presented to
enhance an understanding of the Company's operating results and is not
intended to represent cash flow or results of operations in accordance with
U.S. GAAP for the periods indicated. The Company's use of EBITDA may not be
comparable to similarly titled measures used by other companies due to the
use by other companies of different financial statement components in
calculating EBITDA.
(6) Capital expenditures include assets acquired through capital lease
financing and other debt.
(7) Adjusted to give effect to the Offerings 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--the 1996 Notes.'
(9) As of June 30, 1998, the Company had approximately $6.7 million of
available (undrawn) borrowing capacity under its current bank and vendor
facilities.
14
<PAGE>
RISK FACTORS
An investment in the Class A Common Stock offered hereby is subject to a
number of risks. Prospective investors should carefully consider the following
factors as well as the more detailed descriptions cross-referenced to the body
of this Prospectus and the other matters described in this Prospectus before
purchasing shares of Class A Common Stock.
SHORT OPERATING HISTORY; ENTRANCE INTO NEWLY OPENING MARKETS; MARGINS
The Company has acquired all of its operations since 1995 and therefore has
limited experience in operating these businesses. The businesses that now
constitute the Company's principal operations commenced operations on various
dates during 1990 through 1997 and, therefore, have limited operating histories.
In addition, the Company has recently made investments in, and expects in the
future to acquire operations or make investments in, start-up operations, in
markets where it currently does not have operations. Furthermore, in many of its
existing and future markets, the Company plans to offer services that have been
provided in the past only by PTTs and/or services that were not previously
available. Accordingly, the Company may face difficulties in establishing or
expanding such businesses, including difficulties in hiring personnel that have
experience in providing such telecommunications services in such markets. See
'--Risks Associated with Anticipated Growth and Acquisitions.' The Company's
prospects must, therefore, be considered in light of the risks, expenses,
problems and delays inherent in establishing a new business in an evolving
industry.
As a new entrant in its markets, the Company may need to grant substantial
discounts in order to attract a significant customer base. The Company has and
will continue to provide services to carrier customers at discounted prices,
resulting in lower gross margins than margins related to sales to other
customers. In addition, the Local Operators may incur significant costs
developing their network infrastructures (including the purchase of minimum
investment units ('MIUs') and indefeasible rights of use ('IRUs') in fiber optic
cable systems, switches and leased capacity) as their business grows. The fixed
costs and expenses incurred under these circumstances has 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.'
LDM Systems Ltd. ('LDM') has obtained, and has pending applications for,
certificates of authority to provide local exchange services in many states
throughout the U.S., and is currently reselling such services in New York State.
Because local exchange services have, until very recently, been provided only by
a single incumbent local exchange carrier ('LEC') in any particular community,
the Company may face difficulties in establishing or expanding its local
exchange business, including difficulties in negotiating service agreements with
incumbent LECs and in hiring personnel that have experience in providing such
services in such markets. See '--Risks Associated with Anticipated Growth and
Acquisitions.' The Company's prospects must, therefore, be considered in light
of the risks, expenses, problems and delays inherent in establishing a new
business in an evolving industry.
HISTORICAL AND FUTURE NET OPERATING LOSSES AND NEGATIVE EBITDA; NEED FOR
ADDITIONAL CAPITAL; SUBSTANTIAL INDEBTEDNESS; ABILITY TO SERVICE INDEBTEDNESS
The Company will need to continue to enhance and expand its operations and
meet the increasing demands for service quality, availability of value added
services and competitive pricing in order to establish and maintain a
competitive position in its existing markets and the additional markets it
enters. The Company has incurred negative EBITDA and operating losses and has
incurred, and during the next several years expects to continue to incur,
significant and increasing net losses and negative cash flow from operating
activities due to the start-up nature of the Company's business and the
Company's need to expand its operations, develop RSL-NET and build its customer
base and marketing operations. 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. If market conditions are not favorable, the Company
believes that the net proceeds from the Offerings, together with remaining net
proceeds of prior securities offerings and
15
<PAGE>
availability under the Company's 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 well as continuing net losses, for
approximately 12 months. In addition, the Company may be required to seek to
raise additional capital regardless of market conditions if the Company's plans
or assumptions change or prove to be inaccurate, if the Company consummates
acquisitions in addition to those currently contemplated or identifies
additional required or desirable infrastructure investment, if the Company
experiences unanticipated costs or competitive pressures or if the net proceeds
from the Offerings, together with the remaining net proceeds from 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, 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. If the Company decides to raise additional capital
through the incurrence of debt, the Company may become subject to additional or
more restrictive financial covenants. The failure to obtain such additional
capital or 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.
The Company has a significant level of indebtedness. As of June 30, 1998,
the Company had consolidated indebtedness of $690.8 million and shareholders'
equity of $31.4 million. Trust indentures governing the Company's debt
securities limit but do not prohibit the incurrence of additional indebtedness
by the Company. In connection with its plans to raise substantial additional
capital as discussed above, the Company expects to incur substantial amounts of
additional indebtedness resulting in substantial and increasing interest
expense. In addition, the Company expects to incur negative EBITDA, negative
cash flow from operations, deficiencies of earnings to fixed charges, operating
losses and net losses for future periods.
In 1997, the Company made capital expenditures of approximately $49.4
million. Under current conditions, it is the intention of the Company to spend
$150 million in 1998, but, if the Company is able to raise additional capital as
discussed above, the Company intends to proportionally increase its capital
expenditures. The Company has also experienced (except for the fiscal quarters
during which the Company closed its prior securities offerings) a consistently
increasing working capital deficit. The Company's interest expense will likely
exceed its EBITDA and cash flow from operations. If the Company's EBITDA is
insufficient to meet its future debt service obligations and fund its net
losses, the Company will face substantial liquidity problems. If the Company is
unable to generate sufficient EBITDA or cash flow from operations, or otherwise
obtain funds necessary to make required payments, or if the Company otherwise
fails to comply with the material terms of its indebtedness, it would be in
default thereunder, which would permit the holders of such indebtedness to
accelerate the maturity thereof. The ability of the Company to meet its
obligations is dependent upon the future performance of the Company, which is
subject to prevailing economic and regulatory conditions (in each market,
country and region in which the Company operates, as well as globally) and to
financial, business and other factors, including factors beyond the Company's
control.
The trust indentures governing the Company's outstanding debt securities
contain certain restrictive covenants which impose limitations on the Issuer 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 affilitates, (vi) create liens,
(vii) enter into sale-leaseback transactions, and (viii) sell assets. See
'Description of Certain Indebtedness--1996 Notes,' '--U.S. Dollar Notes' and
'--DM Notes.'
Additionally, the Company's indebtedness could have important consequences
to holders of the Class A Common Stock including the following: (i) the debt
service requirements of any existing and additional indebtedness could make it
more difficult for the Company to make payments on its existing debt; (ii) the
Company's level of indebtedness could limit the ability of the Company to obtain
any necessary financing in the future for working capital, capital expenditures,
debt service requirements or other purposes; (iii) a substantial portion of the
Company's future cash flow from operations, if any, will
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be dedicated to the payment of principal and interest on its indebtedness and
other obligations and will not be available for the Company's business; (iv) the
Company's level of indebtedness could limit its flexibility in planning for, or
reacting to changes in, its business; (v) the Company is more highly leveraged
than certain of its competitors, which may place it at a competitive
disadvantage; and (vi) the Company's high degree of indebtedness could make it
more vulnerable in the event of a downturn in its business. See 'Selected
Consolidated Financial Data' and 'Management's Discussion and Analysis of
Financial Condition and Results of Operations.'
RISKS ASSOCIATED WITH ANTICIPATED GROWTH AND ACQUISITIONS
The Company has experienced rapid growth and intends to continue to grow
through further expansion of its existing operations, through acquisitions,
joint ventures, strategic alliances and through the establishment of new
operations. The Company constantly evaluates acquisition and joint venture
opportunities. The Company's ability to manage its anticipated future growth
will depend on its ability to evaluate new markets and investment vehicles,
monitor operations, control costs, maintain effective quality controls, obtain
satisfactory and cost-effective lease rights from, and interconnection
agreements with, competitors that own transmission lines (in many cases
intra-national and local transmission lines may be available from only one
dominant competitor) and significantly expand the Company's internal management,
technical and accounting systems. The Company's growth will also depend on its
ability to purchase successfully MIUs, IRUs and other capacity, which ability
may be adversely affected by, among other factors, competition to purchase such
rights and regulatory restrictions on ownership. The Company's rapid growth has
placed, and its planned future growth will continue to place, a significant and
increasing strain on the Company's financial, management and operational
resources, including the identification of acquisition targets and joint venture
partners, the negotiation of acquisition and joint venture agreements and the
maintenance of satisfactory relations, including, when necessary, the resolution
of disputes with its joint venture partners and minority investors in acquired
entities. In addition, acquisitions and the establishment of new operations will
entail considerable expenses in advance of anticipated revenues and may cause
substantial fluctuations in the Company's operating results.
The Company may, as a result of legal restrictions or other reasons,
acquire a minority interest in strategic targets, in which case the Company
would lack control over the target company's operations and strategies. There
can be no assurance that such lack of control will not interfere with the
Company's growth and integration of its operations.
The Company may also acquire interests in operations for strategic reasons,
despite the fact that such operations have operational or managerial problems 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.
The Company's planned new businesses will need to be integrated with its
existing operations. For acquired businesses, this will entail, among other
things, integration of switching, transmission, technical, sales, 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 in the past limited
experience in providing, such as, in the case of the recent Motorola Telecom
acquisition, wireless resale. Furthermore, acquired businesses generally suffer
from employee and customer attrition and turnover at higher rates during the
period commencing when employees and customers learn of a proposed transaction
and ending 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, among other things, recruit, hire and train personnel,
establish offices, obtain regulatory authorization, lease transmission lines
from, and obtain interconnection agreements with,
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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 Europe, Asia/Pacific Rim and Latin America, the Company must
manage the problems associated with integrating a culturally and linguistically
diverse workforce. The Company has limited experience dealing with these
problems.
RISKS ASSOCIATED WITH RAPIDLY CHANGING INDUSTRY
The international telecommunications industry is changing rapidly due to,
among other things, deregulation, privatization of PTTs, technological
improvements, expansion of telecommunications infrastructure and the
globalization of the world's economies and free trade. There can be no assurance
that one or more of these factors will not vary unpredictably, which could have
a material adverse effect on the Company. There can also be no assurance, even
if these factors turn out as anticipated, that the Company will be able to
implement its strategy or that its strategy will be successful in this rapidly
evolving market. Furthermore, there can be no assurance that the Company will be
able to compete effectively or adjust its contemplated plan of development to
meet changing market conditions.
Much of the Company's planned growth is predicated upon the deregulation of
telecommunications markets. There can be no assurance that such deregulation
will occur when or as anticipated, if at all, or that the Company will be able
to grow in the manner or at the rates currently contemplated.
The telecommunications industry is in a period of rapid technological
evolution, marked by the introduction of new product and service offerings and
increased satellite and fiber optic cable transmission capacity for services
similar to those provided by the Company, including utilization of the Internet
for international voice and data communications. The Company cannot predict
which of the many possible future product and service offerings will be
important in order to establish and maintain a competitive position or what
expenditures will be required to develop and provide such products and services.
The Company's profitability will depend, in part, on its ability to anticipate
and adapt to rapid technological changes occurring in the telecommunications
industry and on its ability to offer, on a timely basis, services that meet
evolving industry standards and customer preferences. There can be no assurance
that the Company will be able to adapt to such technological changes or offer
such services on a timely basis or establish or maintain a competitive position.
As a result of existing excess international transmission capacity, the
marginal cost of carrying an additional international call is often very low for
carriers that own MIUs or IRUs. Industry observers have predicted that these low
marginal costs may result in significant pricing pressures and that, within a
few years after the end of this century, there may be no charges based on the
distance a call is carried. Certain of the Company's competitors have introduced
calling plans that provide for flat rates on calls within the U.S. and Canada,
regardless of time of day or distance of the call. If this type of pricing were
to become prevalent in the markets on which the Company focuses, it 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,
therefore, may be obligated to pay for transmission capacity without adequate
corresponding revenues. Conversely, the Company may underestimate its need for
leased capacity and, therefore, be required to obtain transmission capacity
through more expensive means. The Company has, in the past, both overestimated
and underestimated its need for leased capacity and, therefore, has been forced
to obtain capacity for overflow 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.' If the Company is unable to
accurately project its needs for leased capacity in the future, such inability
may have a material adverse effect on the Company's business and profitability.
Additionally, the Company has in the past acquired, and may in the future
acquire, operations that have
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entered into long-term agreements for leased capacity with under-utilization
charge provisions. These agreements present the same risks.
DEPENDENCE ON OTHER CARRIERS
The Company does not own any local exchange transmission facilities and
owns only limited intra-national transmissional facilities in the countries in
which it provides services (and does not intend to construct or acquire any of
its own local exchange transmission facilities unless required to do so in order
to receive regulatory approval to operate). Consequently, the Company must
continue to rely on providers of intra-national and local exchange transmission
facilities. All of the telephone calls made by the Company's customers are and
will continue to be connected, at least in part, through transmission facilities
that the Company leases. In many of the jurisdictions in which the Company
conducts business or plans to conduct business, the primary provider of
significant intra-national transmission facilities is the PTT. Similarly, in the
U.S., the primary or only providers of local exchange transmission facilities
are generally only the incumbent LECs, including the regional Bell operating
companies ('RBOCs'). Accordingly, prior to full deregulation, there may be only
one source of intra-national and/or local exchange transmission facilities in
these countries, and the Company may be required to lease transmission capacity
at artificially high rates from a provider that occupies a monopoly or near
monopoly position. Such rates may be too high to allow the Company to generate
gross profit on intra-national calls or international calls routed to a Company
switch by means of such intra-national lines. In addition, PTTs will not
necessarily be required by law to allow the Company to lease transmission lines
upon which the Company depends. To the extent that applicable law requires PTTs
to lease transmission lines to the Company, delays may nevertheless be
encountered with respect to the commencement of operations and extensive delays
can be expected with respect to the negotiation of leases and interconnection
agreements. See '--Government Regulatory Restrictions.' In addition, disputes
can be expected with respect to pricing terms and billing. Similarly, to the
extent that the Company leases local exchange facilities in the U.S., there is
currently some uncertainty involving the prices and nature of such facilities
that LECs may offer to competitors in the local exchange market, which could
include the Company. Currently, the U.S. Court of Appeals for the Eighth Circuit
has held that 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 and will continue to be transported through transmission facilities that the
Company owns or leases. The lessors of such facilities are competitors of the
Company, including American Telephone & Telegraph, Inc. ('AT&T'), MCI
Communications Corporation ('MCI'), Teleglobe Canada, Inc. ('Teleglobe'),
British Telecommunications PLC ('British Telecom'), France Telecom S.A. ('France
Telecom'), Deutsche Telekom AG ('Deutsche Telekom'), Cable and Wireless
Communications PLC ('C&W'), WorldCom, Inc. ('WorldCom') and Sprint Corporation
('Sprint'). Similarly, 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 United States, lease
rates have declined and short term leases have been advantageous. Recently,
capacity has been somewhat constrained in the United States and the decline in
lease rates has slowed. As a result, longer term leases may become more
attractive. Should the Company fail to meet its minimum volume commitments
pursuant to long-term leases, it will be obligated to pay 'under-utilization'
charges. See '--Inability to Predict Traffic Volume.' For these reasons, the
Company would suffer competitive disadvantages if it entered into
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leases with inappropriate durations or leases based on per-minute charges for
high volume routes (or leases with fixed monthly rates for low volume routes),
or if it failed to meet its minimum volume requirements. The Company is also
vulnerable to service interruptions and poor transmission quality from leased
lines. The deterioration or termination of the Company's relationships with one
or more of its carrier vendors could have a material adverse effect upon the
Company's business, financial condition and results of operations.
DEPENDENCE ON EFFECTIVE INFORMATION SYSTEMS; YEAR 2000 TECHNOLOGY RISKS
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 implement or integrate new
systems without difficulty, if at all, the failure of any new systems or the
failure to upgrade systems as necessary could have a material adverse effect on
the Company, its financial condition and the results of operations.
The Company is in the process of 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-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.
The Company is 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. 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 and will continue to be
extremely competitive. Prices for long distance calls have decreased
substantially over the last few years in most of the markets in which the
Company does business and prices are expected to decline substantially over the
next several years in all of the markets where the Company does business or
expects to do business. In addition, all of the Company's markets and expected
future markets have deregulated or are in the process of deregulating telephone
services. Customers in most of these markets are not familiar with obtaining
services from competitors to the PTTs and incumbent LECs and may be reluctant to
use new providers, such as the Company. In particular, the Company's target
customers, small and medium-sized businesses, may be reluctant to entrust their
telecommunications needs to new and unproven operators or may switch to other
service providers as a result of price competition. The Company has experienced,
and expects to continue to experience, high levels of customer attrition and
turnover as a result of the highly competitive nature of most of its markets.
The Company's success will depend upon the Company's ability to compete
with a variety of other telecommunications providers in each of its markets,
including (i) the PTTs, (ii) alliances such as 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, the entity resulting from the proposed merger of MCI and
WorldCom, 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 WorldCom offering local exchange service
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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 expects that competition will
increase in the future as the deregulation of telecommunications markets
worldwide accelerates. Many of the Company's competitors have significantly
greater financial, management and operational resources and more experience than
the Company. If any of the Company's competitors were to devote additional
resources to the provision of international long distance voice
telecommunication services to the Company's target customer base of small and
medium-sized businesses, there could be an adverse effect on the Company's
business. In addition, certain of the Company's competitors may target discounts
in one market to gain an advantage in another market or with a particular
customer. The Company may be unable to compete with such discounts on an
economically feasible basis.
Each of the Company's Local Operators is expected to separately compete
within its respective country. There can be no assurance that any of the Local
Operators will be able to do so effectively and the success of the Company's
strategy in any one market is not necessarily indicative of its ability to
succeed in any other market.
Competition for customers is primarily on the basis of price and, to a
lesser extent, on the type and quality of services offered and customer service.
The Company attempts to price its services at a discount to the prices charged
by the PTT or major carriers in each of its markets. The Company has no control
over the prices set by its competitors and some of the Company's larger
competitors may be able to use their substantial financial resources to cause
severe price competition in the countries in which the Company operates. There
can be no assurance that severe price competition will not occur. Any price
competition could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, certain of the
Company's competitors will provide potential customers with a broader range of
services than the Company currently offers or can offer due to regulatory
restrictions. See 'Business--Industry Overview' and '--European
Operations--General.'
In addition to these competitive factors, recent and pending deregulation
in each of the Company's markets may encourage new entrants. For example, as a
result of the enactment of the Telecommunications Act of 1996 and regulatory
initiatives taken by the FCC, the RBOCs may provide international
telecommunications services, are allowed to offer domestic long distance service
through an affiliate outside their service areas as 'non-dominant' carriers and
are allowed to provide long distance service within their service areas,
provided certain competition related conditions are met. AT&T, MCI and other
long distance carriers are allowed to enter the local telephone services market,
and any entity, including cable television companies and utilities, may enter
the United States domestic long distance telecommunications market. As of the
date of this Prospectus, no RBOC has been granted authority by the FCC to
provide long distance service within its service area. However, the U.S.
District Court for the Northern District of Texas has recently ruled that
restrictions placed by the Telecommunications Act of 1996 on the RBOCs regarding
their ability to provide long distance service within their respective service
areas are unconstitutional. Moreover, certain of the RBOCs have filed with the
FCC applications for 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 of the World Trade
Organization (the 'GBT Agreement') executed in February 1997. In its decision,
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 foreign carriers with less than 50%
market share in its home market should be treated as non-dominant. In addition,
the FCC had, on several occasions since 1984, approved or required price
reductions by AT&T because it was a 'dominant' carrier. However, the FCC
reclassified AT&T as a 'non-dominant' carrier for domestic purposes in October
1995 and for international purposes in May 1996. These FCC actions substantially
reduced the regulatory constraints on AT&T and affiliates of foreign
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carriers. As the Company expands its geographic coverage, it will encounter
additional regional competitors and increased competition. Moreover, the Company
believes that competition in non-U.S. markets will increase and begin to
resemble the competitive landscape in the United States.
The PTTs and incumbent LECs generally have certain competitive advantages
that the Company and its other competitors do not have, due to their control
over the intra-national and local exchange transmission facilities and
connection to them, their ability to delay access to lines and the reluctance of
some regulators to adopt policies and grant regulatory approvals that will
result in increased competition for the PTTs and incumbent LECs. If the PTT or
incumbent LEC in any jurisdiction uses its competitive advantages to their
fullest extent, the Local Operator in such jurisdiction would be adversely
affected.
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
United States or in any other country would not have a material adverse effect
on the Company or that FCC or other regulatory investigation or intervention
would not have a material adverse effect on the Company. In addition, the
Company's strategy is based in large part upon the ongoing liberalization of the
EU and deregulation of other foreign markets based on European Commission
directives and the GBT Agreement. Deregulation of the EU and other foreign
markets has already experienced some delays. There can be no assurance that
other foreign markets will proceed with the expected deregulation in the
immediate future, if at all, or that the trend towards deregulation will be
effective. 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 their 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. In
the EU, even if a national legislature 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. 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 telecommunications services provided by the Company in the United
Kingdom are subject to and affected by regulations and license conditions
enforced by the Office of Telecommunications ('Oftel'). Oftel has imposed
mandatory rate reductions on British Telecom in the past and is expected to
continue to do so for the foreseeable future. This may have the effect of
reducing the prices the Company can charge its U.K. customers.
The 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 financial condition and results
of operations of Delta Three and the Company.
RISK OF LOSS, OR DIMINUTION OF VALUE, OF OPERATING AGREEMENTS
Although the Company has 21 operating agreements, the Company presently
only utilizes seven such agreements. In order to take advantage of the
operating agreements not utilized, the Company would have to make an investment
in transmission facilities to each of these countries, which the Company is
unlikely to do unless and until it originates sufficient calling volume to such
countries to justify an investment. The Company's failure to utilize these
operating agreements may result in these foreign carriers terminating such
agreements in order to secure more profitable agreements with carriers other
than the Company and may limit the Company's ability to secure operating
agreements
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with additional foreign carriers. The loss of the Company's operating agreements
could have a material adverse effect on its business, and the failure to enter
into additional operating agreements or other favorable arrangements in the
future could limit the Company's ability to increase its revenues on a positive
gross margin basis. There can be no assurance that the Company will be able to
enter into additional operating and other interconnection agreements or other
favorable arrangements in the future.
In addition, the Company's operating agreements may become less valuable to
the Company. As increasing numbers of international carriers emerge, operating
agreements may become more available. Moreover, as telecommunications markets
deregulate, particularly in Europe, an increasing proportion of international
traffic is being carried outside of the traditional operating agreement/
settlement rate system.
DEPENDENCE ON CARRIER CUSTOMERS
In the United States, a substantial portion of the Company's revenues are
generated by the telecommunication services it provides to carrier customers.
Revenues derived from the provision of such services accounted for 24% of the
Company's revenues for the six-month period ended June 30, 1998. Accordingly,
the loss of revenue from carrier customers could have a material adverse effect
upon the Company's business, financial condition and results of operations.
Carrier customers are extremely price sensitive, generate very low margins and
frequently choose to move their business based solely on small price changes. In
addition, certain of the Company's carrier customers are unprofitable or are
only marginally profitable, resulting in a higher risk of delinquency or
non-payment than in the case of more creditworthy customers. While the Company
instituted revised credit criteria to enable the Company to reduce its exposure
to the higher risks associated with carrier customers, no assurance can be given
that such criteria and methods will afford adequate protection against such
risks.
RISKS RELATED TO HOLDING COMPANY STRUCTURE
The Issuer is a holding company and its only material assets consist of the
stock of its subsidiaries and fluctuating cash balances. The Issuer has
contributed or loaned substantial portions of the net proceeds from its prior
securities offerings, and intends to contribute or loan substantial portions of
the net proceeds of the Offerings, to its subsidiaries and other affiliates. The
cash flow and the consequent ability of the Issuer to service its debt
obligations and pay dividends are dependent upon the ability of the Issuer to
receive cash from such subsidiaries. The ability of these subsidiaries to make
such distributions to the Issuer will be subject to, among other things, the
availability of funds and the terms of such subsidiaries' indebtedness. In
addition, the repayment of loans and advances by such subsidiaries may be
subject to statutory or other legal restrictions and to taxation, are contingent
upon the earnings of those subsidiaries and are subject to various business
considerations. Dividends and other payments to the Issuer from its
subsidiaries, in certain jurisdictions, may have adverse tax consequences to the
Issuer and to the shareholders of the Issuer. Moreover, the subsidiaries'
ability to declare and pay dividends and/or their ability to make any payment or
transfer of property or assets to the Issuer are, in certain circumstances,
subject to local statutory or other legal restrictions, and restrictions
contained in their respective Articles of Association, other organizational
documents or loan agreements.
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 degree of Mr. Lauder's involvement
in the activities of the Company varies from time to time based on the needs of
the Company. Mr. Lauder's involvement with the Company, in addition to his
activities as Chairman of its Board of Directors and Executive Committee,
includes identifying potential
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local strategic partners, capital allocation, corporate governance, setting
compensation policy and recruiting top management. However, he is not an
employee of the Company and he spends a majority of his business time on other
matters. While Mr. Fisher has an employment agreement with the Company, the
Company does not have employment agreements with many of the other members of
its senior management team.
The Company believes its future success will depend in large part upon its
ability to attract, retain and motivate highly skilled employees. Such employees
are in great demand and are often subject to offers for competitive employment.
There can be no assurance that the Company can retain its key managerial
employees or that it can attract, integrate or retain such employees in the
future.
DEPENDENCE ON EQUIPMENT SUPPLIER
The Company purchases most of its switches from Ericsson, which has granted
the Company volume discounts and also provides lease financing for, and
maintenance of, this equipment. Although switches of comparable quality may be
obtained from several alternative suppliers, the failure of the Company to
acquire compatible switches from an alternative source, or the failure to
acquire additional switches (regardless of the vendor) on a timely basis or on a
similar price basis, could result in delays, operational problems or increased
expenses, which could have a material adverse effect on the Company's business,
results of operations and financial condition.
CONTROLLING SHAREHOLDERS; NEGATIVE EFFECTS OF ANTI-TAKEOVER PROVISIONS
Certain of the executive officers and directors of the Company, companies
and partnerships they control and members of their immediate families control,
in the aggregate, approximately 94.0% ( % after giving effect to the
Offerings, assuming the Underwriters' over-allotment options are exercised in
full) of the voting power and approximately 67.1% ( % 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, the
existing shareholders are able to control the election of all of the directors
and the results of other shareholder votes. Ronald S. Lauder, Chairman of the
Board of Directors of the Company, beneficially owns, in the aggregate,
approximately 58.9% ( % after giving effect to the Offerings, assuming the
Underwriters' over-allotment options are exercised in full) of the voting power
and approximately 38.0% ( % 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
control of the Company, the ability to approve certain fundamental corporate
transactions and to elect all members of the Company's Board of Directors. The
exercise of voting power by Mr. Lauder and such other persons may present
conflicts of interest between them and the other owners of the Company's capital
shares. See 'Principal and Selling Shareholders.'
The concentration of ownership in the Issuer and Mr. Lauder's intention to
maintain a controlling interest 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 Bye-Laws contain provisions that could delay,
defer or prevent a change in control without the approval of the incumbent Board
of Directors. Such a provision could impede the ability of the shareholders to
replace management even if factors warrant such a change. See 'Principal and
Selling Shareholders' and 'Description of Capital Stock--Anti-Takeover
Protections.'
BERMUDA CORPORATE LAW
The Issuer is a Bermuda corporation and, accordingly, is governed by The
Companies Act 1981 of Bermuda. The Companies Act 1981 of Bermuda differs in
certain aspects from laws generally applicable to United States corporations and
shareholders, including with respect to the provisions relating to interested
directors, mergers and similar arrangements, takeovers, shareholders suits,
indemnification of directors and inspection of corporate records. See
'Description of Capital Stock-- Certain Provisions of Bermuda Law.'
24
<PAGE>
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Class A Common Stock may be extremely volatile.
Factors such as adverse regulatory changes, fluctuations of liquidity,
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
Assuming all of the Shares offered hereby by the Company were sold, then as
of the date hereof, the Company would have a total of shares of
Common Stock outstanding ( shares if the Underwriters'
over-allotment options are exercised in full), including shares of
Class A Common Stock ( shares if the Underwriters' over-allotment
options are exercised in full) and shares of Class B Common Stock
( shares if the Underwriters' over-allotment options are
exercised in full). Of such shares, approximately shares
( shares if the Underwriters' over-allotment options are exercised
in full) of the Class A Common Stock (unless acquired in the Offering by an
'affiliate' of the Company, as that term is defined by Rule 144 promulgated
under the Securities Act ('Rule 144')) will 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' (as that term is defined by Rule
144). Subject to the volume and other resale limitations set forth in Rule 144,
all of such restricted securities would be eligible for public sale after
December , 1998, when certain lock-up agreements between the underwriters and
the Company's executive officers and directors and certain other shareholders of
the Company expire. Additionally, certain shareholders of the Company who
beneficially own, in the aggregate, shares of Class A Common Stock
(including shares of Class A Common Stock issuable upon the conversion of shares
of Class B Common Stock) are entitled to demand registration rights with respect
to such shares. Such demand registration rights are exercisable, with certain
restrictions, after , 1998. Certain shareholders who
beneficially own, in the aggregate, shares of Class A Common Stock
(including the shares which are subject to demand rights and shares of Class A
Common Stock issuable upon the conversion of shares of Class B Common Stock) are
entitled to piggyback registration 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 to be issued pursuant to an
exercise of their Roll-Up Rights. See 'Description of Capital Stock' and 'Shares
Eligible for Future Sale.'
In October 1996, the Company issued an aggregate 300,000 warrants, each to
purchase 3.975 shares of Class A Common Stock from the Company at an exercise
price of $.00457 per share (the 'Warrants'). The Warrants may be exercised at
any time prior to the close of business on October 3, 2007. As required by the
registration rights agreement covering the Warrants, in February 1998, the
Company registered the 1,192,455 shares of Class A Common Stock underlying the
Warrants. As of August 25, 1998, 69,064 Warrants were exercised into 274,528
shares of the Class A Common Stock.
In July 1998, the Company acquired a minority interest in Telegate AG
('Telegate'). Metro Holding and certain of its affiliates also own a minority
interest in Telegate. In certain circumstances, the Company will be required to
issue shares of Class A Common Stock to Metro Holding and its affiliates in
exchange for their Telegate interests. The number of shares of Class A Common
Stock issuable in such exchange will be based on a valuation of the Telegate
interests and the Class A Common Stock at the time of the exchange and,
consequently can not be determined at the time, but would likely be material.
As consideration for agreeing to provide (or to arrange for a bank to
provide) the Company with a $35.0 million subordinated loan facility (the
'Shareholder Standby Facility') and a continuing guarantee
25
<PAGE>
of the Company's revolving credit facility with The Chase Manhattan Bank (the
'Revolving Credit Facility'), Ronald S. Lauder, Chairman of the Board and
principal and controlling shareholder of the Company, received, in the
aggregate, warrants to purchase 459,900 shares of Class B Common Stock (the
'Lauder Warrants'), which shares are convertible into 459,900 shares of Class A
Common Stock. The Lauder Warrants became exercisable on September 10, 1997, have
an expiration date of September 10, 2006 and a current exercise price of $.00457
per share. The terms of the Lauder Warrants are substantially the same as the
Warrants, except that the Lauder Warrants are exercisable for shares of Class B
Common Stock and the Warrants are exercisable for shares of Class A Common
Stock.
The Company has adopted the RSL Communications, Ltd. 1997 Performance
Incentive Plan (the '1997 Performance Plan'), the RSL Communications, Ltd. 1997
Stock Incentive Plan (the '1997 Plan') and the RSL Communications, Ltd. 1997
Directors' Compensation Plan (the 'Directors' Plan') which, in the aggregate,
provide for stock grants and grants of options to acquire up to 3,750,000 shares
of Class A Common Stock, of which 464,878 options had been granted and 164,250
shares of restricted stock had been awarded as of the date of this Prospectus.
In addition, options to acquire up to 1,132,352 shares of Class A Common Stock
are outstanding under the RSL Communications, Ltd. 1995 Amended and Restated
Stock Option Plan (the '1995 Plan'). The Company registered with the Commission
in November 1997 all of the shares underlying all such options (the 'Option
Shares') and all of the shares of restricted stock and shares. Options with
respect to 907,752 of the Option Shares are currently exercisable or exercisable
within 60 days of the date of this Prospectus, and 54,750 shares of restricted
stock have vested or will vest within 60 days of the date of this Prospectus.
See 'Management--Compensation of Executive Officers.'
Sales of substantial amounts of Class A Common Stock in the public market,
and the availability of shares for future sale (including, in each case, shares
of Class A Common Stock issuable upon the conversion of shares of Class B Common
Stock, upon the exercise of options or under the Company's stock option and
compensation plans) 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. See 'Principal and Selling
Shareholders' and 'Shares Eligible for Future Sale.'
ABSENCE OF DIVIDENDS
The Issuer 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 Indentures (as defined herein)
contain restrictions on the Issuer's ability to declare and pay dividends on
each class of the Common Stock. See 'Description of Certain Indebtedness' and
'Dividend Policy.'
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
at satisfactory cost, and there can be no assurance that exchange rate
fluctuations will not have a material adverse effect on the ability of the
Issuer 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 (the 'Member States') of the EU, including some countries in which
the Company operates. Modifications to the Company's computer systems and
programs are being made in order to prepare for the upcoming replacement of
certain European currencies with the Euro. Costs
26
<PAGE>
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 would be successful in this endeavor. See 'Certain United States Federal
Income Tax Considerations.'
27
<PAGE>
USE OF PROCEEDS
The net proceeds to the Issuer from the Offerings are estimated to be
approximately $ million, after deducting the underwriting discount and
estimated expenses of the Offerings. Of the net proceeds to be received by the
Issuer from the Offerings the Company will use (i) approximately $ 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 certain
European countries, as well as the installation of additional national and
international gateways, (ii) approximately $ million for strategic merger and
acquisition activities in the telecommunications industry, including certain
potential acquisitions which the Company is currently pursuing, and (iii)
approximately $ million for the funding of the Company's operating losses. In
the ordinary course of its business, the Company continuously reviews
acquisition opportunities as they arise. 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 pursuant to
the exercise of the Underwriters' over-allotment option.
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 , 1998, there
were approximately holders of record of the Class A Common Stock,
and the Issuer believes that there were approximately beneficial
owners of the Class A Common Stock. At , 1998, there were
approximately holders of record of the Class B Common Stock and the
Issuer believes that there were approximately 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 $21 1/8
1998 First
Quarter...................................................................................... 27 1/2 17
1998 Second Quarter.......................................................................... 30 21 7/8
1998 Third Quarter (through August 25, 1998)................................................. 44 1/2 29 3/4
</TABLE>
On August 25, 1998 the last reported sales price for the Class A Common
Stock on the Nasdaq National Market was $32 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 operations,
capital requirements, restrictions in loan agreements and Indentures, if any,
and any such other factors as the Board of Directors may deem relevant.
28
<PAGE>
DILUTION
As of June 30, 1998, the net tangible book value of the Common Stock was
$( ) 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
shares of Class A Common Stock offered by the Company in the
Offerings had been sold at June 30, 1998 at the initial public offering price.
<TABLE>
<CAPTION>
Initial public offering price per share............................................ $
<S> <C> <C>
Net tangible book value per share before the Offerings(1)........................ $
Increase per share attributable to the Offerings.................................
-------
Net tangible book value per share after the Offerings(1)...........................
-------
Dilution of net tangible book value per share to new investors..................... $
-------
-------
</TABLE>
- ------------------
(1) Includes (i) 1,597,230 shares of Class A Common Stock issuable upon exercise
of outstanding stock options, (ii) 1,377,827 shares of Class A Common Stock
issuable upon the exercise of the Warrants and the Lauder Warrants (which is
comprised of 459,900 shares of Class A Common Stock issuable in connection
with the Lauder Warrants and 917,927 issuable on exercise of the Warrants),
(iii) 164,250 shares of restricted stock granted pursuant to the Company's
1997 Stock Incentive Plan and (iv) shares of Class A Common Stock
expected to be issued upon the exchange of the Incentive Units. Excludes
shares of Class A Common Stock issuable upon exercise of the Roll-Up Rights
and the Telegate Shares.
The following table summarizes, as of June 30, 1998, the differences
between the existing shareholders and the new investors with respect to the
number of shares of Class A Common Stock and Class B Common Stock to be
purchased from the Company in the Offerings, the total consideration paid
therefor and the average price per share paid by the existing shareholders and
the new investors.
<TABLE>
<CAPTION>
SHARES TOTAL
PURCHASED(1) CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders................. % $ % $
New investors.........................
---------- ------- ------------ -------
Total................................. 100.0 $ 100.0
---------- ------- ------------ -------
---------- ------- ------------ -------
</TABLE>
- ------------------
(1) Includes (i) 1,597,230 shares of Class A Common Stock issuable upon exercise
of outstanding stock options, (ii) 1,377,827 shares of Class A Common Stock
issuable upon the exercise of the unexercised Warrants and the Lauder
Warrants (which is comprised of 459,900 shares of Class A Common Stock
issuable in connection with the Lauder Warrants and 917,927 issuable on
exercise of the unexercised Warrants), (iii) 164,250 shares of restricted
stock granted pursuant to the Company's 1997 Stock Incentive Plan and (iv)
shares of Class A Common Stock expected upon the exchange of the
Incentive Units. Excludes shares of Class A Common Stock issuable upon
exercise of the Roll-Up Rights and the Telegate Shares.
29
<PAGE>
CAPITALIZATION
The following table sets forth the unaudited consolidated cash and cash
equivalents, marketable securities, restricted marketable securities and
capitalization of the Issuer as of June 30, 1998 on an actual basis and as
adjusted to give effect to (a) the use of $196 million of cash and cash
equivalents to fund certain acquisitions closed since June 30, 1998 and $14
million of deposits made since June 30, 1998 to certain carriers against
services to be rendered in the future and (b) the Offerings and the application
of the estimated net proceeds therefrom to be received by the Company. The table
should be read in conjunction with the Consolidated Financial Statements and the
related notes thereto and the other information included elsewhere in this
Prospectus. See 'Management's Discussion and Analysis of Financial Condition and
Results of Operations.'
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
---------------------------------------------------
AS ADJUSTED
FOR THE
AS ADJUSTED OFFERINGS, THE
FOR ACQUISITIONS ACQUISITIONS AND
ACTUAL AND DEPOSITS DEPOSITS
----------- ---------------- ----------------
(IN THOUSANDS, EXCEPT SHARE DATA)
---------------------------------------------------
<S> <C> <C> <C>
Cash and cash equivalents......................... $ 319,613 $ 109,180(1) $
----------- ---------------- ----------------
----------- ---------------- ----------------
Securities available for sale..................... $ 33,631 $ 33,631 $ 33,631
----------- ---------------- ----------------
----------- ---------------- ----------------
Restricted marketable securities(2)............... $ 51,885 $ 51,885 $ 51,885
----------- ---------------- ----------------
----------- ---------------- ----------------
Short-term debt and current portion of long-term
debt and current portion of capital lease
obligations..................................... $ 12,917 $ 12,917 $ 12,917
Long-term debt and capital lease obligations:
Capital leases.................................. 21,461 21,461 21,461
12 1/4% Senior Notes due 2006 (net of
unamortized discount of $1.9 million)......... 170,609 170,609 170,609
9 1/8% Senior Notes due 2008.................... 200,000 200,000 200,000
10 1/8% Senior Discount Notes due 2008.......... 206,978 206,978 206,978
10% Senior Discount Notes due 2008.............. 103,410 103,410 103,410
----------- ---------------- ----------------
Total long-term debt, short-term debt and
capital lease obligations(3)................ 715,375 715,375 715,375
----------- ---------------- ----------------
Shareholders' equity:
Common Stock, $.00457 par value; 438,000,000
authorized; 14,179,346 shares of Class A
Common Stock outstanding and shares
outstanding as adjusted(4)(5)................. 54 54
28,455,081 shares of Class B Common Stock
outstanding(5).............................. 141 141
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...................... 283,180 283,180
Accumulated deficit............................. (245,249) (245,249) (245,249)
Foreign currency translation adjustment......... (12,271) (12,271) (12,271)
----------- ---------------- ----------------
Total shareholders' equity.................... 31,399 31,399
----------- ---------------- ----------------
Total capitalization.......................... $ 746,774 $ 746,774 $
----------- ---------------- ----------------
----------- ---------------- ----------------
</TABLE>
- ------------------
(1) The as adjusted figure reflects the use of approximately $210.4 million of
cash and cash equivalents to fund the Company's acquisitions subsequent to
June 30, 1998 of WestComm, Westel and Motorola Tel.co and deposits made
since June 30, 1998 to certain carriers against future services.
(2) 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--Description of the
1996 Notes.'
(3) As of June 30, 1998, the Company had approximately $6.7 million of available
(undrawn) borrowing capacity under its current bank and vendor facilities.
(4) Does not include, at June 30, 1998, (i) 1,953,752 shares of Class A Common
Stock issuable upon exercise of outstanding stock options, (ii) 1,079,183
shares of Class A Common Stock issuable on exercise of unexercised Warrants,
or (iii) 28,914,981 shares of Class A Common Stock issuable upon the
conversion of the shares of Class B Common Stock (including 459,900 shares
of Class B Common Stock issuable upon the exercise of the Lauder Warrants).
(5) Does not give effect to the conversion of Class B Common Stock to Class A
Common Stock by the Selling Shareholder.
30
<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 six months
ended June 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 have been prepared on the same basis as the audited
Consolidated Financial Statements and include all adjustments, which consist
only of normal recurring adjustments, necessary for a fair presentation of the
financial position and the results of operations for these periods. Operating
results for the six months ended June 30, 1998 are not necessarily indicative of
the results that may be expected for the full year. The Company has experienced
rapid growth over the periods set forth below, which 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 the 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, SIX MONTHS ENDED
------------------------------------------------ JUNE 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 $ 109,361 $ 298,202
Cost of services........................... (4,923) (17,510) (98,461) (265,321) (96,797) (251,865)
----------- -------- -------- --------- --------- -----------
Gross profit (loss)........................ (221) 1,107 14,796 35,475 12,564 46,337
Selling, general and administrative
expenses................................. (2,395) (9,639) (38,893) (94,712) (38,213) (79,817)
Depreciation and amortization.............. (240) (849) (6,655) (21,819) (8,960) (21,124)
----------- -------- -------- --------- --------- -----------
Loss from operations....................... (2,856) (9,381) (30,752) (81,056) (34,609) (54,604)
Interest income............................ -- 173 3,976 13,826 7,124 10,834
Interest expense........................... (225) (194) (11,359) (39,373) (19,252) (33,330)
Other income (expense)..................... -- -- 470 6,595(2) 6,606(2) (1,504)
Minority interest.......................... -- -- (180) 210 (229) 2,728
Income taxes............................... -- -- (395) (401) (357) (634)
----------- -------- -------- --------- --------- -----------
Net loss before extraordinary item......... (3,081) (9,402) (38,240) (100,199) (40,717) (76,510)
Extraordinary item(3)...................... -- -- -- -- -- (20,800)
----------- -------- -------- --------- --------- -----------
Net loss after extraordinary item.......... $(3,081) $ (9,402) $(38,240) $(100,199) $ (40,717) $ (97,310)
----------- -------- -------- --------- --------- -----------
----------- -------- -------- --------- --------- -----------
Loss per share before extraordinary
item(3)(4)............................... $(15.41) $ (1.67) $ (5.13) $ (5.27) $ (3.72) $ (1.82)
Loss per share after extraordinary
item(3)(4)............................... $(15.41) $ (1.67) $ (5.13) $ (5.27) $ (3.72) $ (2.32)
Weighted average number of shares of Common
Stock outstanding(4)..................... 200 5,641 7,448 19,008 10,957 42,021
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
------------------------------------------------ JUNE 30,
PREDECESSOR -----------------------
1994 1995 1996 1997 1997 1998
----------- -------- --------- -------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
EBITDA(5).................................. $(2,616) $ (8,532) $ (23,807) $(52,432) $(19,272) $ (32,256)
Capital expenditures(6).................... 1,126 6,074 23,880 49,417 13,870 41,801
Cash (used in) provided by operating
activities............................... (1,987) 3,554 (10,475) (91,812) (45,247) (108,205)
Cash (used in) provided by investing
activities............................... (478) (16,537) (225,000) (18,821) 26,862 (85,136)
Cash (used in) provided by financing
activities............................... 2,888 18,143 335,031 152,035 (2,807) 368,571
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------- AS OF JUNE 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 $ 81,992 $ 319,613
Securities available for sale.............. -- -- 67,828 13,858 50,797 33,631
Restricted marketable securities(7)........ -- -- 104,370 68,836 84,728 51,885
Total assets............................... 3,682 53,072 427,969 605,664 436,519 985,388
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 9,204 12,917
Long-term debt and capital lease
obligations(8)........................... 1,404 6,648 314,425 316,608 318,088 702,458
Shareholders' (deficiency) equity.......... (3,651) 5,705 20,843 126,699 13,359 31,399
</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.
Outstanding stock options, unexercised Warrants, the Lauder Warrants Roll-up
Rights, Incentive Units, and the Telegate Shares are not included in the
loss per common share calculation as their effect is anti-dilutive.
(5) EBITDA consists of loss before interest, income taxes, extraordinary item,
depreciation and amortization. EBITDA is provided because it is a measure
commonly used in the telecommunications industry. It is presented to enhance
an understanding of the Company's operating results and is not intended to
represent cash flow or results of operations in accordance with U.S. GAAP
for the periods indicated. The Company's use of EBITDA may not be comparable
to similarly titled measures used by other companies due to the use by other
companies of different financial statement components in calculating EBITDA.
(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 June 30, 1998, the Company had approximately $6.7 million of available
(undrawn) borrowing capacity under its current bank and vendor facilities.
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements, including the notes thereto, appearing
elsewhere in this Prospectus. The following contains statements which constitute
forward-looking statements regarding the intent, belief or current expectations
of the Company or its officers with respect to, among other things, the
Company's financing plans, trends affecting the Company's financial condition or
results of operations, the impact of competition, the start-up of certain
operations and acquisition opportunities. The Company's actual future results
could differ materially from those discussed herein. Prospective investors are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and that actual results may
differ materially from those in the forward-looking statements as a result of
various factors. Information contained in this Prospectus, including, without
limitation, information contained in this section of this Prospectus and
information under 'Risk Factors' and 'Business,' identifies important factors
that could cause such differences.
OVERVIEW
GENERAL
The Company is a rapidly growing multinational telecommunications company
which provides a broad array of 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 1996,
approximately 68% of all international long distance telecommunications minutes
originated in these markets. The Company is in the process of commencing
start-up operations through its investments in an entity in Mexico. 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 1995 and has since
implemented solutions designed to improve RSL USA's operations. The Company
added key members to its management and purchased and developed additional
management software systems which provide current traffic provisioning and an
enhanced ability to predict future traffic volume. The Company also successfully
negotiated and continues to negotiate rate reductions and more appropriate
transmission capacity arrangements based on the Company's current and
anticipated capacity requirements. In addition, the Company's U.S. operations
began to benefit from lower termination costs as a result of utilizing the
Company's own facilities in the fourth quarter of 1996. The Company anticipates
that expanded utilization of its own facilities (as such component of RSL-NET
continues to grow) will result in more cost-efficient methods of transport for
its U.S. business. The Company also improved vendor relations by paying bills on
a more timely basis and has implemented stricter financial controls, including
ongoing customer credit reviews and managerial procedures to reduce credit
exposure, and settled certain disputes and claims with certain of its vendors.
The Company's U.S. gross margin improved during 1998 as compared to the
Company's 1997 and 1996 gross margins. Although the Company's U.S. gross margin
decreased for the year ended December 31, 1997 as compared to the year ended
December 31, 1996 due to the rapid expansion of its operations, the Company now
expects that operational efficiencies implemented to date and to be derived from
continued growth, the continued development of RSL-NET and the resulting
economies of scale should result in increased gross margins in the future.
However, the foregoing is a forward-looking statement and there can be no
assurances in this regard. See 'Risk Factors--Short Operating History; Entrance
into Newly Opening Markets; Margins', '--Inability to Predict Traffic Volume'
and '--Risks Associated with Rapidly Changing Industry.'
As of June 30, 1998, the Company had recorded approximately $147.5 million
of goodwill in connection with its U.S. acquisitions (including RSL North
America, Cyberlink, LDM and Delta Three).
33
<PAGE>
Goodwill represents the excess of cost over the fair value of the net assets of
acquired entities. The Company's component cost and purchase price allocation
for U.S. acquisitions are as follows:
<TABLE>
<CAPTION>
COMPONENT COST AND
PURCHASE PRICE ALLOCATION
-------------------------
($ IN MILLIONS)
<S> <C>
ASSETS ACQUIRED:
Cash and cash equivalents.......................... $12.4
Accounts receivable................................ 13.9
Telecommunications equipment....................... 5.3
Deposits and others................................ 2.8
Intangible assets--goodwill........................ 147.5
LIABILITIES ASSUMED:
Accounts payable and other long-term liabilities... 64.8
Long-term debt..................................... 4.7
EQUITY:
Acquisition of minority interest................... 25.5
Increase to shareholders' equity................... 41.3
</TABLE>
EUROPE. EU 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 Europe nevertheless provides an opportunity for the Company
to provide a range of services immediately in many countries, while putting in
place adequate infrastructure to capitalize on final deregulation if and when it
occurs. The Company can provide value-added services before interconnection is
available and, in certain EU countries, 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 PSTN to
the Company's switches. See 'Business--European International Long Distance
Mechanics.'
As of June 30, 1998, the Company had recorded an aggregate of approximately
$61.9 million of goodwill in connection with its European acquisitions. Goodwill
represents the excess of cost over the fair value of the net assets of acquired
entities. The Company's component cost and purchase price allocation for its
European acquisitions are:
<TABLE>
<CAPTION>
COMPONENT COST AND
PURCHASE PRICE ALLOCATION
-------------------------
($ IN MILLIONS)
<S> <C>
ASSETS ACQUIRED:
Cash............................................... $ 5.9
Accounts receivable................................ 6.2
Telecommunications equipment....................... 4.5
Deposits and others................................ 5.8
Intangible assets--goodwill........................ 61.9
LIABILITIES ASSUMED:
Accounts payable and other long-term liabilities... 13.5
Lease commitments.................................. 2.4
</TABLE>
34
<PAGE>
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 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,
-------------------------------------------
SIX MONTHS ENDED
PREDECESSOR JUNE 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 $ 69,889 $ 159,943
Percentage of consolidated revenues............ 100.0% 99.2% 75.8% 64.7% 63.9% 53.6%
Cost of services............................... (4,923) (17,367) (76,892) (176,780) (63,928) (136,227)
------- ------- -------- --------- --------- ---------
Gross profit (loss)............................ (221) 1,094 8,951 17,738 5,961 23,716
Selling, general and administrative expenses... (2,395) (7,444) (17,606) (38,207) (11,550) (26,235)
Depreciation and amortization.................. (240) (619) (3,047) (5,650) (2,580) (3,908)
------- ------- -------- --------- --------- ---------
Loss from operations........................... $(2,856) $(6,969) $(11,702) $ (26,119) $ (8,169) $ (6,427)
------- ------- -------- --------- --------- ---------
------- ------- -------- --------- --------- ---------
</TABLE>
Prior to 1997, the Company's revenues had been primarily derived from its
operations within the United States. The Company's U.S. revenues result
primarily from the sale of long distance voice services on a wholesale basis to
other carriers, on a retail basis to commercial customers and on a bulk discount
basis to distributors of prepaid calling cards. The Company has experienced, and
expects to continue to experience, significant month to month changes in
revenues generated by its carrier customers. The Company believes such carrier
customers will react to temporary price fluctuations and spot market
availability that will impact the Company's carrier revenues. The Company has
shifted its marketing focus in the United States to small and medium-sized
businesses and has restructured its pricing of wholesale services to other
carriers. The Company 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 from its recent
acquisition of operations in Canada. See 'Risk Factors--Dependence on Carrier
Customers' and '--Overview.'
35
<PAGE>
EUROPEAN OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 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 $ 32,286 $ 83,951
Percentage of consolidated revenues............ 0.8% 24.2% 24.5% 29.5% 28.2%
Cost of services............................... (143) (21,569) (59,516) (26,252) (70,494)
------- -------- ----------- --------- ---------
Gross profit................................... 13 5,845 14,137 6,034 13,457
Selling, general and administrative expense.... (539) (17,377) (43,004) (20,607) (38,000)
Depreciation and amortization.................. (12) (1,906) (7,038) (2,404) (8,231)
------- -------- ----------- --------- ---------
Loss from operations........................... $ (538) $(13,438) $ (35,905) $ (16,977) $ (32,774)
------- -------- ----------- --------- ---------
------- -------- ----------- --------- ---------
</TABLE>
The Company commenced European operations in certain countries in the
second quarter of 1996 and has since established operations in additional
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. 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--Regulatory Environment.'
ASIA/PACIFIC RIM OPERATIONS
<TABLE>
<CAPTION>
INCEPTION SIX MONTHS
(APRIL 1997) ENDED
THROUGH JUNE 30,
JUNE 30, 1997 1998
------------- -------------
(IN THOUSANDS EXCEPT
PERCENTAGE OF CONSOLIDATED
REVENUES)
<S> <C> <C>
Revenues.......................................................................... $ 7,186 $54,063
Percentage of consolidated revenues............................................... 6.6% 18.1%
Cost of services.................................................................. (6,616) (44,912)
------------- -------------
Gross profit...................................................................... 570 9,151
Selling, general and administrative expenses...................................... (1,370) (10,787)
Depreciation and amortization..................................................... (125) (2,243)
------------- -------------
Loss from operations.............................................................. $ (925) $(3,879)
------------- -------------
------------- -------------
</TABLE>
36
<PAGE>
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. In March 1997, the Company incorporated
RSL Japan to initiate the Company's operation in Japan.
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 $538,000 in revenues from their acquisition in
August 1997 through June 30, 1998.
COST OF SERVICES
The Company's cost of services is comprised of costs associated with
gaining local access and the transport and termination of calls over RSL-NET.
The majority of the Company's cost of services are variable, including local
access charges and transmission capacity leased on a per-minute of use basis.
The Company 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. 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. By integrating its operations in this
manner, the Company expects to continue to improve its gross margins. For a
discussion of important factors that adversely affect the Company's gross
margins, see 'Risk Factors--Short Operating History; Entrance into Newly Opening
Markets; Margins,' '--Inability to Predict Traffic Volume' and '--Dependence on
Carrier Customers,' '--Overview' in this section and 'Business--Network
Strategy.' While the Company intends to purchase or construct intranational
transmission facilities where such facilities are available, 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.
The Company's cost of services is affected by the volume of traffic
relative to its owned facilities and facilities leased on a point-to-point fixed
cost basis and capacity leased on a per minute basis with volume discounts. To
the extent that volume exceeds capacity on leased facilities that have been
arranged for in advance, the Company is forced to acquire capacity from
alternative carriers on a spot rate per-minute ('overflow') basis at a higher
cost. Acquiring capacity on an overflow basis has a negative impact on margins,
but enables the Company to maintain uninterrupted service to its customers. See
'Risk Factors--Short Operating History; Entrance into Newly Opening Markets;
Margins,' and '--Inability to Predict Traffic Volume.'
EFFECT OF DEREGULATION ON EUROPEAN COST OF SERVICES
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. In countries that are not substantially deregulated, the Company's
access to the local exchange network is subject to more expensive means (i.e.,
leased lines or dial-in access). This results in higher costs to the Company for
carrying international traffic originating within a country and terminating in
another country. In addition, local regulations in many countries restrict the
Company from purchasing capacity on international cable and fiber systems. The
Company must instead either
37
<PAGE>
enter into long-term lease agreements for international capacity at a high fixed
cost or purchase per-minute of use termination rates from the dominant carrier.
Deregulation in countries in which the Company operates is expected to permit
the Company to (i) interconnect its switches with the local exchange network and
(ii) purchase its own international facilities. The Company believes that as a
result of deregulation, its cost structure will improve. Deregulation is also
expected to permit the Company to terminate international inbound traffic in a
country which will result in an improved cost structure for the Company as a
whole. However, the foregoing is a forward-looking statement and there can be no
assurance that deregulation will proceed as expected or lower the Company's cost
of services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The Company's selling, general and administrative expenses consist of costs
incurred to support the continued expansion of RSL-NET, the introduction of new
services and the provision of ongoing customer service. These costs are
principally comprised of costs associated with employee compensation, occupancy,
insurance, professional fees, sales and marketing (including sales commissions)
and bad debt expenses. In addition, as the Company commences operations in
different countries, it incurs significant start-up costs, particularly for
hiring, training and retention of personnel, leasing of office space and
advertising. In addition, the Company's selling, general and administrative
expense includes the settlement of various claims and disputes relating to
pre-acquisition periods.
The Company has grown and intends to continue to grow by establishing
operations in countries that are in the process of being deregulated and that
originate and terminate large volumes of international traffic or offer other
strategic benefits. Each of the Company's operations is in a different stage of
development. The early stages of development of a new operation involve
substantial start-up costs in advance of revenues. Upon the commencement of such
operations, the Company generally incurs additional fixed costs to facilitate
growth. The Company expects that during periods of significant expansion,
selling, general and administrative expenses will increase materially.
Accordingly, the Company's consolidated results of operations will vary
depending on the timing and speed of the Company's expansion strategy and,
during a period of rapid expansion, will not necessarily reflect the performance
of the 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 $7.0 million for the year ended December 31, 1997 and for the six
months ended June 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.
The Company incurs settlement costs when it exchanges traffic via operating
agreements with foreign correspondents. These costs currently represent a small
portion of total costs; however, as the Company's international operations
increase, it expects that these costs will become a more significant portion of
its cost of services. Such costs are settled by utilizing a net settlement
process with the Company's foreign correspondents comprised of special drawing
rights ('SDRs'). SDRs are the established method of settlement among
international telecommunications carriers. The SDRs are valued based upon a
basket of foreign currencies and the Company believes that this mitigates, to
some extent, its foreign currency exposure.
The Company has monitored and will continue to monitor its currency
exposure. See 'Risk Factors--Devaluation and Currency Risks.'
38
<PAGE>
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
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
REVENUES. Revenues increased to $298.2 million for the six months ended
June 30, 1998 compared to $109.4 million for the six months ended June 30, 1997,
an increase of 173%. This increase is due primarily to an increase in the
Company's U.S. revenues from $69.9 million for the six months ended June 30,
1997 to $159.9 million for the same period this year and the Company's European
revenues, which increased from $32.3 million for the six months ended June 30,
1997 to $84.0 million for the same period this year. The Company had revenue
generating operations in the United States, 14 European countries, Venezuela,
Australia and Japan during the first six month period of 1998. The increase in
the Company's U.S. revenues was primarily due to the LDM acquisition, 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, acquisitions and an increase in the European customer base. Revenues from
the Company's Australian operations increased to $54.1 million for the six
months ended June 30, 1998, compared with $7.2 million for the same period of
1997 as a result of various acquisitions which had taken place throughout the
period.
COST OF SERVICES. Cost of services increased to $251.9 million for the six
months ended June 30, 1998 from $96.8 million for the six months ended June 30,
1997, an increase of 160%. 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 84.5% for the six
months ended June 30, 1998 from 88.5% for the six months ended June 30, 1997.
The decrease in cost of services as a percentage of revenues is primarily
attributable to the improvement in the Company's U.S. operations' costs of
services which represented 54.1% of the Company's total cost of services in the
period. 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.
GROSS MARGINS. The Company's consolidated gross margins increased to 15.5%
for the six months ended June 30, 1998 from 11.5% for the six months ended June
30, 1997. This increase in gross margins was primarily a result of lower
termination rates to the Company's most highly trafficked destinations and the
higher profitability contribution from its small and medium sized customer base
in the Company's U.S. operations. Gross margins for the Company's U.S.
operations increased to 14.8% for the first six month period of 1998 from 8.5%
for the first six month period of 1997. Gross margins for the Company's European
operations decreased to 16.0% for the first six month period of 1998 from 18.7%
for the first six month period of 1997. This reduction in gross margins for the
Company's European operations is primarily attributed to problems the Company
experienced in purchasing capacity in Germany and France due to certain delays
in 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
39
<PAGE>
prepaid operations in Germany and France. The Company believes that these
capacity problems were temporary and have since been corrected.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. SG&A expense for the six
months ended June 30, 1998 increased by $41.6 million, or 109%, to $79.8 million
from $38.2 million for the six months ended June 30, 1997. This increase is
primarily attributable to costs of start-ups in and expansion of the Company's
European operations and the hiring of new personnel in Europe and Australia. Due
to a greater proportion of start-up and expansion costs in Europe, the Company's
European operations generated $38.0 million or 47.6% of the Company's
consolidated SG&A for the six months ended June 30, 1998, although such
operations accounted for only 28.2% of the Company's total revenues in such
period. SG&A expense will continue to increase as a result of start-up costs and
infrastructure expansion attributable to new local operations.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense increased 136% to $21.1 million for the six months ended June 30, 1998
from $9.0 million for the six months ended June 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 $10.8 million for the six
months ended June 30, 1998 from $7.1 million for the six months ended June 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 $33.3 million for the six
months ended June 30, 1998 from $19.3 million for the six months ended June 30,
1997, primarily as a result of interest related to the 1998 Notes.
NET LOSS BEFORE EXTRAORDINARY ITEM. Net loss before extraordinary item
increased to $76.5 million for the six months ended June 30, 1998, as compared
to net loss of $40.7 million for the six months ended June 30, 1997 due to the
factors described above. An extraordinary item of $20.8 million for the six
months ended June 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 six month period ended June 30,
1997.
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 same period this year 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 same period this year. 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
acquisitions. 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 and acquisitions.
COST OF SERVICES. 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 represent 66.6% of the
Company's total cost of services. The Company's European operations generated
greater gross margins (19.2% for the year ended December 31, 1997) than the
Company's U.S. operations (9.1% for the year ended December 31, 1997).
40
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GROSS MARGINS. The Company's consolidated gross margins decreased to 11.8%
for the year ended December 31, 1997 from 13.1% for the year ended December 31,
1996. Gross margins in the United States decreased to 9.1% from 10.4% for the
year ended December 31, 1997 as compared to the same period in 1996. Gross
margins in the Company's European operations decreased to 19.2% for the year
ended December 31, 1997 from 21.3% for the year ended December 31, 1996.
Although the Company anticipated U.S. and European gross margin improvements
during 1997, rapid growth in excess of the Company's expectations continued to
cause traffic overflow and gross margin pressure.
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 was primarily attributable to the reasons
previously provided for revenues and cost of services above. 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% in the
comparable period in the prior year. As a percent of European revenues, the
Company's European selling, general and administrative expense decreased to
50.4% for the year ended December 31, 1997 from 60.6% in the comparable period
in 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.
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 Notes and the proceeds from the Company's initial public offering of Class
A Common Stock completed in October 1997 (the 'Initial Public Offering.')
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. Interest expense will increase subtantially in future periods
due to the interest payments on the 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
41
<PAGE>
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. 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 which generated greater gross margins (21.3% in 1996) than the
Company's U.S. operations (10.4% in 1996) and, to a lesser extent, to a decrease
in overflow traffic and increased utilization of the Company's operating
agreements.
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 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 six months ended
June 30, 1998 totaled $108.2 million compared with $45.2 million for the same
period in 1997. Capital expenditures for the six months ended June 30, 1998 were
$41.8 million compared with $13.9 million for the comparable period in 1997.
These capital expenditures are principally for switches, fiber, and related
telecommunications equipment. Funds expended for acquisitions were $47.7 million
during the six months ended June 30, 1998 compared with $5.5 million for the six
months ended June 30, 1997. At June 30, 1998, the Company had $303.0 million of
working capital as compared to $90.7 million on June 30, 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
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<PAGE>
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 Initial Public Offering.
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 $690.8 million at June 30,
1998, of which $682.9 million represented long-term debt and $7.9 million
represented short-term debt. The Company's indebtedness was approximately $304.6
million at December 31, 1997, of which $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
Communications PLC ('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. The Indentures
under which these debt securities were issued contain 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' and '--DM Notes.'
In connection with the issuance of the 12 1/4% Senior Notes, RSL PLC was
required to purchase and maintain restricted marketable securities, which are
held by the indenture trustee for these Notes, in order to secure the payment of
the first six scheduled interest payments on these Notes. The market value of
such restricted marketable securities was approximately $68.9 million at
December 31, 1997 and approximately $51.9 million at June 30, 1998. The market
value of such securities at August 24, 1998, as adjusted to reflect the
redemption of $127.5 million of the 1996 Notes, was $31.9 million.) See
'Description of Certain Indebtedness--1996 Notes.'
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.
Approximately $3.6 million of the commitment under the facility was utilized at
June 30, 1998 and at the date of this Prospectus. The Revolving Credit 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
$2.8 million outstanding under this facility at June 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 certain of the Company's subsidiaries an aggregate of approximately $50.0
million vendor financing facility to fund the purchase of additional capital
equipment. At June 30, 1998, this facility was fully utilized. Borrowings from
this vendor accrue interest at a rate of LIBOR plus either 5.25% or 4.5%
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.
If market conditions are not favorable, the Company believes that the net
proceeds from the Offerings, 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 well as
continuing net losses, for approximately 12 months. In addition, 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
consummates acquisitions in addition to those currently contemplated or
identifies additional required or desirable infrastructure investment, if the
Company experiences unanticipated costs or competitive pressures or if the net
proceeds from the Offerings, together with the remaining proceeds of prior
43
<PAGE>
securities offerings and availability under its revolving credit facilities, and
vendor financing facility otherwise prove to be insufficient. See 'Risk
Factors--Historical and Future Net Operating Losses and Negative EBITDA; Need
for Additional Capital; Substantial Indebtedness; Ability to Service
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 six month period ended June 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 six months ended June 30,
1998 and June 30, 1997 of $7.0 million and $0.5 million, respectively,
represented foreign currency translation adjustment. Accumulated other
comprehensive loss included in the accompanying condensed consolidated balance
sheet as of June 30, 1998 and June 30, 1997 was $12.3 million and $1.1 million,
respectively, consisting of the accumulated foreign currency translation
adjustment.
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.
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 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.
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. In
particular, 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 and that all of its computer systems will be fully Year 2000 compliant
before the end of 1999. In addition, the Company is currently in the process of
developing contingency plans with regard to potential Year 2000 problems.
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<PAGE>
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. See 'Risk Factors--Dependence on Effective Information Systems;
Year 2000 Technology Risks,' 'Business--North American Operations--U.S.
Operations' and '--European Operations--General.'
45
<PAGE>
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 was formed in 1994 by Ronald S. Lauder
and Itzhak Fisher, and has since grown rapidly through acquisitions, strategic
investments, joint ventures and alliances, as well as through the start-up of
its own operations in key markets. The Company currently has revenue generating
operations in 19 countries. These countries accounted for approximately 68% of
all international long distance telecommunications minutes originated worldwide
in 1996.
The Company's consolidated revenues were $300.8 million for the year ended
December 31, 1997 and $298.2 million for the six months ended June 30, 1998, as
compared to $109.4 million for the six months ended June 30, 1997. The Company's
consolidated gross margins were 11.8% for the year ended December 31, 1997 and
increased to 15.5% for the six months ended June 30, 1998, as compared to 11.5%
for the six months ended June 30, 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.
NORTH AMERICA
The Company began operations in 1995 in the United States, 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.
The Company's U.S. operations have grown rapidly. Revenues from the
Company's U.S. operations, generated principally from carriers, commercial
accounts and pre-paid calling cards, increased to $159.9 million for the six
months ended June 30, 1998 from $69.9 million for the six months ended June 30,
1997.
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 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 in the United States. WestComm's six national
switches, and the Company's New York and Los Angeles switches, are strategically
located in cities in which more than 50% of all U.S. long distance traffic
originates. 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. This development should further enhance the gross
margin of the Company's North American operations. In August 1998, the Company
acquired Westel from British Columbia Railway Company for approximately $38
million. Westel is a telecommunications company that provides regional switched
voice and data, long distance and Internet access throughout British Columbia.
Also in August 1998, the Company, together with its joint venture partner in
Mexico, acquired switches and fiber optic cable covering 14 cities in Mexico,
which are expected to be fully installed by September 30, 1998.
46
<PAGE>
EUROPE
The Company began European operations in 1996, when most member states of
the European Union ('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 four most deregulated European markets
where deregulation has occurred, 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 purchased, or is in the process of purchasing, its own international
transmission facilities directly, instead of entering 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. 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.
Revenues from the Company's European operations, generated principally from
commercial accounts and pre-paid calling cards, increased to $84.0 million for
the six months ended June 30, 1998 from $32.3 million for the six months ended
June 30, 1997. For the six months ended June 30, 1998, the Company's European
operations contributed 28.2% of the Company's total revenues as compared to
29.5% for the six months ended June 30, 1997, but the Company expects the
Company's European operations to contribute a larger percentage of the Company's
total revenues after giving effect to the Motorola Tel.co acquisition.
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 the
management holding company for Metro AG, the largest retailer 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 has acquired
approximately 7.2% of the outstanding stock of the Company, which it is required
to hold until at least April 1, 2001.
In June 1998, the Company agreed to acquire the business of Motorola Tel.co
from Motorola Inc. for approximately $100.0 million. Motorola Telcom is a
reseller of wireless services and related products in Europe with operations in
the United Kingdom, France, Germany and Belgium and has a base of over 475,000
subscribers. The Company intends to cross-sell its fixed wire and other
traditional long distance services to this customer base. The Company intends to
market long distances services to this customer base. The Company has completed
the acquisition of Motorola Tel.co's operations in the United Kingdom, Germany
and Belgium and is awaiting receipt of various required approvals in France.
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. Revenues from the Company's Australian operations increased to $54.1
million for the six months ended June 30, 1998 from $7.2 million for the six
months ended June 30, 1997, primarily as a result of various acquisitions
completed since June 30, 1997.
The Company is evaluating acquisition opportunities in other Asia/Pacific
Rim markets consistent with its global strategy.
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<PAGE>
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, a privately held conglomerate 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 involves the transmission of voice and
data from the domestic telephone network of one country to that of another.
According to industry sources, international long distance switched
telecommunications traffic worldwide increased from 28 billion minutes in 1989
to 70 billion minutes in 1996 and is projected to reach between approximately 99
and 151 billion minutes by the year 2000. The market for these services is
highly concentrated in more developed countries, with Europe and the United
States accounting for approximately 41% and 27%, respectively, of the industry's
1996 total worldwide minutes of use.
International telecommunications is currently recognized as one of the
fastest growing and most profitable segments of the long distance
telecommunications industry, having experienced a compounded growth in total
minutes of 14.0% per annum from 1989 to 1996. 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, and Analysys Ltd., a
telecommunications industry consulting group, project this trend to continue
with an annual growth rate between approximately 11% and 17% through the year
2000.
The size of each market in which the Company currently operates or is in
the process of commencing operations is set forth below.
<TABLE>
<CAPTION>
COUNTRY'S
1996 MARKET COUNTRY'S PERCENTAGE
SIZE IN OF 1996 GLOBAL
COUNTRY OF MILLIONS OF INTERNATIONAL
OPERATION MINUTES(1) TRAFFIC
- ------------------- ------------ --------------------
<S> <C> <C>
USA................ 18,874 27.0
Germany............ 5,100 7.3
UK................. 4,569 6.5
France............. 3,116 4.5
Italy.............. 2,124 3.0
Switzerland........ 1,936 2.8
Japan.............. 1,698 2.4
The Netherlands.... 1,534 2.2
Australia.......... 1,305 1.9
Belgium............ 1,228 1.8
Spain.............. 1,189 1.7
Mexico............. 1,071 1.5
Sweden............. 1,026 1.5
Austria............ 960 1.4
Canada............. 915 1.3
Denmark............ 573 0.8
Portugal........... 340 0.5
Finland............ 332 0.5
Luxembourg......... 249 0.4
Venezuela.......... 139 0.2
------------ --------
48,278 69.2%
</TABLE>
(Footnote on next page)
48
<PAGE>
(Footnote from previous page)
- ------------------
(1) All data, with the exception of U.S. outbound traffic, were taken from
Telegeography 1997/1998, which is published by Telegeography, Inc. and the
International Telecommunication Union. U.S. data were derived from FCC Rule
Section 43.61 filings which are publicly available.
The increasing pace of deregulation in telecommunications is evidenced by
the recent 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 such enactment. 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.
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PROJECTED GROWTH OF INTERNATIONAL LONG DISTANCE VOICE TRAFFIC
[Compound Annual
Growth Rate
16.9% of Minutes of Use*]
Billions of Outgoing Minutes
1997 1998 1999 2000
---- ---- ---- ----
Europe 33.2 37.7 42.9 48.8
USA & Canada 27.9 32.8 38.5 45.4
Asia/Pacific Rim 14.8 17.8 21.6 26.2
Other 18.6 21.9 25.8 30.5
Total 94.5 110.2 128.8 150.9
- ------------------
Source: Analysys Ltd.
* Prices have declined and are expected to continue to decline. Accordingly,
growth in revenues is expected to be substantially less than growth in
minutes. The data presented above constitutes a forward-looking statement.
Important factors that could cause actual minutes of use to differ materially
from the forward-looking data above are noted herein. See 'Risk Factors--Risks
Associated with Rapidly Changing Industry' and '--Government Regulatory
Restrictions.'
U.S. INTERNATIONAL LONG DISTANCE MARKET
The U.S. international long distance switched telecommunications market
accounted for approximately 27% of global international long distance call
originations in 1996 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.
The profitability of the traditional U.S.-originated international long
distance market is principally driven by the difference between settlement rates
(i.e., the rates paid to other carriers to terminate an international call) and
billed revenues. Increased competition arising from deregulation and
privatization
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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.
Although the Company focuses on the international telecommunications
market, it also provides domestic long distance services to many of its
customers. According to the FCC, the U.S. domestic long distance market grew in
total minutes at an annual compound rate of approximately 7.6% from 1989 to 1995
while the U.S.-originated international long distance market grew in total
minutes at an annual compound rate of approximately 15.4% during the same
period. Although the domestic market is much larger, the profit per minute of
use for international traffic has generally been higher than for domestic
traffic. See '--North American Operations--U.S. Operations.'
EUROPEAN INTERNATIONAL LONG DISTANCE MARKET
The European international long distance market is the largest in the
world, accounting for approximately 29 billion minutes or approximately 41% of
worldwide minute originations in 1996 based on minutes.
The European PTTs have historically had monopolies on providing telephone
services, making the cost of international telephone calls from Europe much
higher than similar calls from the United States. In addition, the Company
believes that many PTTs have used profits from international traffic to
subsidize domestic calling. Customers in many European markets are not able to
obtain a number of value-added features taken for granted in the United States,
such as itemized billing, touch tone dialing, voice mail and other enhanced
services. Deregulation, together with significant advances in technology that
have decreased the cost of providing services and allowed the provision of more
sophisticated value-added features, have made it possible for other telephone
companies to compete with the PTTs in providing international voice
telecommunications services.
A 1990 EC directive (the '1990 Directive') required each EU member state to
liberalize by 1992 all telephony services offered over its PSTN, with the
exception of basic 'voice telephony' and specified other services. The effect of
the 1990 Directive was that value-added services and the delivery of voice
telephony to closed user groups (i.e., to a specified group of people) were
liberalized to the extent that they do not come within the 1990 Directive's
definition of basic 'voice telephony.' Different interpretations as to whether a
service should be regarded as a value-added service or as a basic 'voice
telephony' service, and as to what constitutes a closed user group, have led to
variations among the EU member states as to what services may be delivered and
the manner in which they can be provided. In addition, certain EU member states
are late in enacting the relevant legislation 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 derogation 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
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telecommunications services. Such deregulation in the United States and the
United Kingdom has resulted in an increase in call traffic and the emergence of
multiple new telecommunications services providers of varying sizes. In
addition, significant reductions in prices, particularly for domestic long
distance calls, as well as improvement in both the services offered and the
level of overall responsiveness to customers, have occurred. Although pricing
has become competitive in both countries, pricing levels continue to permit
services to be profitably provided. There can be no assurance, however, that
this will continue to be the case.
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. Hong Kong
also licensed three new carriers in 1997 to provide local service and Singapore
has stated its intention to license 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, Chile,
Mexico, Peru and Venezuela. Venezuela has also legalized value-added services
and has targeted January 1, 2000 as the date for deregulation. Brazil has
privatized its PTT, Telebras, in July 1998. Brazil has also established an
independent regulator, ANATEL, to oversee the telecommunications industry. In
Mexico, the former PTT has been privatized, its exclusive long distance
concession was modified on December 10, 1990 in order to allow other
participants to render long distance services as of August 1996. Additionally,
the former PTT was bound and committed 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.
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INTERNATIONAL LONG DISTANCE MECHANICS
[ARTWORK]
A long distance telephone call generally consists of three segments:
origination, transport and termination.
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 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
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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 EU member
states, but is generally interpreted as meaning that the customer can only call
a limited predetermined group of destinations. As with prefix dialing, the
Company can make this service more transparent to the customer by programming
the customer's telephone system or installing an auto-dialer, subject to local
regulation. Given the greater number of digits required to be dialed by the
customer, however, a slight delay in placing a call cannot be avoided by this
service. Dial-in service involves a variable local access charge to route the
call to the Company's switch.
TRANSPORT
The transport of telephone calls is accomplished via land-based cables or
undersea cables, which are usually fiber optic, or by microwave radios or
satellites. A carrier can obtain half circuits on cable systems through MIUs,
IRUs or leases. In instances where a carrier has not purchased interests in a
cable prior to the time when the cable was placed in service, the carrier is
only permitted to acquire capacity on the cable through the purchase, by way of
a lump sum payment, of an IRU. The fundamental difference between an IRU holder
and an owner of MIUs is that the IRU holder is not entitled to participate in
management decisions relating to the cable system. Between two countries, a
carrier from each country owns a 'half-circuit' of a cable, essentially dividing
the ownership of the cable into two equal components. In the event that the
Company commences utilizing its remaining operating agreements, it will have to
either invest in additional IRUs or MIUs, or acquire satellite capacity, to
enable it to connect to a carrier in such countries. Additionally, any carrier
may generally lease circuits on a cable from another carrier with an MIU or IRU.
Satellite circuits are also obtained on a leased basis.
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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 America
- --US 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 foreign
carriers with less than 50% market share in each relevant market on the foreign
end 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. For example, in the United States, before the deregulation of
telecommunications services, AT&T was the only carrier that had operating
agreements with foreign carriers. However, after deregulation, MCI and Sprint,
over a period of years, each negotiated its own operating agreements with
foreign carriers. Since then, a limited number of other U.S.-based companies,
including the Company, have been able to secure operating agreements with
foreign carriers. Operating agreements are expected to become increasingly
available as international markets deregulate and new carriers that are seeking
business partners emerge in countries previously subject to a PTT monopoly or
other limited competition market.
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See 'Risk Factors--Risks Associated with Rapidly Changing Industry' and '--Risk
of Loss, or Diminution of Value, of Operating Agreements.'
For an international long distance company without operating agreements or
its own international network, the profitability of originating international
traffic is a function of, among other things, the difference between its billing
rates and the rates it must pay another carrier to transport and terminate such
traffic.
For a company with operating agreements that provide for return traffic,
the profitability of originating international traffic will be a function of,
among other things, the volume of its originating traffic and its billing rates,
as well as the relative volume of its originating and return traffic minutes.
Under the settlement process, a carrier which originates more traffic than it
receives, will, on a net basis, make payments to the corresponding carrier,
while a carrier which receives more traffic than it originates will receive
payments from the corresponding carrier. If the incoming and outgoing flows of
traffic are equal in the number of minutes transmitted, there is no net
settlement payment to either carrier. Therefore, in addition to all of the other
factors that can influence the profitability of a long distance carrier, the
profitability of an international carrier is dependent on its relative flows of
incoming and outgoing traffic.
Return traffic can be more profitable than outgoing traffic when there is a
significant disparity in the cost of terminating traffic between the two
countries that are party to an operating agreement. This is particularly true
for a U.S. carrier because the actual cost for a U.S. carrier to terminate a
call in the United States generally is less expensive than the settlement cost
under an operating agreement with any foreign carrier and return traffic does
not involve any origination costs. The receipt of more profitable return traffic
reduces the aggregate cost to a carrier to transport traffic pursuant to an
operating agreement, and carriers with significant levels of return traffic can
price their international transport and termination services at a discount to
the settlement cost and recover the discount on the return traffic.
TERMINATION
The termination of an international call occurs after the call has been
transported to an international carrier in the destination country. The
international carrier then transports the call to a local exchange network where
it is then terminated. In many countries, only the PTT is licensed to provide
international long distance service and local exchange services.
COMPANY STRATEGY
The Company's strategic objective is to create a low-cost, facilities-based
global network that provides high quality international telecommunications
services to small and medium-sized businesses in key markets. The key elements
of the Company's strategy to achieve this objective are as follows.
FOCUS ON PROVIDING INTERNATIONAL LONG DISTANCE SERVICES
The international long distance public switched telecommunications market
generated an estimated $61.3 billion in revenue and 70.0 billion minutes in 1996
with minutes of use projected to grow at a rate of between approximately 11% and
approximately 17% per annum through the year 2000. The Company currently has
significantly less than a 1% share of this market. Although prices are expected
to decline, resulting in substantially slower growth in revenues, the
international long distance switched telecommunications market is currently
recognized as one of the fastest growing and most profitable segments of the
long distance industry. The Company provides a broad array of international and
domestic services but focuses on providing services to end-users which generate
significant calling traffic between countries to capitalize on (i) the continued
growth of international traffic and (ii) the margin opportunity created by the
high end-user rates currently maintained by PTTs and other dominant carriers. If
any of the factors contributing to the growth of traffic or the pricing scheme
by the PTTs and other major carriers should cease to apply, growth and
profitability in the international market and the Company's prospects would be
negatively impacted. The United States market, one of the most deregulated and
competitive markets in the world, illustrates the greater profitability of
international traffic versus domestic traffic in the current market and
regulatory environment. Based on FCC statistics and other available information,
the Company estimates that industry-wide gross profit (before access
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charges) in 1996 for U.S.-originated traffic averaged $.29 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.'
ENHANCE DISTRIBUTION CHANNELS
The Company has developed a wide range of marketing and distribution
channels in order to expand its customer base, particularly in its target market
of small to medium-sized businesses. The Company's marketing and distribution
channels include direct sales forces, telemarketing organizations, agents and
resellers, and marketing alliances with service providers, such as Internet
service providers and wireless service providers. The Company has been
innovative in seeking marketing partners to better identify potential customers
and penetrate markets on a cost-efficient basis, such as through its alliance
with Metro Holding. In addition, in Australia, the United Kingdom, Germany and
Belgium, the Company has commenced efforts to cross-sell fixed wire services to
its wireless subscribers and wireless services to its fixed wire-customers and
in the United States the Company intends to cross-sell data services to certain
of its existing customers.
DEVELOP A COST COMPETITIVE GLOBAL NETWORK
By integrating its current and future POPs into RSL-NET, the Company
believes that it will be able to originate, transport and terminate traffic
utilizing its own network, thereby bypassing the high costs associated with the
transport of the international portion of a call through a third party carrier.
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 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 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.
TARGET SMALL AND MEDIUM-SIZED BUSINESSES
The Company focuses on offering high quality products and services to small
and medium-sized businesses that originate in excess of $500 in international
telephone calls per month. The Company believes that this segment offers
significant market opportunities because it has traditionally been underserved
by the major global telecommunications carriers and the PTTs, which offer their
lowest rates and best services primarily to higher volume multinational business
customers. The Company believes that in most markets, small and medium-sized
businesses account for a significant percentage of international calling
traffic. In addition, the Company continues to offer services to carriers to
most effectively utilize its network. Through offering a broad range of
interrelated services combined with a commitment to 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 estimates that there are 15 million small and
medium-sized businesses in the EU and that
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businesses that employ fewer than 100 workers in the aggregate account for more
than one half of all EU employment and almost half of all business revenue. In
addition, Europe's small to medium-sized businesses are projected to produce
total telecommunications revenues larger than those of the major multinational
business sector. For the six-month period ended June 30, 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.
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ESTABLISH OPERATIONS IN KEY MARKETS
The Company establishes operations in markets that (i) originate or
terminate significant levels of international traffic and (ii) are, or are in
the process of being, deregulated. The Company has structured its Local
Operators to be managed independently and expects its Local Operators to be
separately profitable, while benefiting from centralized strategic, financial
and network support provided by the Company. The Local Operators are each
developed to be stand-alone operations shaped by local market conditions and
preferences. The Company currently provides each Local Operator with centralized
business development, financial, and marketing support and has commenced a plan
of operation to provide billing and RSL-NET management. See '--Headquarters
Operations.' The Company currently operates or is in the process of commencing
operations in 20 markets that, in the aggregate, accounted for approximately 70%
of all international long distance telecommunications minutes in 1996. By
expanding its operations into additional key markets, in which significant
volumes of international traffic are originated and terminated and which are in
the process of deregulation, the Company seeks to rapidly establish a broad
market coverage. The Company currently plans to initiate operations in
approximately 10 additional countries over the next two years which, together
with the markets in which the Company currently operates, accounted for in
excess of 80% of the 1996 worldwide international long distance minutes of use.
The Company enters additional countries primarily by acquiring a
controlling interest in existing companies that are either operating in or are
in the process of establishing operations in the international
telecommunications industry in that country or by means of a start-up operation
which the Company funds and manages on its own or together with a local
strategic partner. In the case of an acquisition, the Company seeks to acquire
an international carrier which matches the criteria set forth below. See
'--Pursue Strategic Acquisitions and Alliances.' In the case of the
establishment of new operations, the Company identifies an experienced and
professional management team to develop the new operation. In the formation of a
joint venture, the Company identifies a local strategic partner with a good
reputation and knowledge of the local marketplace.
ENTER MARKETS EARLY
The Company enters new markets ahead of full deregulation in order to gain
competitive advantages over carriers which attempt to enter a market after
deregulation is complete. These advantages include (i) the development of
multiple sales and distribution channels and the establishment of a customer
base prior to widespread competition, (ii) the early acquisition of scarce
experienced management, including technical and marketing personnel, and (iii)
the achievement of name recognition as one of the early competitors to the
incumbent PTTs. The Company employs multiple marketing and distribution
channels, including direct sales forces, telemarketing organizations, agents and
resellers, while also forming marketing alliances with other service providers,
such as Internet service providers and mobile service providers.
The Company believes that its early entry into deregulating markets 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 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
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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.'
PURSUE STRATEGIC ACQUISITIONS AND ALLIANCES
The Company intends to enter additional markets and expand its operations
through acquisitions, joint ventures, strategic alliances and the establishment
of new operations. The Company is continuously reviewing acquisition
opportunities, and seeks to acquire control of businesses with an established
customer base, compatible operations, licenses to operate as an international
carrier, experience with additional or emerging telecommunications products and
technologies and/or experienced management. The Company intends to pursue
acquisitions which it believes will expand or enhance its current operations by
providing the Company with the opportunity to enter additional key markets or to
strengthen its operations in an existing market. In addition, the Company seeks
to enter into strategic alliances which the Company believes will enhance its
ability to grow its business. Examples include the Company's joint venture with
the Cisneros Group and strategic alliances with each of Metro Holding and
Ericsson, the acquisition of Delta Three and the recent acquisitions of Motorola
Tel.co, WestComm and Westel.
The Company believes that many of the emerging carriers in developing
countries, as well as certain recently privatized PTTs, are likely to seek
alliances, partnerships or joint ventures to compete more effectively in their
local markets and abroad. The Company actively seeks out opportunities for
alliances with such carriers to expand the scope of its network and improve its
competitive abilities. The Company believes that it is uniquely positioned as an
attractive alternative strategic partner for such carriers as opposed to the
mega-carriers such as Uniworld, Concert and Global One.
LEVERAGE EXPERTISE OF MANAGEMENT TEAM
The Company has strengthened its management team by attracting experienced
management from the telecommunications industry to enhance its regional
expertise and to facilitate the integration of its regional operations. Many of
its key managers have had significant experience with incumbent providers, as
well as 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 ON-LINE AND IP TELEPHONY SERVICE OFFERINGS
Through its subsidiary, Delta Three, the Company intends to continue to
expand its IP telephony service offering by increasing its investment in
Internet gateway servers and increasing its sales and marketing channels. Delta
Three's IP telephony offering is based on utilizing IP protocol as a
transmission standard for voice communications over the public Internet as well
as private intranets, extranets and dedicated leased lines, at substantially
reduced transmission and termination costs. One of the services offered by Delta
Three allows customers to place long distance and international phone calls
using standard telephones, without requiring any additional equipment. Delta
Three also currently 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, the Company plans to develop value added
services on the Web 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.'
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NETWORK
The Company generally utilizes a single switch technology platform for its
international gateway switches comprised of state-of-the-art Ericsson AXE-10
switches. The Company believes that a single switch platform 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 other global
carriers which may employ multiple switch technologies. The Company is also
pursuing alternative transmission technologies such as the Internet in order to
minimize its operating costs. See '--IP Telephony Operation--General.'
OWNED FACILITIES
The Company's owned facilities include switches and interests in
international fiber optic cable systems. The Company's 14 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. The Company's existing international gateway switches conform to
international signaling and transmission standards provided for in CCITT
recommendations and allow the Company to interconnect its network to existing
PTT and carrier networks around the world while maintaining quality and
dependable services. The Company's switch and related equipment purchases have
been financed by Ericsson and the Company believes it has developed a favorable
working relationship with Ericsson which will enable the Company to benefit from
Ericsson financing for future Ericsson purchases, although there can be no
assurance that this will be the case. See 'Risk Factors--Dependence on Equipment
Supplier.' The Company's switching facilities are easily expandable to
accommodate growth.
The Company also owns capacity on 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) and undersea fiber optic cable systems. The Company's
Swedish operation owns IRUs in the CANUS-1, CANTAT-3, SWE-FIN, DK-SWE,
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.
PCM agreed to acquire two strands of dark fiber (the 'Fiber') in Mexico
from Bestel Communicaciones, S.A. de CV for approximately $8.8 million. The
Fiber will be connected through 14 cities in Mexico, including Mexico City,
Guadalajara and Monterrey. Installation of the Fiber is expected to be completed
by the end of the third quarter of 1998. PCM will be accepting delivery of the
Fiber at different stages as completed.
OPERATING AGREEMENTS
The Company's operating agreements provide the Company with the ability to
transmit traffic directly to foreign carriers over jointly-owned facilities
rather than utilizing leased capacity. The Company's U.S. operations currently
hold 21 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, the Republic of Srpska, Sweden, Switzerland, Suriname and
the United Kingdom. The Company currently only transmits and terminates
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traffic pursuant to operating agreements in the Dominican Republic, the United
Kingdom, Denmark, The Netherlands, Russia, 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. See 'Risk Factors--Risk of Loss, or Diminution
of Value, of Operating Agreements.'
LEASED CAPACITY
For all routes where the Company does not own facilities or utilize
operating agreements, the Company utilizes leased capacity. In addition, the
Company has arrangements with local carriers in each country in which it
originates traffic to transmit domestic calls from its end-users to its switch.
While the Company intends to purchase or construct intranational transmission
facilities where available, and if such purchase or construction is
cost-effective and warranted by traffic patterns, a significant percentage of
its international 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
which maintain 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; Year 2000 Technology
Risks' and '--Dependence on Equipment Supplier.'
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 are,
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according to the FCC, up to 70% higher than the actual cost. The Company expects
that it will realize significant cost savings by routing an increasing portion
of its international traffic over its owned and leased facilities as opposed to
corresponding via operating agreements, in particular, once the markets in which
the Company operates deregulate sufficiently to allow interconnect. See
'Management's Discussion and Analysis of Financial Condition and Results of
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; Margins,' '--Inability to Predict Traffic Volume' and
'--Dependence on Other Carriers.'
For calls to countries where the Company does not have a Local Operator,
the Company seeks to establish and utilize an operating agreement with a local
carrier. While this method generates higher costs than transporting calls
between the Local Operators, it has the potential to generate higher margin
return minutes. The Company has not generated significant return minutes to
date. In addition, by strategically establishing its Local Operators and
obtaining operating agreements, the Company will seek to arbitrage the
differential in settlement rates between countries.
Origination and termination of traffic is accomplished through transmission
capacity leased on a per minute basis, except where the Company provides private
line service. As the Company's operations in a given country grow, the Company
generally will install additional POPs and 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
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prepaid card that entitles the customer to make phone calls on the card up to
some limit. The Company also offers prepaid calling cards that are rechargeable.
In all cases, the card number is proprietary to the customer and is secured by
means of a personal identification number. The Company currently offers these
products 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 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. See 'Risk
Factors--Dependence On Carrier Customers.' Transit traffic originates and
terminates outside of a particular country, but is transported through that
country on a carrier's network to take advantage of lower costs.
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,
video conferencing, e-mail, packet switching, LAN integration and network and
facilities management.
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 Company's local operations in each country ('Local Operators'). 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 has capitalized, and will continue to capitalize, 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
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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.
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 in
international phone calls per month). The Company has focused on industries
which traditionally have significant volumes of international traffic. The
Company believes that small and medium-sized businesses have generally been
underserved by the major global telecommunications carriers and the PTTs, which
have focused on offering their lowest rates and best services primarily to
higher volume multinational business customers. The Company offers these
companies significantly discounted international calling rates as compared to
the standard rates charged by the major carriers and PTTs.
Small and medium-sized businesses account for the majority of all
businesses and the Company believes that in most markets they account for a
significant percentage of the international long distance traffic originated in
those markets. For example, the EU estimates that in 1996 there were 15 million
small and medium-sized businesses in the EU and that businesses that employ
fewer than 100 workers accounted for more than one half of all EU employment in
1996, almost half of all business revenue and about $30 billion per year in
total telecommunications revenue. Consistent with that, it is estimated that in
the United Kingdom, companies employing fewer than 250 people spend about $6
billion to $7 billion per year on telecommunications services as compared to
about $8 billion to $9 billion per year for businesses employing in excess of
250 people and only $3 billion per year for the multinationals.
CARRIERS. The Company offers international termination and transit traffic
services to other carriers, including resellers, on a wholesale basis, as a
'carriers' carrier.' The Company's carrier customers as a group currently
provide the Company with a relatively stable customer base and thereby assist
the Company in projecting potential utilization of its network facilities. In
addition, the significant levels of traffic volume generated by such carrier
customers enable the Company to obtain large usage discounts based on volume
commitments. The Company believes that revenues from its carrier customers will
continue to represent a significant portion of the Company's overall revenues in
the future. See 'Risk Factors--Inability to Predict Traffic Volume' and
'--Dependence on Carrier Customers.'
RESIDENTIAL CUSTOMERS. The Company targets customers with high
international calling patterns. The Company intends to capitalize on global
immigration patterns to target ethnic communities, primarily for its prepaid
calling cards.
LARGE CORPORATIONS. The Company services a number of large corporations in
the United States through the WestComm acquisition and the Company intends to
continue to target large corporations on those routes where the Company's cost
structure allows it to compete effectively. See '--U.S. Operations.'
SALES CHANNELS
The Company markets its services through a variety of channels, including
sales by the Company's own direct sales force, strategic alliances with
companies that have access to significant customer bases, networks of
independent agents and distributors strategic alliances with resellers and
telemarketing sales by outside organizations, depending, in part, on local
business practices and business environment. 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. 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.
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DIRECT SALES. Most Local Operators maintain their own direct sales force.
Generally, sales representatives are compensated on a commission basis. The
Company intends to expand its direct sales force as it expands existing
operations and commences additional operations.
INDEPENDENT AGENTS. The Company also markets its services through an
indirect sales force comprised of independent agents. These agents include,
among others, companies which have a sales force or individuals marketing
related services such as telephone systems, copiers, fax machines or other
office equipment to the Company's targeted customer segments. The Company's
indirect sales force will be an increasingly important sales channel to access
the local market.
DISTRIBUTORS. The Company has relationships with a small number of
distributors in the United States as well as the Netherlands for the sale of
prepaid cards and will seek such arrangements in its other markets.
TELEMARKETING SALES. The Company's 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.
ON-LINE SALES. The Company intends to offer potential subscribers the
ability to subscribe on-line for the Company's services.
CUSTOMER MANAGEMENT
The Company strives to provide competitive pricing, high quality services
and superior customer service and believes that these factors are important to
its ability to compete effectively. The Company works closely with its customers
to develop competitively priced telecommunications and value-added services
(such as customized billing) that are tailored to their needs. The Company has
invested significant resources in developing information systems to allow it to
provide accurate and timely responses to customer inquiries. In addition, each
of the Local Operators has customer service and engineering personnel available
to address service and technical problems as they arise.
HEADQUARTERS OPERATIONS
The Company directs the operations of its subsidiaries, including the
management of the growth of current operations, the expansion of operations into
new markets, the formation of potential joint ventures and strategic alliances
and the execution of acquisitions. Identification of key markets, determination
of the vehicles through which, as well as the manner in which, the Company will
enter such markets and oversight of the implementation of these plans is also
done at the Company level. The Company is continuously reviewing and considering
investment and acquisition opportunities. The Company intends to pursue
acquisitions which it believes will expand or enhance its current operations.
All such acquisitions will be identified, negotiated and consummated at the
Company level, generally working together with local and regional management in
cases where the acquisitions supplement existing operations. In addition, the
Company seeks alliances with carriers to expand the scope of the Company's
network and improve its competitive profile.
The Company currently provides centralized financial services for all of
the Local Operators, including financial planning and analysis, cost control and
network management. The Company attempts to coordinate the acquisition of
additional transmission capacity (either leased or purchased) with the growth of
traffic volumes of each Local Operator. The Company assists in securing
financing and discounts for these expenditures as well as other capital
expenditures through its arrangements with particular vendors. The Company also
maintains global treasury functions, including the management of cash flows
between the Local Operators for the transmission of traffic between them, as
well as the allocation of working capital.
The Company expects to eventually link all of its switching facilities to a
central billing system administered at the Company level, and provide the
billing information to Local Operators which will
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then invoice the customers directly. The invoice will be branded with the
Company's name and will be payable to a Company account in the Local Operator's
country.
The Company manages the expansion of RSL-NET, including the acquisition of
additional capacity for existing operations and the integration of developing
and new Local Operators into RSL-NET. The Company coordinates the routing of
traffic on RSL-NET to effect routing on a least cost basis. Least cost routing
involves the programming of the Company's switches to transport international
calls over the route which is most likely to produce the lowest cost to the
Company without compromising call quality. The Company consolidates the least
cost routing information of each of its Local Operators to allow them to take
advantage of each others' cost structure.
The Company is in the process of coordinating the marketing activities of
the Local Operators and plans to introduce a universal brand image to create
worldwide name recognition for the Company. In addition, the Company intends to
direct the service offerings of the Local Operators to enable the Company to
provide services to a single customer in more than one country. The Company
intends to then provide the customer with a single bill and designate a primary
customer service representative to address the customer's overall needs.
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 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 280 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 sales. In addition, the Company employs a
retail and wholesale sales force dedicated to
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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 gateway switches conform to
CCITT recommendations and are directly connected to each other via leased lines
on a fixed cost, point-to-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 currently owns in its US operations IRUs in fifteen undersea
fiber optic cable systems which are the CANUS-1, CANTAT-3, PTAT-1, NPC, RIOJA 2,
RIOJA 3, ODIN 1, ODIN 2, APCN, JASAURUS, FLAG (various segments),
Estepona-Tetouan, Gemini, America's One and Taino-Carib systems and 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 fiber optic cables. 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 additional segments in the FLAG undersea fiber optic cable
systems.
The Company currently is a party to 21 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 the operating agreements in the Dominican
Republic, the United Kingdom, Denmark, The Netherlands, Russia 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. See 'Risk
Factors--Risk of Loss, or Diminution of Value, of Operating Agreements.'
The Company also operates the network management control facilities from
which the Company administers and monitors the Company's switches and facilities
and provides customer service, 24-hour network monitoring, trouble reporting and
response procedures, service implementation and billing assistance. The Company
designates a specific customer service representative for each commercial
customer to oversee the installation and maintenance of the phone equipment, the
start-up of service and problem resolution.
INFORMATION SYSTEMS AND BILLING
The Company owns and operates an Electronic Data Systems ('EDS') IXPlus
System that runs on an IBM 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
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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 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 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; Year 2000
Technology Risks.'
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COMPETITION
The Company competes with AT&T, MCI, Sprint, 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 United States based
carriers have entered into joint ventures with foreign carriers to provide
international services. In addition, certain foreign carriers have entered into
joint ventures with other foreign carriers to provide international services and
have begun to compete or invest in the United States market, creating greater
competitive pressures on the Company. The Company believes that its services are
competitive in terms of price and quality with the service offerings of its U.S.
competitors.
REGULATORY ENVIRONMENT
The Company's United States operations are subject to extensive federal and
state regulation. Federal laws and FCC regulations apply to interstate
telecommunications (including international telecommunications that originate or
terminate in the United States), while particular state regulatory authorities
have jurisdiction over telecommunications originating and terminating within the
state. There can be no assurance that future regulatory, judicial and
legislative changes will not have a material adverse effect on the Company, that
domestic or international regulators or third parties will not raise material
issues with regard to the Company's compliance or noncompliance with applicable
regulations or that regulatory activities will not have a material adverse
effect on the Company.
FEDERAL. The FCC currently regulates the Company as a non-dominant carrier
with respect to both its domestic and international long distance services.
Generally, the FCC has chosen not to exercise its statutory power to closely
regulate the charges, practices or classifications of non-dominant carriers.
Nevertheless, the FCC acts upon complaints against such carriers for failure to
comply with statutory obligations or with the FCC's rules, regulations and
policies. The FCC also has the power to impose more stringent regulation
requirements on the Company, to change its regulatory classification, to impose
monetary forfeiture and to revoke its authority. In the current regulatory
atmosphere, the Company believes that the FCC is unlikely to do so with respect
to the Company's domestic service offerings. With respect to the Company's
international services, however, it is possible that the FCC could classify the
Company as dominant for the provision of services on specific international
routes on the basis of the Company's foreign ownership and affiliations or a
determination that the Company had the ability to discriminate against U.S.
competitors. 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 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
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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 international
switched telecommunications. Such calls typically involve a bilateral,
correspondent relationship between a carrier in the United States and a carrier
in the foreign country. Until recently, the United States was one of a few
countries to allow multiple carriers to handle international calls; almost all
foreign countries authorized only a single carrier, often a state-owned
monopoly, to provide 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 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 is
estimated to be approximately 70% higher than the actual cost of terminating
international calls. Three benchmarks
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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 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 foreign carriers with less than 50% market share in each relevant
market on the foreign end should be treated as non-dominant. These open entry
policies will apply to applicants of all World Trade Oranization 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 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
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may be required for acquisitions of telecommunications operations. In the past,
the Company has sought and successfully obtained such approval for its
acquisitions.
CANADA OPERATIONS
OVERVIEW
Canada originated 900 million minutes of international traffic in 1996. The
Company operates in Canada through Westel and 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 metropolitan Toronto. The
Company's customer base in Canada consists primarily of 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 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 Ltd. 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 ATM
data products.
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. Finally, the Company is facing 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
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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.
Concurrent 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. Commencing on
October 1, 1998, the Company will be permitted to file an application with the
CRTC (as defined below) for the issuance of an international telecommunications
service license. 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 Canadian Radio-television and Telecommunications Commission
(the 'CRTC') retains a critical regulatory function in Canada. As a reseller of
telecommunications services, Westel remains subject to the jurisdiction of the
CRTC, although it is not subject to any Canadian foreign ownership and control
restrictions.
The CRTC has implemented certain non-structural safeguards to encourage
competition in the provision of long distance services. In particular, the CRTC
has required local access providers (i) to offer their underlying local
facilities to third parties prior to receiving authorization to enter the long
distance market and (ii) to offer comparable interconnection arrangements to
competing long distance service providers. However, once local access providers
satisfy the requirements imposed by the CRTC, these providers are permitted to
compete directly with long distance providers.
EUROPEAN OPERATIONS--GENERAL
OVERVIEW
The Company began European operations in 1996, when most member states of
the European Union ('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 four most deregulated European
markets where deregulation has occurred, 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 purchased, or is in the process of purchasing, its own international
transmission facilities directly, instead of entering 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. 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. In June 1998, the Company, entered into
a marketing and distribution services agreement with Metro Holding, the
management holding company for Metro AG, the largest retailer in Europe. Under
this agreement, Metro Holding will assist the Company in promoting, marketing,
selling and distributing the
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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 has acquired approximately
7.3% of the outstanding stock of the Company, which it is required to hold until
at least April 1, 2001.
In June 1998, the Company agreed to acquire Motorola Telico from Motorola
Inc. for approximately $100.0 million. Motorola Telico is a reseller of wireless
services and related products in Europe with operations in the United Kingdom,
France, Germany and Belgium and has a base of over 475,000 subscribers. The
Company has recently completed the acquisition of Motorola Telico's operations
in the United Kingdom, Germany and Belgium and is awaiting receipt of various
required approvals in France.
In July 1998, the Company acquired a minority interest in Telegate,
Europe's third largest directory information provider serving 200,000 callers a
day. Metro Holding and certain of its affiliates also own a minority interest in
Telegate. 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 Telegate interests. The number of shares of
Class A Common Stock issuable in such exchange will be based on a valuation of
the Telegate 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 Sales.'
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 gateway and domestic switches in Europe in connection
with the Year 2000 problem and the Company expects that its switches will be
Year 2000 compliant by the end of 1998.
In connection with the Motorola Acquisition, 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.
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REGULATORY ENVIRONMENT
Most EU member states are in the initial stages of deregulation.
Deregulation in these countries may occur either because the member state
decides to open up its own market (e.g., the United Kingdom, Sweden and Finland)
or because it is directed to do so by the European Commission ('EC') through one
or more directives issued thereby. In the latter case, such an EC directive
would be addressed to 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 wholesale rates and it is expected that carriers will be allowed
to compete against the PTT in the domestic long distance market, as well as the
international market. However, the implementation of this or any EC directive by
member states is subject to substantial delay. See 'Risk Factors--Government
Regulatory Restrictions.'
The EC 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 License 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 to interpret EC directives. If the
EC determines that a member state's legislation implementing an EC directive
does not adequately do so, the EC may test such interpretation through legal
proceedings in the European Court of Justice. This process is time consuming.
Accordingly, while a date has been set for the liberalization of voice telephony
services within the EU, the actual date on which liberalization actually occurs
could be months or years later. See 'Risk Factors--Government Regulatory
Restrictions.'
There also may be practical considerations in implementing a directive
which could result in a delay of its implementation, as there are considerable
doubts as to the preparedness of many EC countries for a wide-ranging change.
For example, notwithstanding the time parameters set down by relevant
Directives, the negotiation of interconnection agreements can take a significant
amount of time. Even after such agreements are negotiated and implemented,
substantial ongoing disputes with the incumbent PTTs regarding capacity, prices
and billing are to be expected.
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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.
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Although interconnect has been implemented in most countries in Europe,
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 United Kingdom originated approximately 4.6 billion minutes of
international traffic in 1996. 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 with 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.
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 Motorola
Acquisition, the Company has greatly expanded its dealer network and certain of
these dealers have entered into long-term agreements with the Company.
U.K. NETWORK ARCHITECTURE
RSL UK operates two Ericsson switches: an international planning 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. After December 1996, the Company's United
Kingdom operation acquired interests in IRUs on the UK-NL14, CANTAT-3 and
PTAT-1, GEMINI, CANUS-1, UK-GER6, RIOJA2 and RIOJA3 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.
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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 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. The Company believes its services are
competitive, in terms of price and quality, with the service offerings of its UK
competitors.
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 Resale ('ISR')
license in the United Kingdom. An ISR license allows the Company to resell
international private lines, as well as interconnect with, and lease capacity at
wholesale rates from, British Telecom and 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, it is expected that applications for
judicial review will be filed by independent service providers.
GERMAN OPERATIONS
OVERVIEW
Germany originated 5.1 billion minutes of international traffic in 1996.
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 seven 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 with 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 and medium-sized business customers, residential
customers and calling card customers. Following the granting of its Category 4
license, RSL Germany commenced the use of its interconnect and began operating
pursuant to such license.
MARKETING AND SALES
The Company employs direct sales and marketing employees in Germany. The
Company currently has five sales offices in Germany, one located in each of
Munich, Hamburg and Wiehl and two in Frankfurt. RSL Germany is expanding its
direct sales force as a part of its growth strategy by adding
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additional sales representatives. The Company currently markets its services
through a variety of channels including indirect sales, resellers and agents,
and direct sales. The Company has expanded its network of independent sales
agents in Germany through the Motorola Acquisition.
GERMAN NETWORK ARCHITECTURE
RSL Germany currently operates an Ericsson AXE 10 international gateway
switch which is connected directly to the Company's international gateway switch
in London. The Company is in the process of installing an additional eight
Ericsson ANS switches. International transmission facilities are currently
leased from other carriers. The Company has interconnects with other carriers
for 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 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. The Company believes its
services are competitive, in terms of price and quality, with the service
offerings of its German competitors.
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 European Union into national law. The TKG called for the immediate
liberalization of public switched voice telephony with effect as of January 1,
1998. Accordingly, public switched voice telephony services, previously
exclusively provided by Deutsche Telekom only, 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 mid-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 and thereby
facilitating the offering of national and international telecommunication
services by the RSL Germany network.
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DUTCH OPERATIONS
OVERVIEW
The Netherlands originated 1.5 billion minutes of international traffic in
1996. The Company operates in The Netherlands through 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 card 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 WorldCom, and from mega-carriers including Concert and Global One. The
Company believes its services are competitive, in terms of price and quality,
with the service offerings of its competitors in The Netherlands.
Assuming deregulation occurs in 1998, it is expected that alternative
networks currently under construction will become available to route and
terminate voice traffic.
REGULATORY ENVIRONMENT
As of July 1, 1997, restrictions on voice telephony services over cable
infrastructure were liberalized, in effect bringing about full liberalization of
the telecommunications market in The Netherlands.
Under the current licensing regime, two new licensees other than the Dutch
PTT may operate nationwide fixed telecommunications networks: Telfort, a joint
venture between British Telecom and the Dutch Railway Company, and Enertel, a
consortium of Dutch electricity companies and a large Dutch cable television
company. Furthermore, hundreds of licenses to operate regional fixed networks
have been granted mainly to electricity and cable television companies.
Nevertheless, neither the use of leased lines capacity and other leased
facilities, nor the services provided by the Company, requires a license.
A new telecommunications act is expected to be enacted in the third quarter
of 1998. The new act is expected to consolidate the full liberalization of the
Dutch telecommunications market and introduce a new licensing regime. Although
the details of that new regime are not yet certain, the Company expects it will
be required to obtain a registration 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
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market. In the second quarter of 1998, the Company applied for a new license in
order to permit the Company to continue to offer the range of services it
currently offers in The Netherlands on an economical basis as well as offer new
services that it had previously not been permitted to offer.
FRENCH OPERATIONS
OVERVIEW
France originated 3.1 billion minutes of international traffic in 1996. 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 operations employ 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.
FRENCH NETWORK ARCHITECTURE
RSL France operates an Ericsson AXE-10 international gateway switch in its
offices in Paris and intends to install 20 Ericsson ANS gateway switches over
the next three years. RSL France also operates three POPs, one located in each
of Paris, Nice-Sophia Antipolis and Marseilles. The Company intends to install
fiber to connect its local switches. The Company connected its French operations
to RSL-NET in December 1996. RSL France expects full interconnect in Paris and
Marseilles in the fourth quarter of 1998.
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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.
The Company believes its services are competitive, in terms of price and
quality, with the service offerings of its French market competitors.
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 ('Autorite de regulation des Telecommunications' or
'ART'), which was established in January 1997. The telecommunications market in
France was liberalized on January 1, 1998. The French Telecommunications
authority is working toward liberalization. In accordance with the standard
terms and conditions and price lists for interconnection with France Telecom
duly approved by the French Telecommunications Authority on April 9, 1997, new
operators of public networks would be able to interconnect with France Telecom's
PSTN starting January 1, 1998. ART awarded the Company a license during the
second quarter of 1998 which will enable the Company 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 would 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
is the only such operator capable of providing interconnection services on a
national scale in France. The terms and conditions of interconnection offered by
France Telecom would 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 would be
available only in those areas where RSL France has POPs. The Company expects to
commence offering these direct access or dial-in access services under its
license in Paris and Marseilles in the fourth quarter of 1998. The Company
further expects to install approximately 20 additional POPs over the next three
years and will be in a position to compete with larger carriers in the pricing
of telecommunications services to customers in the areas serviced by these
additional POPs. See 'Risk Factors--Government Regulatory Restrictions.'
In November 1997, RSL France entered into a joint venture agreement with
the Chamber of Commerce and Industry of Marseille Provence (the 'CCIMP') and
Teleport Marseille Provence ('Teleport'), a licensed telecommunications service
provider in Marseille, France, to provide 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 Marseille and in other regions of France.
SWEDISH OPERATIONS
OVERVIEW
Sweden originated approximately one billion minutes of international
traffic in 1996. The Company operates in Sweden through 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.
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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 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, DK-SWE, 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, United States and Finland.
COMPETITION
The Company's principal competitor in Sweden is Telia, the dominant
supplier of telecommunications services in Sweden. The Company also faces
competition from emerging licensed public telephone operators (which are
constructing their own fiber networks) such as Tele 2 and WorldCom, and from
resellers including Telenordia, Telecom Finland and Tele 8. Upon the completion
of the construction of the new fiber networks, the Company will have alternative
means of routing and terminating calls. The Company believes its services are
competitive, in terms of price and quality, with the service offerings of its
Swedish competitors.
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 originated 332 million minutes of international traffic in 1996 and
is a strategically important market because it serves as a gateway to Russia.
The Company operates in Finland through RSL Finland. 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.
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SERVICES AND CUSTOMERS
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. The Company also 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.
MARKETING AND SALES
The Company markets its services in Finland through a variety of channels,
including direct sales. Company employs sales and marketing employees in
Finland. The Company relies heavily on its direct sales to sell its long
distance calling services in Finland. As of January 1998, the Company acquired a
90% interest in Telecenter Oy, an independent sales agent in Finland.
FINNISH NETWORK ARCHITECTURE
In Finland, the Company operates an Ericsson AXE-10 international gateway
switch in its offices in Helsinki. RSL Finland primarily utilizes RSL Europe's
network for international termination. International termination is also
achieved by RSL Finland through connections to Telecom Finland's and other
carriers' international circuits. RSL Finland utilizes an operating agreement
with a Russian carrier and is directly connected to RSL Sweden.
COMPETITION
The Company's principal competitor in Finland is Sonera Corporation
(formerly known as 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. The Company
believes its services are competitive, in terms of price and quality, with the
service offerings of its Finnish competitors.
REGULATORY ENVIRONMENT
There are two classes of operators in Finland, (i) network operators, which
have their own network of domestic transmission lines, and (ii) service
operators, which cannot own domestic transmission lines or IRUs, but can have
their own switching facilities. RSL Finland was granted a license to provide
services as a network operator in March 1997. However, RSL Finland does not have
its own network of domestic transmission lines.
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 Law provides that companies will only need to hold a
license in order to provide services as a mobile phone network operator.
DANISH OPERATIONS
Denmark originated 573 million minutes of international traffic in 1996.
The Company operates in Denmark through RSL Denmark, a wholly owned subsidiary
of RSL Netherlands, which initiated its operations in April 1997 and began
generating revenues in May 1997.
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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 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
PTT supplier of telecommunications services in Denmark. In January 1998, the
Danish government sold a controlling interest in the Danish PTT, 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.
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 an additional license. The PTT operator Tele Danmark in practice still
has an effective (but not legal) monopoly on the ownership of fixed lines. Thus,
the Company can only either 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 from April 1, 1998, Tele Danmark has
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
Portugal originated 340 million minutes of international traffic in 1996.
The Company operates in Portugal through its 39% investment in Maxitel. The
Company made its initial 30.4% investment in Maxitel in April 1997. Maxitel
commenced operations in the international voice and data business in December
1994.
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SERVICES AND CUSTOMERS
Maxitel offers international and long distance voice services to closed
user groups of companies utilizing autodialers and direct access. In addition,
Maxitel offers store and forward 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 gateway switch in its
offices in Lisbon. Maxitel 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 voice telephony services, except mobile, were subject to a monopoly
until March 1997. A second GSM mobile operator has been licensed since 1992 and
a third operator was licensed for GSM and PCN (DCS 1800). Under the terms of the
current legislation it is possible for companies other than the PTT to offer
both national and international voice services to closed user groups.
Interconnection to the Portugal Telecom PSTN is permitted for such services. 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.
ITALIAN OPERATIONS
OVERVIEW
Italy originated 2.1 billion minutes of international traffic in 1996. 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 shareholder of RSL Italy, the
Company's interest in RSL Italy was increased to 99.30%. The minority
shareholder, however, has the right, which the Company expects will be
exercised, to fund its portion of such capital increase for a certain period of
time. The exercise of such right in full would then decrease the Company's
ownership interest in RSL Italy to 85%. In addition, in July 1998, RSL Italy
acquired 75% of the equity of Comesa Telecom S.r.l. ('Comesa'), an international
telecommunications reseller in 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.
In addition, on July 28, 1998, RSL Italy obtained an individual license to
establish a telecommunications network in order to provide the 'voice telephony'
services that it intends to offer in Italy. RSL Italy is currently implementing
the activities necessary to benefit from the rights established and the
obligations imposed by said individual license.
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MARKETING AND SALES
RSL Italy markets its services through a direct 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 gateway switch in Milan and plans to install an Ericsson ANS
switch in Rome. 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 expects to link RSL Italy with
RSL-NET in Paris by the end of 1998.
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 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 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 the services. In fact, for said voice services
to be offered through switched links to the PSTN, the declaration is required,
whereas the authorization is needed for voice services to be offered through
dedicated links.
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.
Such license is necessary, inter alia, also 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 for by Telecom Italia and a
few other telecommunications organizations (please 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. The proceedings are
still pending and are not expected to be closed before the end of 1998.
Further implementing legislation is expected to be enacted in the near
future with reference to other matters, including the general authorization (a
regime that will substitute the current regulations on the voice services
different from 'voice telephony').
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 National Regulatory
Authority, an independent body, established in 1998, 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 voice services different from the 'voice telephony'
services.
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AUSTRIAN OPERATIONS
OVERVIEW
Austria originated 960 million minutes of international traffic in 1996.
The Company operates in Austria through RSL Austria in which it currently holds
a 90% interest.
SERVICES AND CUSTOMERS
RSL Austria began offering international voice services utilizing
autodialers, direct access and calling cards in March 1998. RSL Austria's
targeted customers will be small to medium-sized businesses.
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 an international
telecommunications reseller. The Company has installed an Ericsson AXE-10
international gateway switch in Vienna which is operational. An international
gateway switch in Austria enables RSL Austria to expand the products and
services it offers.
COMPETITION
RSL Austria's primary competitors in Austria are Post und Telecom Austria
(the 'PTA'), the dominant supplier of telecommunications services in Austria and
UTA. The Company competes with the local Austrian affiliates of global carriers
such as the British Telecom and Global One. In addition, the Company expects to
compete with resellers in the Austrian market.
REGULATORY ENVIRONMENT
The telecommunications monopoly has remained largely intact and the PTA has
a legal monopoly on voice telephony, telex and telegram services. New
telecommunications legislation, however, was passed in July 1997 which permitted
interconnection with the PTA'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 PTA.
SPANISH OPERATIONS
OVERVIEW
Spain originated 1.2 billion minutes of international traffic in 1996. RSL
Spain was formed in December 1997. The Company operates in Spain through RSL
Europe which holds a 90% interest in RSL Spain. It is expected that RSL Spain
will begin generating revenues by June 1998.
SERVICES AND CUSTOMERS
Only Telefonica de Espana, S.A. ('Telefonica de Espana'), Lince 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.
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MARKETING AND SALES
RSL Spain intends to market its services through both a direct and indirect
sales force.
SPANISH NETWORK ARCHITECTURE
RSL Spain anticipates installing an Ericsson AXE-10 international gateway
switch in Spain by the end of 1998. An international gateway switch will allow
RSL Spain to expand the products and services it offers.
COMPETITION
The Company's main competitor in Spain will be 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 has not yet started to
operate. Retevision, started operations at the beginning of 1998. In addition,
the Government has called for bids to award a third nationwide license to
provide voice telephony, as well as carrier services. 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 EU 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 EU Commission 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 May 28, 1998 and authorization to enable operators to provide
voice telephony as of January, 1998, (iv) the third license for mobile telephone
service granted to Retevision (which had already been operating under a voice
telephony license); (v) the recent call for a competitive bid for the granting
of a third basic telephony license no later than May 1998 and authorization to
cable operators to provide voice telephony as of January 1998; and (vi) 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 in Spain. RSL Spain has also applied for
licenses to resell telecommunications services and to provide value added
services.
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BELGIAN OPERATIONS
OVERVIEW
Belgium originated 1.2 billion minutes of international traffic in 1996.
The Company operates in Belgium through RSL Belgium, in which the Company
currently holds a 90% interest.
SERVICES AND CUSTOMERS
The Company, through RSL Belgium and RSL Telco Belgium S.A./N.V., a
wholly-owned subsidiary of the Company, 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, which was granted a temporary
license to offer international and domestic fixed wire long distance service,
and is in the process of applying for permanent license, 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 with 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
RSL Belgium markets its services through a direct and indirect sales force
as well as independent agents.
BELGIAN NETWORK ARCHITECTURE
RSL Belgium currently operates as a reseller, purchasing wholesale
facilities from other carriers operating in Belgium. The Company anticipates
installing an Ericsson AXE-10 international gateway switch in Belgium by the end
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, Cable & Wireless 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, most 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 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 exists since July 1998, such providers had to apply for a temporary
license. The Company applied for and obtained such temporary license.
Nevertheless, the Company will now have to apply for a new permanent voice
telephony license. Failure by the Company to obtain such permanent voice
telephony license would have a material effect on the ability of RSL Belgium to
offer national and international
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telecommunications services in Belgium and could have a material adverse effect
on the Company, its financial condition and its results of operations.
SWISS OPERATIONS
OVERVIEW
Switzerland originated 1.9 billion minutes of international traffic in
1996. The Company operates in Switzerland through 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.
SERVICES AND CUSTOMERS
While in the past RSL Switzerland targeted multinationals and supplied
international voice and fax services, in the future RSL Switzerland will, in
addition to such multinationals, target 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 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, 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 '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. To date, 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.
Pursuant to the Joint Venture Agreement, RSL Latin America acquired 100% of
RSL Venezuela, from Divtel and Megatel Telecomunicaciones, C.A. ('Megatel'). RSL
Venezuela has terminated its agreements with each of Sprint and Global One to
distribute each of their products in Venezuela and
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has begun to provide calling cards, enhanced fax services and closed user group
services for RSL Latin America.
In August 1998, the Company acquired a 49% interest in 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.
In April 1998, PCM agreed to acquire two strands of dark fiber (the
'Fiber') in Mexico from Bestel Communicaciones, S.A. de CV for approximately
$8.8 million. The Fiber will be connected through 14 cities in Mexico, including
Mexico City, Guadalajara and Monterrey. Installation of the Fiber is expected to
be completed by the end of the third quarter of 1998. PCM will be accepting
delivery of the Fiber at different stages as completed.
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 target segments prior to
full market liberalization, and when the market opens to competition, the
Company will have an established base in its target areas.
VENEZUELAN OPERATIONS
OVERVIEW
Venezuela originated 139 million minutes of international traffic in 1996.
The Company operates in Venezuela through RSL Venezuela and provides value-added
telecommunications services for RSL Latin America. 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.
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,
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 with a concession. RSL Venezuela currently
holds Concessions for Value Added and Data Services which allow it to provide
international voice services via dedicated access provided
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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, was required to register its investment in RSL Venezuela with
the Venezuelan Office of the Superintendent of Foreign Investments ('SIEX')
within 60 days of the acquisition of RSL Venezuela, which was completed as to
49% on August 4, 1997 and as to the remaining 51% on January 26, 1998.
ASIA/PACIFIC RIM OPERATIONS--GENERAL
The Company carries on its Asian operations through RSL Asia, 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. RSL Asia
was formed to expand the Company's operations into the Asian/Pacific Rim market.
In March 1997, the Company incorporated RSL Japan to initiate the Company's
operations in Japan. RSL Asia intends to capitalize on the trend toward
deregulation within the region to establish operations in key countries.
The Company has hired a managing director to oversee and develop RSL
Japan's operations. In February 1998, RSL Japan was granted an International
Simple Resale license by the MPT to resell international telephony, fax and data
services to and from Japan. RSL Japan has received a Type II value added network
provider license and expects to provide such services early in the third quarter
of 1998. RSL Japan has applied for a Type I license in Japan to provide
facilities-based international long distance service. The Company has installed
an Ericsson AXE-10 international gateway switch in its offices in Tokyo. The
Company's Tokyo gateway is currently connected to the Company's Australian
Operation.
AUSTRALIAN OPERATIONS
OVERVIEW
Australia originated 1.3 billion minutes of international traffic in 1996.
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 transaction with Pac Star and the acquisition of the
Call Australia Group, 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. As a result of a series of related acquisitions, 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 and Link. 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.
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COMPETITION
The Company's principal competitors in Australia are the two licensed
general carriers Telstra Corporation Limited (the former PTT) and Optus
Communications Pty. Limited. Each of these competitors 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 Spectrum Network Systems Limited, Axicorp Pty. Limited and
AAPT Limited.
REGULATORY ENVIRONMENT
RSL Australia has been enrolled with the Australian Telecommunications
Authority ('Austel') under the provisions of the International Service Providers
Class License as a provider of services with double-ended interconnection. The
Telecommunications Act 1991 allows enrollment as a provider of services with
double-ended interconnection, provided that Austel is satisfied that the
services to be offered are in the public interest. Double-ended interconnection
allows the Company to interconnect with the Australian PSTN, to resell general
carrier services, and to transmit international calls over owned international
transmission facilities. Customers are able to access the Company's network from
the PSTN utilizing a four digit prefix code issued by Austel and via '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 1997, the Company acquired Delta Three, a telecommunications provider
utilizing packet switched networks, such as the Internet and networks based on
Internet protocols ('IP'), 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 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.
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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 30 countries and it plans to extend the service to additional
countries within the next two years.
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 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 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.
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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 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 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 protocol 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 July 31, 1998, the Company employed approximately 1,850 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 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 $1.5 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 $83,000 until March 1998 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.
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.
The Company, through its direct and indirect subsidiaries, also leases
additional office spaces for its operations.
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LEGAL PROCEEDINGS
AT&T recently filed with the FCC an opposition to the Company's requests
for modification of the International Settlement Policy to implement the
Company's accounting rates for international long distance service between the
United States and each of Denmark, the Dominican Republic, Finland, Norway and
the United Kingdom. AT&T has alleged, inter alia, that the requests violate the
principles underlying the International Settlement Policy and the FCC's
non-discrimination policy. The Company does not believe that the FCC's
resolution of this matter reasonably can be expected to have a material adverse
effect on its business or results of operations.
On April 14, 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'). On October 24,
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. Under the
terms of the stock purchase agreement between LDM and RSL USA, RSL USA is
indemnified from, among other things, liability relating to litigation
proceedings. 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.
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 the unauthorized changing or combining of local and long distance
telephone service providers or billing for telephone related services
('slamming'). 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.
A subpoena, relating to alleged 'slamming' activities, has also been issued
by the Attorney General of the State of New Jersey against Cyberlink. 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, President and Chief Executive
Officer
Jacob Z. Schuster............................. 49 Director, Executive Vice President, Chief
Financial Officer, Assistant Secretary and
Treasurer
Richard E. Williams........................... 46 President and Chief Executive Officer 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 subsidiaries. While at Clal, he was also responsible for the
development of new international telecommunications ventures. Prior to 1992, Mr.
Tarlovsky served as an officer in the Israeli Army, where he was responsible for
management and financial oversight of international research and development
projects.
Nesim N. Bildirici has been Vice President of Mergers and Acquisitions of
the Company since 1995 and served as a director of the Company from April 1995
until March 1997. From August 15, 1993 to December 31, 1996, Mr. Bildirici was
employed by both RSLAG and the Company. Mr. Bildirici is also a Managing
Director of RSLAG. Prior to joining RSLAG, Mr. Bildirici was an investment
banker at Morgan Stanley & Co. Incorporated from 1989 to 1991. From 1991 to
1993, Mr. Bildirici was a graduate student at Harvard Business School, where he
received his MBA.
Mark J. Hirschhorn has been Vice President-Finance of the Company since
August 1997 and has been Global Controller of the Company since January 1996.
Mr. Hirschhorn has also served as the Assistant Secretary of the Company since
September 1996. From October 1987 to December 1995, Mr. Hirschhorn was employed
at Deloitte & Touche LLP, most recently as a Senior Manager specializing in
emerging business and multinational consumer product companies.
Roland T. Mallcott has been Vice President of Engineering of the Company
since February 1997. From December 1995 until January 1997, Mr. Mallcott served
as Director of Joint Ventures of Concert, through British Telecom and MCI, in
Canada, Mexico and Germany. From January 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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<PAGE>
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 November 1995, and was
Executive Vice President of Estee Lauder from 1985 until 1995. Mr. Langhammer
joined Estee Lauder in 1975 as President of its operations in Japan. In 1982, he
was appointed Managing Director of Estee Lauder's operations in Germany. Prior
to joining Estee Lauder, Mr. Langhammer was General Manager of Dodwell (Japan),
a global trading company. He is a member of the Board of Directors of the
Cosmetics, Toiletries and Fragrance Association, an industry group, and serves
on the Board of the American Institute for Contemporary German Studies at Johns
Hopkins University.
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 1986 to 1991. Prior to joining NYNEX
International Company, Mr. Sekulow had served as President of RCA International,
Ltd. since 1973. Mr. Sekulow previously served as a member of the United States
State Department Advisory Committee on International Communications and
Information Policy and on the State Department Task Force on Telecommunications
in Eastern Europe.
Nicolas G. Trollope, a director of the Company since July 1996, has been a
partner with the law firm of Conyers, Dill & Pearman, Hamilton, Bermuda, since
1991. 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
require shareholder approval), (ii) adopt an agreement of merger or
consolidation or approve the sale, lease or exchange of all or substantially all
of the Company's property and assets, or (iii) approve or recommend to the
Company's shareholders a dissolution of the Company.
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 two fiscal years (together, the 'Named
Executive Officers'). See 'Employment Agreements.'
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------------
AWARDS
ANNUAL SECURITIES
COMPENSATION UNDERLYING
------------------------- OPTIONS/
SALARY BONUS(1) 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 --
Nir Tarlovsky....................................................... 1997 187,500 300,000 --
Vice President of Business Development 1996 178,000 75,000 --
Richard E. Williams (2)............................................. 1997 240,000 165,000 350,400
President and Chief Executive Officer of RSL Europe 1996 172,000 50,000 --
Nesim N. Bildirici (3).............................................. 1997 185,000 300,000 --
Vice President of Mergers and Acquisitions 1996 165,000 75,000 --
Mark Hirschhorn..................................................... 1997 155,000 232,500 16,206
Vice President--Finance 1996 140,000 50,000 93,294
</TABLE>
- ------------------
(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 Incentive Compensation Plan described below and paid in the first
quarter of 1998 following receipt of 1997 audited financial results.
(Footnotes continued on next page)
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<PAGE>
(Footnotes continued from previous page)
(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 1995 Plan (which was later amended and
restated). 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 Initial
Public Offering, the 1995 Plan was replaced by the stock option plans described
below and the Company will not grant further options under the 1995 Plan.
1997 STOCK INCENTIVE PLAN
In connection with the Initial Public Offering, the Company adopted 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'). The number of shares of Class A Common Stock which are available for
Awards granted under the 1997 Plan during its term is approximately 7.0% of the
total number of shares of Class A Common Stock outstanding on a fully diluted
basis. 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,
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. As of August 25,
1998, the Company had granted options to acquire 437,856 Class A Common Stock
under the 1997 Plan and 163,750 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
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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
The Company has established 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 not less than 50% of
such bonus may 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
(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. 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 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
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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
have been granted by the Company.
<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 $22.00 and is increased on the first
day of each calendar quarter after the date of grant, compounded annually,
equal to one-quarter of the yield to maturity on U.S. Treasury Securities
having a maturity, at the time of grant of the options, approximately equal
to seven years. Forty percent of the options are exercisable on December 31,
2000, 70% are exercisable on December 31, 2001 and 100% are exercisable on
December 31, 2002.
(3) Shares of Class A Common Stock issuable upon the exercise of options issued
on October 6, 1997. In connection with an employment agreement dated as of
August 5, 1995 between Mr. Williams and the Company, Mr. Williams was
granted the RSL Europe Option Rights (as defined), which rights were
exchanged for the above-listed options.
(4) Shares of Class A Common Stock issuable upon the exercise of options granted
on January 1, 1997 under the 1995 Plan. The options became fully vested on
January 1, 1998.
106
<PAGE>
FISCAL YEAR-END OPTION VALUES
The following table sets forth information with respect to each exercise of
stock options during the fiscal year ended December 31, 1997 by the Named
Executive Officers and the value at December 31, 1997 of unexercised stock
options held by the Named Executive Officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
VALUE OPTIONS/SARS AT OPTIONS/SARS AT
SHARES ACQUIRED ON REALIZED FY-END (#) FY-END($)(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 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 and Vice 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 issued under the Directors' Plan is
250,000.
107
<PAGE>
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
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 Initial Public Offering 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 agreed to by the Executive and Compensation Committees as
representing a comparable investment opportunities as 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 Initial Public Offering, 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.
The Company is negotiating new employment agreements with two of its key
employees, Richard Williams and Nir Tarlovsky. The Company has entered into an
agreement with Codan Services Limited,
108
<PAGE>
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 Initial Public Offering, Andrew Gaspar and Itzhak Fisher were members of the
Compensation Committee.
RSL Management Corporation ('RSL Management'), which is wholly-owned by
Ronald S. Lauder, the Chairman of the Board of the Company 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, Leonard A. Lauder, a director of the
Company, is 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 through 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
Revolving Credit Facility. During a portion of 1997, 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 continuing guarantee of the Revolving
Credit Facility, Mr. Lauder received, in the aggregate, 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.
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.
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 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.
109
<PAGE>
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.'
110
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
PRE-OFFERINGS
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
August 25, 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 Stockholders' 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 these
shares of Common Stock. No Named Executive Officer or Director who is a Selling
Shareholder will sell in the Offerings more than 10% of the shares of Common
Stock beneficially owned by such person. Except as otherwise noted below, each
of the shareholders identified in the table has sole voting and investment power
over the shares beneficially owned by such person.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
DIRECTORS, EXECUTIVE OF CLASS A COMMON STOCK(1) OF CLASS B COMMON STOCK
OFFICERS ---------------------------------- ----------------------------
AND 5% SHAREHOLDERS NUMBER PERCENT NUMBER PERCENT
- ------------------------- --------------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
Ronald S. Lauder
(3)(4)(5)(6)(7)........ 1,363 * 17,134,760 62.6
Itzhak Fisher (3)(8)..... -- * 4,390,986 16.3
Leonard A. Lauder
(3)(5)(6)(7)(9)........ 454 * 6,399,831 23.8
RSL Investments
Corporation (3)........ -- * 9,348,563 34.8
E/L RSLG Media, Inc.
(3).................... -- * 1,786,350 6.6
Jacob Z. Schuster
(3)(10)................ -- * 1,688,215 6.3
Gustavo A. Cisneros
(11)................... 1,409,083 7.9 -- *
Coral Gate (12).......... 1,408,629 7.9 -- *
Nir Tarlovsky (13)....... 717,804 4.1 270,301 1.0
Nesim Bildirici.......... 572,499 3.1 118,513 *
Mark J. Hirschhorn....... 51,605 * -- *
Eugene Sekulow (14)...... 43,800 * -- *
Fred H. Langhammer (15).. 12,680 * -- *
Richard Williams (16).... 350,400 2.0 -- *
Nicolas G. Trollope
(17)................... 1,000 * -- *
All directors and
executive officers as a
group (20 persons)
(18)................... 3,583,171 19.6 27,045,759 98.9
Metro Holding AG (19).... 3,214,284 18.3 -- *
Andrew Gaspar
(5)(6)(20)............. 1,863,241 10.5 -- *
Bukfenc, Inc. ........... 1,810,633 10.2 -- *
Essex Investment (21).... 1,384,950 7.9 -- *
<CAPTION>
SELLING SHAREHOLDERS
- -------------------------
<S> <C> <C> <C> <C>
Jacob Davidson (22)...... 189,479 * -- *
Roland T. Mallcott....... 33,500 * -- *
Andrew C. Shields (23)... 39,500 * -- *
Waltham Trust (24)....... 171,228 * -- *
Fisher Investment
Partners, L.P. (24).... -- * 4,390,986 16.3
Bukfenc Inc.............. 1,810,633 10.5 -- *
Nesim Bildirici.......... 547,499 3.1 143,513 *
Mark J. Hirschhorn....... 51,605 * -- *
<CAPTION>
COMMON STOCK
-------------------------
DIRECTORS, EXECUTIVE % OF
OFFICERS VOTING
AND 5% SHAREHOLDERS POWER(2) % OWNERSHIP(2)
- ------------------------ -------- --------------
<S> <C> <C>
Ronald S. Lauder
(3)(4)(5)(6)(7)........ 58.9 38.2
Itzhak Fisher (3)(8)..... 15.3 9.8
Leonard A. Lauder
(3)(5)(6)(7)(9)........ 22.3 14.4
RSL Investments
Corporation (3)........ 32.6 21.0
E/L RSLG Media, Inc.
(3).................... 6.2 4.0
Jacob Z. Schuster
(3)(10)................ 5.9 3.8
Gustavo A. Cisneros
(11)................... * 3.2
Coral Gate (12).......... * 3.2
Nir Tarlovsky (13)....... 1.2 2.2
Nesim Bildirici.......... * 1.6
Mark J. Hirschhorn....... * *
Eugene Sekulow (14)...... * *
Fred H. Langhammer (15).. * *
Richard Williams (16).... * *
Nicolas G. Trollope
(17)................... * *
All directors and
executive officers as a
group (20 persons)
(18)................... 94.0 67.2
Metro Holding AG (19).... 1.1 7.2
Andrew Gaspar
(5)(6)(20)............. * 4.2
Bukfenc, Inc. ........... * 4.1
Essex Investment (21).... * 3.1
SELLING SHAREHOLDERS
- -------------------------
<S> <C> <C>
Jacob Davidson (22)...... * *
Roland T. Mallcott....... * *
Andrew C. Shields (23)... * *
Waltham Trust (24)....... * *
Fisher Investment
Partners, L.P. (24).... 15.3 9.8
Bukfenc Inc.............. * 3.1
Nesim Bildirici.......... * 1.6
Mark J. Hirschhorn....... * *
</TABLE>
- ------------------
* Less than 1%.
<TABLE>
<S> <C>
(1) Does not include (i) 26,874,795 shares of Class A Common Stock issuable upon conversion of shares of Class B
Common Stock (including 459,900 shares of Class B Common Stock issuable upon the exercise of the Lauder
Warrants) or (ii) 917,927 shares of Class A Common Stock issuable upon the exercise of the unexercised
Warrants. 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 August 25, 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 shall vest 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 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.
(Footnotes continued on following page)
</TABLE>
111
<PAGE>
<TABLE>
<CAPTION>
(Footnotes continued from previous page)
<S> <C>
(5) Andrew Gaspar is president of the corporate general partner of RSLAG, and Ronald S. Lauder is directly and
indirectly the owner of a majority of the limited partnership interests in RSLAG. 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 managing member of LGV and Ronald S. Lauder is a member with a substantial ownership
interest in LGV. The managing member of LGV 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
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. Mr. Gaspar served as a director and Vice
Chairman of the Board of Directors of the Company from its inception in 1994 until May 7, 1998. 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., a Delaware limited partnership ('FIP'), of which
Itzhak Fisher is the sole general partner and the Fisher 1997 Family Trust is the sole limited partner. Mr.
Fisher disclaims beneficial ownership of such shares.
(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 all vest 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., a New York limited partnership, the sole general
partner of which is Jacob Z. Schuster and the limited partners of which are certain of Mr. Schuster's
children. 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) Such shares of Class B Common Stock are owned by Tarlovsky Investment Partners, L.P., a Delaware limited
partnership of which Nir Tarlovsky is the sole general partner and the Tarlovsky 1997 Family Trust is the sole
limited partner. Mr. Tarlovsky disclaims beneficial ownership of such shares.
(14) Consists of 43,800 shares of Class A Common Stock issuable upon the exercise of an equal number of presently
exercisable options granted to Mr. Sekulow under the 1995 Plan.
(15) 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) 12,226 shares of Class A Common
Stock held by Mr. Langhammer directly.
(16) 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.
(17) Such shares are owned by The Proverbs Trust, a Bermuda trust, of which Mr. Trollope and his wife are the
trustees and beneficiaries.
(18) Includes 512,726 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.
(19) 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.
(20) Includes (a) 48,879 shares of Class A Common Stock owned directly by Mr. Gaspar; (b) 1,810,633 shares of Class
B Common Stock owned by Bukfenc, Inc., a corporation wholly owned by Mr. Gaspar and members of his family; and
(c) 3,729 shares of Class B Common Stock owned by Bukfenc, LLC, a limited liability company, of which Mr.
Gaspar and members of his family are the only members.
(21) 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 Securities and Exchange Commission (the 'Commission') on August 8, 1998. The address for Essex
Investment Management Company is 125 High Street, Boston, Massachussetts 02110.
(22) Includes (a) 18,250 shares of restricted stock, which shall vest on October 1, 1998, and (b) 171,228 shares of
Class B Common Stock directly owned by Mr. Davidson. Mr. Davidson is Chairman and co-founder of Delta Three
and has served in that capacity since 1996, when Delta Three was founded.
(Footnotes continued on following page)
</TABLE>
112
<PAGE>
<TABLE>
<S> <S>
(Footnotes continued from previous page)
(23) Includes (a) 36,500 shares of Class A Common Stock issuable upon the exercise of a like number of options
granted under the 1997 Plan, such options vested on August 15, 1998, and (b) 3,000 shares of Class A Common
Stock directly owned by Mr. Shields.
(24) Elie C. Wurtman is a principal beneficiary of Waltham Trust, but has no voting or investment power over the
shares held by Waltham Trust.
(25) Itzhak Fisher is the sole general partner of FIP and the Fisher 1997 Family Trust is the sole limited partner.
Mr. Fisher disclaims beneficial ownership of such shares. FIP will not sell in the Offerings more than 10% of
the shares of Class A Common Stock benefically owned by it.
</TABLE>
POST-OFFERINGS
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
, 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, in all cases, assuming (a) the sale on , 1998 by the
Selling Shareholders of all shares of Class A Common Stock offered by
them hereby and (b) the conversion by the Selling Shareholders of
shares of Class B Common Stock (see note to the table). 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. No Named Executive Officer or Director who is a Selling
Shareholder will sell in the Offerings more than 10% of the shares of Common
Stock beneficially owned by such person. Except as otherwise noted below, each
of the shareholders identified in the table has sole voting and investment power
over the shares beneficially owned by such person.
<TABLE>
<CAPTION>
NUMBER BENEFICIAL OWNERSHIP
OF SHARES OF CLASS A COMMON STOCK(1)
DIRECTORS, EXECUTIVE OFFICERS, BEING --------------------------------------------------------
AND 5% SHAREHOLDERS OFFERED NUMBER PERCENT
- ----------------------------------- --------- -------------------------- --------------------------
<S> <C> <C> <C>
Ronald S. Lauder...................
Itzhak Fisher......................
Leonard A. Lauder..................
RSL Investments Corporation........
EL/RSLAG Media, Inc. ..............
Jacob Z. Schuster..................
Gustavo A. Cisneros................
Coral Gate.........................
Nir Tarlovsky......................
Nesim Bildirici....................
Mark J. Hirschhorn.................
Eugene Sekulow.....................
Fred H. Langhammer.................
Richard Williams...................
Nicolas G. Trollope................
All directors and executive
officers as a group (20
persons).........................
Metro Holding AG...................
Andrew Gaspar......................
Bukfenc, Inc. .....................
Essex Investment...................
<CAPTION>
SELLING SHAREHOLDERS
- -----------------------------------
<S> <C> <C> <C>
Jacob Davidson.....................
Roland T. Malcott..................
Andrew C. Shields..................
Waltham Trust......................
Fisher Investment Partners, L.P....
Bukfenc Inc........................
Nesim Bildirici....................
Mark J. Hirschhorn.................
<CAPTION>
BENEFICIAL OWNERSHIP
OF CLASS B COMMON STOCK
DIRECTORS, EXECUTIVE OFFICERS, ----------------------------------
AND 5% SHAREHOLDERS NUMBER PERCENT
- --------------------------------- -------- -----------------------
<S> <<C> <C>
Ronald S. Lauder...................
Itzhak Fisher......................
Leonard A. Lauder..................
RSL Investments Corporation........
EL/RSLAG Media, Inc. ..............
Jacob Z. Schuster..................
Gustavo A. Cisneros................
Coral Gate.........................
Nir Tarlovsky......................
Nesim Bildirici....................
Mark J. Hirschhorn.................
Eugene Sekulow.....................
Fred H. Langhammer.................
Richard Williams...................
Nicolas G. Trollope................
All directors and executive
officers as a group (20
persons).........................
Metro Holding AG...................
Andrew Gaspar......................
Bukfenc, Inc. .....................
Essex Investment...................
SELLING SHAREHOLDERS
- -----------------------------------
<S> <<C> <C>
Jacob Davidson.....................
Roland T. Malcott..................
Andrew C. Shields..................
Waltham Trust......................
Fisher Investment Partners, L.P....
Bukfenc Inc........................
Nesim Bildirici....................
Mark J. Hirschhorn.................
<CAPTION>
COMMON STOCK
-------------------------
% OF
DIRECTORS, EXECUTIVE OFFICERS, VOTING
AND 5% SHAREHOLDERS POWER(2) % OWNERSHIP(2)
- ---------------------------------- -------- --------------
Ronald S. Lauder...................
Itzhak Fisher......................
Leonard A. Lauder..................
RSL Investments Corporation........
EL/RSLAG Media, Inc. ..............
Jacob Z. Schuster..................
Gustavo A. Cisneros................
Coral Gate.........................
Nir Tarlovsky......................
Nesim Bildirici....................
Mark J. Hirschhorn.................
Eugene Sekulow.....................
Fred H. Langhammer.................
Richard Williams...................
Nicolas G. Trollope................
All directors and executive
officers as a group (20
persons).........................
Metro Holding AG...................
Andrew Gaspar......................
Bukfenc, Inc. .....................
Essex Investment...................
SELLING SHAREHOLDERS
- -----------------------------------
Jacob Davidson.....................
Roland T. Malcott..................
Andrew C. Shields..................
Waltham Trust......................
Fisher Investment Partners, L.P....
Bukfenc Inc........................
Nesim Bildirici....................
Mark J. Hirschhorn.................
</TABLE>
113
<PAGE>
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 September 1997, in connection with the Initial Public Offering, 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 the date of this Prospectus, 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 Company, the
holders of Class A Common Stock are entitled to receive, pari passu with the
holders of Class B Common Stock, pro rata the net assets of the Company
remaining after preferential distribution to holders of Preferred Stock and the
payment of all creditors and liquidation preferences, if any.
TRANSFER AGENT AND REGISTRAR
The Company's transfer agent and registrar for the Class A Common Stock is
American Stock Transfer & Trust Company.
CLASS B COMMON STOCK
As of the date of this Prospectus, there were holders of Class B Common
Stock and shares of Class B Common Stock were issued and
outstanding. The holders of the Class B Common Stock are entitled to 10 votes
per share and are entitled to vote as a single class together with the holders
of the Class A Common Stock and the Preferred Stock on all matters subject to
shareholder approval, except that the holders of the Class B Common Stock vote
as a separate class on any matter requiring class voting by The Companies Act
1981 of Bermuda. The holders of the outstanding shares of Class B Common Stock
are entitled to receive dividends as and when declared by the Board of
Directors, pari passu with the holders of Class A Common Stock, out of funds
legally available therefor. The holders of the Class B Common Stock can convert
their shares of Class B Common Stock on a share-for-share basis into Class A
Common Stock. Shares of Class B Common Stock may be transferred only to other
original holders of Class B Common Stock or to members of the family of the
original holder by gift, devise or otherwise through laws of inheritance,
descent, distribution or to a trust established by the holder for the holder's
family members, to corporations the majority of beneficial owners of which are
or will be owned by the holders of Class B Common Stock and from corporations or
partnerships which are the holders of Class B Common Stock, to their
shareholders or partners, as the case may be (each a 'Permitted Transferee').
Any other transfer of Class B Common Stock is void, although the Class B Common
Stock may be converted at any time into Class A Common Stock on a one to one
basis and then sold, subject to the conditions and restrictions of Rule 144.
On liquidation or winding up of the Company, the holders of the Class B
Common Stock are entitled to share ratably, pari passu with the holders of Class
A Common Stock, the assets remaining after
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<PAGE>
payment of all debts and other liabilities and after distribution in full of the
preferential amounts to be distributed to the holders of Preferred Stock.
PREFERRED STOCK
As of the date of this Prospectus, the Company is authorized to issue
65,700,000 shares of Preferred Stock and no such shares are currently
outstanding.
WARRANTS
SHAREHOLDER WARRANTS
As consideration for the Shareholders Standby Facility and Ronald S.
Lauder's continuing guarantee of the Revolving Credit Facility, Mr. Lauder
received the Lauder Warrants to purchase 459,900 shares of Class B Common Stock,
of the Company. The exercise price, exercise period and other terms of the
Lauder Warrants are substantially the same as the terms of the Warrants, other
than with respect to the class of stock which will be issued upon their
exercise.
WARRANTS ISSUED IN DEBT 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 the date of this Prospectus, 23% of the Warrants have been exercised
and 917,927 shares of Class A Common Stock are issuable upon exercise of the
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.
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
115
<PAGE>
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 Offering 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 it had notice of such trust.
As an 'exempted company', the Company is exempt from Bermuda laws which
restrict the percentage of share capital that may be held by non-Bermudians but,
as an exempted company, the Company may not participate in certain business
transactions including: (1) the acquisition or holding of land in Bermuda
(except that required for its business and held by way of lease or tenancy for
terms of not more than 21 years); (2) the taking of mortgages on land in Bermuda
to secure an amount in excess of $50,000 without the consent of the Minister of
Finance of Bermuda; (3) the acquisition of securities created or issued by, or
any interest in, any local company or business, other than certain types of
Bermuda government securities or another 'exempted' company, partnership or
other corporation resident in Bermuda but incorporated abroad; or (4) the
carrying on of business of any kind in Bermuda, except in furtherance of the
business of the Company carried on outside Bermuda or with the permission of, or
under a license granted by, the Minister of Finance of Bermuda.
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
subsidiary for in certain circumstances, shares of the 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 COM U.S.A., Inc. ('RSL USA'), RSL COM Australia
Holdings Pty. Limited ('RSL Australia'), RSL Italy (and its subsidiary Comesa
Telecom S.r.l.) ('RSL Italy'), RSL Latin America, RSL Austria, RSL
Communications Spain, S.A. ('RSL Spain'), RSL COM Schweiz AG ('RSL
Switzerland'), Telecenter Oy (a subsidiary of RSL COM Finland Oy), RSL Belgium
and PCM Communicaciones S.A. de C.V. ('PCM'). 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.
The Company has also granted to certain employees of its subsidiaries
options to acquire subsidiary shares or similar rights (the 'Incentive Units'),
some of which are currently exercisable and
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<PAGE>
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.
In addition, under certain circumstances the Company may be required to
issue to Metro Holding and certain affiliates shares of Class A Common Stock
(the 'Telegate Exchange Shares') in exchange for interests in Telegate AG
('Telegate'), Europe's third largest directory information provider. See
'Business--European Operations--General.' The number of shares of Class A Common
Stock issuable in such exchange will be based on a valuation of the Telegate
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 Sales.'
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<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
CREDIT FACILITIES
Ericsson has provided to certain of the Company's subsidiaries an aggregate
of approximately $50 million in financing commitments to fund the purchase of
additional switches and related equipment, none of which was available as of
June 30, 1998. 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 $7.5 million Revolving Credit Facility with The
Chase Manhattan Bank and a $10.0 million revolving credit facility with Coast
Business Credit, of which $3.9 million and $2.8 million respectively, was
available at June 30, 1998. 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 12 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>
118
<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'), between 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 12
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.
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<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 Issuer 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.
120
<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'), between 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 12 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 Issuer 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.
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SHARES ELIGIBLE FOR FUTURE SALE
Assuming all of the Shares offered hereby by the Company were sold, then as
of the date of this Prospectus, the Company would have shares of
Common Stock outstanding, including shares of Class A Common Stock
( shares, if the Underwriters' over-allotment options were exercised in
full) and shares of Class B Common Stock ( shares, if the
Underwriters' over-allotment options were exercised in full). The foregoing
Class A Common Stock share figures do not include (i) 917,927 shares of Class A
Common Stock issuable upon exercise of unexercised Warrants, (ii) up to
1,597,230 shares of Class A Common Stock issuable upon the exercise of an equal
number of options and 164,250 shares of restricted stock granted under the 1995
Plan, the 1997 Performance Incentive Plan, 1997 Stock Incentive Plan and
Directors' Compensation Plan, (907,752 of which are presently exercisable or
exercisable within 60 days of the date of this Prospectus), (iii)
shares of Class A Common Stock issuable upon the conversion of shares of Class B
Common Stock (including 459,900 shares of Class B Common Stock issuable upon the
exercise of Lauder Warrants) and (iv) shares of Class A Common Stock issuable
upon exercise of Roll-up Rights and Incentive Units and the Telegate shares. See
'Management--Stock Option and Compensation Plans,' '--Compensation of
Directors--Directors' Plan,' 'Description of Capital Stock' and 'Certain Rights
to Acquire Class A Common Stock.'
Of the shares of Class A Common Stock ( shares, if the
Underwriters' over-allotment options were exercised in full), which are assumed
would be outstanding after completion of the Offerings, approximately
shares ( shares, if the Underwriters' over-allotment options
were fully exercised), including the shares of Class A Common Stock sold in the
Offerings, the Initial Public Offering and pursuant to the Warrant Registration,
other than those purchased by 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 of the
outstanding shares of Class B Common Stock would be subject to the volume and
other resale limitations set forth in Rule 144. All of such restricted
securities are eligible for public sale, subject to compliance with 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 beneficially 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.
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
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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 Initial Public Offering. 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 also has granted to a number of Minority Interestholders
certain registration rights with respect to shares of Class A Common Stock
acquired by the Minority Interestholders pursuant to an exercise of their
Roll-Up Rights. 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 Class A Common Stock
concurrently with the registration of such other securities. In addition,
certain Minority Interestholders in RSL Latin America have demand registration
rights on or after the Company becomes eligible to file a registration statement
on Form S-3.
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 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
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consequences to certain types of holders that may be subject to special rules
under the U.S. federal income tax laws, such as financial institutions,
insurance companies, dealers in securities or foreign currency, tax-exempt
organizations, foreign corporations or nonresident alien individuals or persons
whose functional currency is not the U.S. dollar. Moreover, the effect of any
applicable state, local or foreign or other tax laws is not discussed.
THE FOLLOWING DISCUSSION IS FOR GENERAL INFORMATION ONLY. EACH PURCHASER IS
STRONGLY URGED TO CONSULT WITH ITS OWN TAX ADVISORS TO DETERMINE THE IMPACT OF
SUCH PURCHASER'S PERSONAL TAX SITUATION ON THE ANTICIPATED TAX CONSEQUENCES,
INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN OR OTHER TAX LAWS, OF
THE OWNERSHIP AND DISPOSITION OF CLASS A COMMON STOCK.
TAXATION OF THE COMPANY AND ITS SUBSIDIARIES
In general, the Company and its foreign (non-U.S.) subsidiaries will be
subject to U.S. federal income tax only to the extent they have income which has
its source in the United States or is effectively connected with a U.S. trade or
business. Except with respect to interest on pledged securities, it is
anticipated that the Company and its foreign subsidiaries will derive
substantially all of their income from foreign sources and that none of their
income will be effectively connected with a U.S. trade or business. As a result,
the Company and its foreign subsidiaries should not be subject to material U.S.
federal income tax. On the other hand, the domestic (U.S.) subsidiaries of the
Company will be subject to U.S. federal income tax on their worldwide income
regardless of its source (subject to reduction by allowable foreign tax
credits), and distributions by such U.S. subsidiaries to the Company or its
foreign subsidiaries generally will be subject to U.S. withholding taxes.
TAXATION OF U.S. SHAREHOLDERS
A U.S. shareholder receiving a distribution on Class A Common Stock
generally will be required to include such distribution in gross income as a
taxable dividend to the extent such distribution is paid from the current or
accumulated earnings and profits of the Company as determined under U.S. federal
income tax principles. Distributions in excess of the earnings and profits of
the Company generally will first be treated, for U.S. federal income tax
purposes, as a nontaxable return of capital to the extent of the U.S.
shareholder's basis in the Class A Common Stock and then as gain from the sale
or exchange of a capital asset. Dividends received on the Class A Common Stock
by U.S. corporate shareholders will not be eligible for the corporate dividends
received deduction.
A U.S. shareholder will be entitled to claim a foreign tax credit with
respect to income received from the Company only for foreign taxes (such as
withholding taxes), if any, imposed on dividends paid to such U.S. shareholder,
and not for taxes, if any, imposed on the Company or on any entity in which the
Company has made an investment. It is not anticipated, however, under current
Bermuda law that any such withholding taxes would be imposed by Bermuda on
distributions made by the Company to a U.S. shareholder. See 'Certain Bermuda
Tax Considerations.' For so long as the Company is a 'U.S. owned foreign
corporation,' distributions with respect to the Class A Common Stock that are
taxable as dividends generally will from the sale of Class A Common Stock 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%.
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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.
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
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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 would also be liable
for interest on the amount of such additional tax due with respect to such prior
years in which the Company was a PFIC. The amount allocated to the current
taxable year and any non-PFIC years would be taxed in the same manner as other
ordinary income earned in the current taxable year.
Under certain circumstances, if the Company were to become a PFIC,
distributions and dispositions in respect of shares in a direct or indirect
foreign corporate subsidiary of the Company may be attributed in whole or in
part to a U.S. investor, and such U.S. investor may be taxed under the PFIC
rules with respect to such distributions or dispositions.
If the Company were to become a PFIC, U.S. shareholders who acquire Class A
Common Stock from decedents could be denied the step-up of the income tax basis
for such Class A Common Stock to fair market value at the date of death which
would otherwise have been available and instead could have a tax basis equal to
the lower of the fair market value of the decedent's basis.
The above results may be eliminated (at least in part) if a U.S.
shareholder permanently elects to treat the Company as a 'qualified electing
fund' ('QEF') for U.S. federal income tax purposes. A stockholder of a QEF is
required for each taxable year to include in income a pro rata share of the
ordinary income of the QEF as ordinary income and a pro rata share of the net
capital gain of the QEF as long-term capital gain. If a U.S. shareholder in a
PFIC has made a QEF election in a year subsequent to the year in which such
investor acquired an interest in the PFIC, the U.S. shareholder must agree in
the year of such election to either (1) recognize gain equal to such U.S.
shareholder's unrealized appreciation in such stock or (2) assuming the Company
is a controlled foreign corporation (discussed below) include in income as a
dividend his pro rata share of the Company's earnings and profits up to the
first day of the tax year for which such election was made (in each case subject
to the
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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. shareholders adjusted
basis. If the stock declines in value during any year, such U.S. shareholder
will be entitled to a deduction from ordinary income the excess of such U.S.
shareholder's adjusted basis over the stock's value at the close of such year
but only to the extent of net mark-to-market gains previously included in
income. Any gain or loss on the sale of the stock of the PFIC will be ordinary
income or ordinary loss (but only to the extent of the previously included net
mark-to-market gains). In the case of a U.S. shareholder who makes this
mark-to-market election for PFIC stock as to which a QEF election was not in
effect during his period of ownership, a coordination rule applies to ensure
that the shareholder does not avoid the interest charge for periods prior to
this election. An election to mark-to-market applies to the year for which the
election is made and following years unless the PFIC stock ceases to be
marketable or the Internal Revenue Service consents to the revocation of such
election.
The Company intends to manage its business and the businesses of the
subsidiaries so as to attempt to avoid PFIC status 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
event that such foreign corporation is subsequently determined to be PFIC and to
permit the Internal Revenue Service ('IRS') to make and 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.
CONTROLLED FOREIGN CORPORATIONS
If 10% Shareholders, who are also U.S. persons, own, in the aggregate,
directly or indirectly, more than 50% (measured by voting power or value) of the
shares of a foreign corporation, that foreign corporation would be a controlled
foreign corporation ('CFC'). If a foreign corporation were characterized as a
CFC, then some portion of the undistributed income of the foreign corporation
may be imputed to such 10% Shareholders, and some portion of the gains
recognized by such 10% Shareholders on the disposition of their shares in the
foreign corporation (which would otherwise qualify for capital gains treatment)
may be converted into ordinary dividend income. The Company is currently a CFC,
and it is likely that 10% Shareholders who are also U.S. persons will continue
to own (or be deemed to own) more than 50% of the voting power of the
outstanding Common Stock of the Company and, thus, that the Company will
continue to be characterized as a CFC. However, the CFC rules referred to above
only apply with respect to such 10% Shareholders. For 1997, because the Company
was a CFC, the asset test to determine whether the Company would be a PFIC was
made by comparing the relative adjusted tax bases of the Company's assets and
not the relative fair market
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values of such assets, making it more difficult for the Company to manage its
affairs so as to avoid PFIC status. However, for taxable years beginning after
December 31, 1997, in the case of CFC's with publicly traded shares, the asset
test to determine whether the CFC is a PFIC will be made on the basis of the
relative fair market values of such assets. The Company expects to be publicly
traded for this purpose.
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 and gains are attributable to an
office or fixed place of business maintained by such non-U.S. shareholder in the
U.S. A non-U.S. shareholder generally will not be subject to U.S. federal income
or withholding tax in respect of gain recognized in the disposition of Class A
Common Stock.
UNITED STATES BACKUP WITHHOLDING AND INFORMATION REPORTING
U.S. SHAREHOLDERS
Under certain circumstances, a U.S. shareholder who is an individual may be
subject to backup withholding at a 31% rate on dividends received on Class A
Common Stock. This withholding generally applies only if such individual U.S.
shareholder (i) fails to furnish his or her taxpayer identification number
('TIN') to the U.S. financial institution or any other person responsible for
the payment of dividends on the Class A Common Stock, (ii) furnishes an
incorrect TIN, (iii) is notified by the U.S. Internal Revenue Service ('IRS')
that such U.S. shareholder has failed to properly report payments of interest
and dividends and the IRS has notified the Company that such U.S. shareholder is
subject to backup withholding, or (iv) fails, under certain circumstances, to
provide a certified statement, signed under penalty or perjury, that the TIN
provided is such U.S. shareholder's correct number and that such U.S.
shareholder is not subject to backup withholding rules.
Amounts withheld under the backup withholding rules do not constitute a
separate U.S. Federal income tax. Rather, any amounts withheld under the backup
withholding rules will be refunded or allowed as a credit against the U.S.
shareholder's U.S. federal income tax liability, if any, provided the required
information or appropriate claim for refund is filed with the Internal Revenue
Service.
NON-U.S. SHAREHOLDERS
Currently, U.S. information reporting requirements and backup withholding
will not apply to dividends on the Class A Common Stock paid to non-U.S.
shareholders at an address outside the U.S. (provided that the payor does not
have definite knowledge that the payee is a U.S. person). As a general matter,
information reporting and backup withholding will not apply to a payment of the
proceeds of a sale effected outside the U.S. of the Class A Common Stock by a
foreign office of a foreign holder. However, information reporting requirements
(but not backup withholding) will apply to a payment of the proceeds of a sale
effected outside the U.S. of the Class A Common Stock through a 'U.S. Broker',
unless the U.S. Broker has documentary evidence in its records that the non-U.S.
shareholder is not a U.S. person and has no actual knowledge that such evidence
is false, or the non-U.S. shareholder otherwise establishes an exemption. For
purposes of the preceding sentence, a U.S. Broker is a broker that (i) is a U.S.
person, (ii) is a foreign person that derives 50% or more of its gross income
for certain periods from the conduct of a trade or business in the U.S. or (iii)
is a Controlled Foreign Corporation. Payment by a broker of the proceeds of a
sale of the Shares effected inside the United States is subject to both backup
withholding and information reporting unless the non-U.S. shareholder certifies
under penalties of perjury that such non-U.S. shareholder is not a United States
person and provides such non-U.S. shareholders 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.
128
<PAGE>
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. 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.
129
<PAGE>
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.
130
<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 June 30, 1998........................... F-26
Condensed Consolidated Statements of Operations for the Six Months Ended
June 30, 1997 and June 30, 1998......................................................................... F-27
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1997 and June 30, 1998......................................................................... F-28
Notes to Condensed Consolidated Financial Statements...................................................... F-29
INTERNATIONAL TELECOMMUNICATIONS GROUP LTD. AND SUBSIDIARIES
Independent Auditors' Report.............................................................................. F-33
Consolidated Statement of Operations and Accumulated Deficit for the Nine Months Ended September 30,
1995.................................................................................................... F-34
Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 1995......................... F-35
Notes to Consolidated Financial Statements................................................................ F-36
</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
------------ ------------
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
Cost of services.................................................. 17,510 98,461 265,321
------------ ------------ ------------
Gross profit.................................................... 1,107 14,796 35,475
Selling, general and administrative expenses...................... 9,639 38,893 94,712
Depreciation and amortization..................................... 849 6,655 21,819
------------ ------------ ------------
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 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
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.
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.
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.
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)
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. The investment in Maxitel is accounted
for under the equity method of accounting.
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.
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.
Other
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.
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 connection with the purchase
of Belnet/RSL, the Company recorded approximately $15.6 million of goodwill.
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)
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, $25.0 million, and
$87.3 million at December 31, 1995, 1996 and 1997, respectively, resulting in
recorded goodwill of $85.5 million. At December 31, 1996 and 1997, the Company's
investment in RSL North America was $54.2 million and $87.3 million,
respectively, which represented in excess of 87% (at December 31, 1996) and 100%
(at December 31, 1997) of the outstanding shares of RSL North America.
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 $5.4 million of goodwill.
Accounting Treatment
The acquisitions, unless otherwise stated, have been accounted for by the
purchase method of accounting and, accordingly, the purchase prices have been
allocated to the assets acquired, primarily fixed assets and accounts
receivable, and liabilities assumed based on their estimated fair values at the
dates of acquisition. The excess of the purchase price over the estimated fair
values of the net assets acquired has been recorded as goodwill, which is
amortized over fifteen years. The valuation of the
F-9
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
2. ACQUISITIONS--(CONTINUED)
acquired assets and liabilities acquired in the 1997 acquisitions is preliminary
and as a result, the allocation of the acquisition costs among the tangible and
intangible assets may change.
The following presents the unaudited pro forma consolidated statements of
operations data of the Company for the years ended December 31, 1996 and 1997 as
though the acquisitions of RSL COM France, RSL COM Germany, Belnet/RSL, LDM,
Call Australia Group, and EZI had occurred on January 1, 1996. All other
acquisitions had insignificant operations prior to the date of acquisition. The
consolidated statements do not necessarily represent what the Company's results
of operations would have been had such acquisitions actually occurred on such
date.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997
----------------- -----------------
(UNAUDITED)
($ 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. The Company has included 100% of certain subsidiaries' operating
losses since the minority interests' investments have been reduced to zero.
Minority interest represents another entity's ownership interest in Belnet/RSL
at December 31, 1996 and Belnet/RSL, RSL Com Austria, RSL Com Italy, and RSL Com
Venezuela at December 31, 1997. All material intercompany accounts and
transactions have been eliminated. Each of the Company's subsidiaries has a year
end of December 31.
Management Assumptions--The preparation of the consolidated financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities and the reported amounts of revenues and expenses. Such
estimates primarily relate to reserves recorded for doubtful accounts and
accruals for other claims. Actual results could differ from these estimates.
Foreign Currency Translation--Assets and liabilities of foreign entities
have been translated into United States dollars using the exchange rates in
effect at the balance sheet dates. Results of operations of foreign entities are
translated using the average exchange rates prevailing throughout the period.
Local currencies are considered the functional currencies of the Company's
foreign operating entities. The Company utilizes a net settlement process with
its correspondents comprised of special drawing rights ('SDRs'). SDRs are the
established method of settlements among international telecommunications
carriers. The SDRs are valued based upon the values of a basket of foreign
currencies. Translation effects are accumulated as part of the cumulative
foreign currency translation adjustment in equity. 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.
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)
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 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.
Goodwill and Related Amortization--Goodwill represents the excess of cost
over the fair value of the net assets of acquired entities, and is being
amortized using the straight-line method over fifteen years. The Company
periodically reviews the value of its goodwill to determine if an impairment has
occurred. The Company measures the potential impairment of recorded goodwill by
the undiscounted value of expected future cash flows in relation to its net
capital investment in the subsidiary. Based on its review, the Company does not
believe that an impairment of its goodwill has occurred.
Deferred Financing Costs--The deferred financing costs incurred in
connection with the Senior Notes are being amortized on a straight line basis
over ten years.
Deposits and Other Assets--Deposits consist principally of amounts paid to
the Company's carrier vendors.
Revenue Recognition and Deferred Revenue--The Company records revenue based
on minutes (or fractions thereof) of customer usage. The Company records
payments received in advance for prepaid calling card services and services to
be supplied under contractual agreements as deferred revenues until such related
services are provided.
Cost of Services--Cost of services is comprised primarily of transmission
costs.
Selling Expenses--Selling costs such as commissions, marketing costs, and
other customer acquisition costs are treated as period costs. Such costs are
recorded in selling, general and administrative expenses in the Company's
consolidated statement of operations.
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
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)
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 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.
F-12
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
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.
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.
F-13
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
6. INCOME TAXES--(CONTINUED)
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.
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.
At December 31, 1996 and 1997, the Company is in compliance with the above
restrictive covenants.
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--(CONTINUED)
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.
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.
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)
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.
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 and other............................................... $ 80,358 $216,858
Deferred financing costs......................................... 10,988 11,655
------------ --------
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.
F-16
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
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 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 as additional paid in capital.
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.
F-17
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
10. CAPITAL LEASE OBLIGATIONS
Future minimum annual payments applicable to assets held under capital
lease obligations for years subsequent to December 31, 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>
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
F-18
<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)
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 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.
F-19
<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 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.
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
exercise price of the options 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 1997 Directors'
Plan provides for
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)
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.
<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
--------- -------------- --------------
--------- -------------- --------------
</TABLE>
<TABLE>
<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>
The following table summarizes information concerning the remaining options
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
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)
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>
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.
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--(CONTINUED)
The Company is committed to pay for transmission capacity under certain
operating leases. The minimum annual lease payments with respect to these
agreements is as follows (in thousands):
<TABLE>
<CAPTION>
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.
In connection with certain acquisitions, the Company has entered into
agreements whereby the minority shareholders have the right to put their
remaining shares to the Company.
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-23
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
16. REVENUES BY GEOGRAPHIC AREA
The following table provides certain geographic data on the Company's
operations for the years ended December 31, 1995, 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
Corporate and other.................................................... 156 (2,412) 15,312
-------- ------------- ------------
$ 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 and other.................................................... -- (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
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997
-------------------- --------------------
<S> <C> <C>
Net Revenue....................................................... $113,257 $266,142
Gross Profit...................................................... 14,796 30,992
Net Loss.......................................................... (34,309) (95,824)
</TABLE>
F-24
<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)
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997 FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
Revenues...................................................... $ 42,168 $ 67,193 $ 83,243 $108,192
-------- -------- -------- --------
-------- -------- -------- --------
Gross profit.................................................. $ 5,199 $ 7,366 $ 8,837 $ 14,073
-------- -------- -------- --------
-------- -------- -------- --------
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
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
<S> <C> <C> <C> <C>
Revenues...................................................... $ 15,864 $ 23,900 $ 30,458 $ 43,035
-------- -------- -------- --------
-------- -------- -------- --------
Gross profit.................................................. $ 1,180 $ 2,927 $ 4,530 $ 6,159
-------- -------- -------- --------
-------- -------- -------- --------
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-25
<PAGE>
RSL COMMUNICATIONS, LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
ASSETS
<S> <C> <C>
Cash and Cash Equivalents........................................................... $144,894 $ 319,613
Accounts Receivable, Net............................................................ 70,610 100,602
Securities--Available for Sale...................................................... 13,858 33,631
Prepaid Expenses and Other Current Assets........................................... 16,073 48,060
Marketable Securities--Held to Maturity............................................. 68,836 51,885
Property and Equipment.............................................................. 85,581 134,711
Less: Accumulated Depreciation...................................................... (13,804) (23,035)
Goodwill and Other Intangibles, Net................................................. 214,983 293,579
Deposits and Other Assets........................................................... 4,633 26,342
------------ -----------
Total Assets...................................................................... $605,664 $ 985,388
------------ -----------
------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts Payable and Other Liabilities.............................................. $154,324 $ 185,964
Short-term Debt..................................................................... 8,033 12,917
Long-term Debt...................................................................... 20,108 21,461
Senior Notes and Senior Discount Notes, Net......................................... 296,500 680,997
Other Liabilities--Noncurrent....................................................... -- 52,650
Other Shareholders' Capital......................................................... 274,638 276,648
Accumulated Deficit................................................................. (147,939) (245,249)
------------ -----------
Total Liabilities and Shareholders' Equity........................................ $605,664 $ 985,388
------------ -----------
------------ -----------
</TABLE>
See notes to condensed consolidated financial statements.
F-26
<PAGE>
RSL COMMUNICATIONS, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR LOSS PER SHARE)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------
JUNE 30, JUNE 30,
1997 1998
-------- --------
<S> <C> <C>
Revenues................................................................................ $109,361 $298,202
Cost of Services........................................................................ (96,797) (251,865)
-------- --------
Gross profit....................................................................... 12,564 46,337
Selling, general and administrative expenses............................................ (38,213) (79,817)
Depreciation and amortization........................................................... (8,960) (21,124)
-------- --------
Loss from operations.................................................................... (34,609) (54,604)
Interest income......................................................................... 7,124 10,834
Interest expense........................................................................ (19,252) (33,330)
Other income (expense)-net.............................................................. 6,606 (1,504)
Minority interest....................................................................... (229) 2,728
Income taxes............................................................................ (357) (634)
-------- --------
Net loss before extraordinary item...................................................... (40,717) (76,510)
Extraordinary item...................................................................... -- (20,800)
-------- --------
Net loss after extraordinary item....................................................... $(40,717) $(97,310)
-------- --------
-------- --------
Loss per share of common stock before extraordinary item................................ $ (3.72) $ (1.82)
Loss per share of common stock after extraordinary item................................. $ (3.72) $ (2.32)
</TABLE>
See notes to condensed consolidated financial statements.
F-27
<PAGE>
RSL COMMUNICATIONS, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1997 1998
--------- ---------
<S> <C> <C>
Net loss.............................................................................. $ (40,717) $ (97,310)
Depreciation and amortization......................................................... 8,960 21,124
Working capital change and other...................................................... (13,490) (32,019)
--------- ---------
Net cash used in operations...................................................... (45,247) (108,205)
--------- ---------
Acquisitions of subsidiaries.......................................................... (5,455) (47,744)
Purchase of property and equipment.................................................... (7,511) (37,098)
Proceeds from sales of marketable securities.......................................... 17,031 13,858
Purchase of securities available for sale............................................. -- (33,631)
Proceeds from restricted securities................................................... 22,665 18,750
Other................................................................................. 132 729
--------- ---------
Net cash provided by (used in) investing activities.............................. 26,862 (85,136)
--------- ---------
Proceeds from issuance of 1998 Notes.................................................. -- 499,045
Payment of offering cost.............................................................. -- (5,647)
Retirement of 1996 Notes.............................................................. -- (127,493)
Proceeds from notes payable........................................................... -- 4,094
Payment of notes payable.............................................................. (1,987) --
Proceeds from issuance of Class A shares.............................................. -- 281
Other................................................................................. (820) (1,709)
--------- ---------
Net cash (used in) provided by financing activities................................. (2,807) 368,571
--------- ---------
(Decrease) increase in cash and cash equivalents...................................... (21,192) 175,230
Effects of foreign currency on cash and cash equivalents.............................. (884) (511)
Cash and cash equivalents at beginning of period...................................... 104,068 144,894
--------- ---------
Cash and cash equivalents at end of period............................................ $ 81,992 $ 319,613
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid for interest................................................................ $ 23,089 $ 17,356
--------- ---------
--------- ---------
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....................................... $ 6,359 $ 4,703
--------- ---------
--------- ---------
Acquisition of distribution rights.................................................... $ -- $ 44,000
--------- ---------
--------- ---------
</TABLE>
See notes to condensed consolidated financial statements.
F-28
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 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 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
'Initial Public Offering') 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-29
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 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').
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 six month period ended June 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 six months ended June 30,
1998 and June 30, 1997 of $7.0 million and $0.5 million, respectively,
represented foreign currency translation adjustment. Accumulated other
comprehensive loss included in the accompanying condensed consolidated balance
sheet as of June 30, 1998 and June 30, 1997 was $12.3 million and $1.1 million,
respectively, consisting of the accumulated foreign currency translation
adjustment.
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 six month period ended June 30, 1997 have been presented
retroactively to give effect to the Company's recapitalization in September 1997
and also reflects the conversion by certain shareholders of Class B common
shares into Class A common shares in September 1997.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------
JUNE 30, JUNE 30,
1997 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Weighted average number of shares of
common stock outstanding................................................................. 10,957 42,021
</TABLE>
Fully diluted income (loss) per share amounts are not presented because the
inclusion of these amounts would be anti-dilutive. Fully diluted income (loss)
per share amounts for the current period do not differ materially from basic
earnings per share amounts.
6. ACQUISITIONS
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. The acquisition has 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.
F-30
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1998--(CONTINUED)
6. ACQUISITIONS--(CONTINUED)
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. 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, the Company acquired a 27.19% economic interest in Telegate
AG, a directory information provider in Germany, for approximately $33.6
million. Management can not exert influence in, nor does it participate in, day
to day management activities. The purchase price was included in securities
available for sale on the Condensed Consolidated Balance Sheets.
In June 1998, RSL COM Europe, Ltd. ('RSL COM Europe'), a subsidiary of the
Company, entered into an agreement (the 'Metro Agreement') with Metro Holding AG
('Metro Holding'), a German wholesale and retail management holding company,
pursuant to which Metro Holding's appropriate subsidiaries agreed to promote,
market, sell and distribute the Company's services through Metro Holding's
wholesale and retail operations in Europe. Metro Holding received a 12.5 percent
interest in the equity of RSL COM Europe and the option to acquire up to an
additional 7.5 percent of RSL COM Europe (the 'Additional Option').
In June 1998, the Company agreed to acquire Motorola Telecom, a division of
Motorola's European Cellular Subscriber Group, for $75 million in cash and
assumption of working capital deficit of approximately $25 million. Motorola
Telecom is a provider of cellular airtime services and related products in
Europe with operations in the United Kingdom, France, Germany and Belgium. The
acquisition is subject to receipt of various third party and work council
approvals.
The valuation of the above acquired assets is preliminary and as a result,
the allocation of the acquisition costs may change, including goodwill.
7. SUMMARIZED FINANCIAL INFORMATION FOR RSL PLC
The following presents summarized financial information of RSL PLC as of
June 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 U.S.
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, Australian operations, Latin American operations,
corporate overhead expenses and available credit facilities, identical to the
financial statements of RSL PLC.
F-31
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1998--(CONTINUED)
7. SUMMARIZED FINANCIAL INFORMATION FOR RSL PLC--(CONTINUED)
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, JUNE 30,
1997 1998
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Current Assets................................................................. $212,568 $429,298
Non-current Assets............................................................. 324,118 430,994
Current Liabilities............................................................ 122,672 172,263
Non-current Liabilities........................................................ 557,448 895,395
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
1997 1998
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Net Revenue......................................................................... $102,175 $242,909
Gross Profit........................................................................ 11,995 36,948
Net Loss............................................................................ (33,738) (86,802)
</TABLE>
8. SUBSEQUENT EVENTS
In July 1998, RSL COM Europe and Metro Holding, entered into an amended and
restated share subscription, share option and shareholders agreement and a
related exchange agreement, pursuant to which, among other things, Metro Holding
converted all of its shares in RSL COM Europe into newly issued shares of the
Class A Common Stock of the Company. Accordingly, the Company issued Metro
Holding 1,607,142 shares (the 'RSL Shares') of RSL's Class A Common Stock, par
value $0.00457 per share, in exchange for 142,857 common shares of RSL Europe
and, the Additional Option granted pursuant to the Metro Agreement was
cancelled. All of the RSL Shares acquired by Metro Holding are restricted from
transfer until April 1, 2001.
In July 1998, the Company agreed to acquire Westel Telecommunications, Ltd.
('Westel'), a Canadian facilities based telecommunications company, from British
Columbia Railway Company, for approximately $38 million. In connection with the
transaction, the Company, together with Michael Kedar, formed MK Telecom
Network, Inc., a Canadian corporation, which will control the transmission
facilities owned by Westel in order to comply with Canadian regulatory
restrictions. The transaction closed in August 1998.
F-32
<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-33
<PAGE>
INTERNATIONAL TELECOMMUNICATIONS GROUP LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
NINE MONTHS ENDED SEPTEMBER 30, 1995
<TABLE>
<S> <C>
Revenues......................................................................................... $ 26,351,634
Cost of Services................................................................................. 24,614,337
------------
Gross Profit................................................................................... 1,737,297
Selling, General and Administrative Expenses..................................................... 6,299,188
------------
Loss from Operations............................................................................. (4,561,891)
Interest Income.................................................................................. 56,148
Interest Expense................................................................................. (345,212)
------------
Net Loss......................................................................................... (4,850,955)
Accumulated Deficit, January 1, 1995............................................................. (5,153,000)
------------
Accumulated Deficit, September 30, 1995.......................................................... $(10,003,955)
------------
------------
</TABLE>
See notes to consolidated financial statements.
F-34
<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-35
<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
Cost of services........................................... 37,087,243
----------------------
Gross Profit............................................... 3,416,929
Selling, general and administrative expenses............... 23,555,216
----------------------
Loss from operations....................................... (20,138,287)
Interest income............................................ 56,148
Interest expense........................................... (738,496)
----------------------
Net loss................................................... $(20,820,635)
----------------------
----------------------
</TABLE>
F-36
<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-37
<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-38
<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-39
<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.........................................
------------
Total .....................................................
------------
------------
</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 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 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 of Class A Common Stock solely to cover
over-allotments, if any. If the U.S. Underwriters exercise their over-allotment
option, the U.S. Underwriters have severally agreed, subject to certain
conditions, to purchase approximately the same percentage thereof that the
number of shares to be purchased by each of them, as shown in the foregoing
table, bears to the shares of Class A Common Stock offered hereby.
The Selling Shareholders have granted the International Underwriters a similar
option to purchase up to an aggregate of additional shares of Class A
Common Stock.
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.................................................... 15
Use of Proceeds................................................. 28
Price Range of Class A Common Stock............................. 28
Dividend Policy................................................. 28
Dilution........................................................ 28
Capitalization.................................................. 30
Selected Consolidated Financial Data............................ 31
Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 33
Business........................................................ 46
Management...................................................... 99
Certain Relationships and Related Transactions.................. 109
Principal and Selling Shareholders.............................. 111
Description of Capital Stock.................................... 114
Description of Certain Indebtedness............................. 118
Shares Eligible for Future Sale................................. 118
Certain United States Federal Income Tax Considerations......... 123
Certain Bermuda Tax Considerations.............................. 129
Legal Matters................................................... 129
Experts......................................................... 130
Service of Process and Enforcement of Liabilities............... 130
Index to Consolidated Financial Statements...................... F-1
Underwriting.................................................... U-1
</TABLE>
================================================================================
================================================================================
SHARES
RSL COMMUNICATIONS, LTD.
CLASS A COMMON SHARES
(PAR VALUE $.00457 PER SHARE)
------------------
[LOGO OF RSLCOM]
------------------
GOLDMAN, SACHS & CO.
LEHMAN BROTHERS
MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
WARBURG DILLON READ LLC
================================================================================
<PAGE>
ALTERNATE
SUBJECT TO COMPLETION, DATED AUGUST 27, 1998
SHARES
RSL COMMUNICATIONS, LTD.
CLASS A COMMON SHARES
(PAR VALUE $.00457 PER SHARE)
----------------------
Of the Class A common shares, par value $.00457 per share (the
'Class A Common Stock'), of RSL Communications, Ltd. (the 'Issuer') offered
hereby, shares are being offered in an international offering outside the
United States (the 'International Offering') and 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 indentical for both
Offerings. See 'Underwriting.'
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
, 1998 was $ .
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 15 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
THE
INITIAL PUBLIC UNDERWRITING ISSUER(2)
OFFERING PRICE DISCOUNT(1) -
-------------- ------------ -------------
<S> <C> <C> <C>
Per Share.............................................................. $ $ $
Total(3)............................................................... $ $ $
</TABLE>
- ------------------
(1) The Issuer and the Selling Shareholders 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 $ payable by the Issuer.
(3) The Selling Shareholders have granted the International Underwriters an
option for 30 days to purchase up to an additional shares of Class A
Common Stock at the offering price per share, less the underwriting
discount, solely to cover any over-allotments. Additionally, the Selling
Shareholders have granted the U.S. Underwriters a similar option with
respect to an additional shares of Class A Common Stock 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 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......................
Warburg Dillon Read.............................................
------------
Total .....................................................
------------
------------
</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
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.
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
U-1
<PAGE>
[ALTERNATE PAGE]
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 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 additional shares of Class A Common Stock solely to
cover over-allotments, if any. 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 shares of Class A Common Stock
offered hereby. The Selling Shareholders have granted the U.S. Underwriters a
similar option to purchase up to an aggregate of additional shares of
Class A Common Stock.
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 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.
U-2
<PAGE>
[ALTERNATE PAGE]
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.................................................... 15
Use of Proceeds................................................. 27
Price Range of Class A Common Stock.............................
Dividend Policy.................................................
Dilution........................................................
Capitalization.................................................. 28
Selected Consolidated Financial Data............................ 30
Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 32
Business........................................................ 44
Management...................................................... 93
Certain Relationships and Related Transactions.................. 104
Principal and Selling Shareholders.............................. 105
Description of Capital Stock....................................
Description of Certain Indebtedness............................. 111
Shares Eligible for Future Sale.................................
Certain United States Federal Income Tax Considerations......... 116
Certain Bermuda Tax Considerations..............................
Legal Matters................................................... 116
Experts......................................................... 116
Service of Process and Enforcement of Liabilities............... 117
Index to Consolidated Financial Statements...................... F-1
Underwriting.................................................... U-1
</TABLE>
================================================================================
SHARES
RSL COMMUNICATIONS, LTD.
CLASS A COMMON SHARES
(PAR VALUE $.00457 PER SHARE)
------------------
[LOGO OF RSLCOM]
------------------
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........................................... *
Counsel Fees and Expenses........................................ *
Accountants' Fees and Expenses................................... *
Transfer Agent and Registrar Fees and Expenses................... *
Nasdaq Listing Fee...............................................
Miscellaneous.................................................... *
----------
Total....................................................... $
----------
----------
</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 'Initial Public Offering').
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 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
II-1
<PAGE>
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 Initial Public Offering.
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 Initial Public Offering, 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.
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
II-2
<PAGE>
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.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ------------------------------------------------------------
<S> <C>
****1.1 -- Underwriting Agreement
*3.1 -- Certificate of Incorporation of RSL Communications, Ltd.,
issued by the Bermuda Registrar of Companies on March 14,
1996.
*3.2 -- Memorandum of Association of RSL Communications, Ltd., filed
with the Bermuda Registrar of Companies on March 14, 1996.
**3.3 -- Bye-Laws of RSL Communications, Ltd. (as amended through
September 2, 1997).
**4.1 -- Form of Class A Common Share Certificate.
5.1 -- Opinion of Conyers, Dill & Pearman.
5.2 -- Opinion of Levinson Gray.
*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.
++10.5 -- Form of 12 1/4% Senior Note due 2006.
+++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.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ------------------------------------------------------------
<S> <C>
+++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.
*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.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ------------------------------------------------------------
<S> <C>
*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.
*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.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ------------------------------------------------------------
<S> <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.
*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>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ------------------------------------------------------------
<S> <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.
****21.1 -- Subsidiaries of the Company.
23.1 -- Consent of Deloitte & Touche LLP (included on page II-10).
23.3 -- Consent of Conyers, Dill & Pearman (included in Exhibit 5.1
hereto).
23.4 -- Consent of Levinson Gray (included in Exhibit 5.3 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.
**** To be filed by amendment.
(Footnotes continued on next page)
II-7
<PAGE>
(Footnotes continued from previous page)
+ 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).
(b) Financial Statement Schedules:
As of 1996 and 1997.
Schedule I - Condensed Financial Information of RSL Communications PLC
(included at page S-1).
Scheduled II - Schedule of Valuation Allowances (included at page S-4).
ITEM 17. UNDERTAKINGS
1. The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to the registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933 (the 'Act');
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the 'Calculation of Registration Fee' table in
the effective registration statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in this registration statement.
(2) That, for the purpose of determining any liability under the Act, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
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-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
State of New York on the 25th day of August, 1998.
RSL COMMUNICATIONS, LTD.
By: /s/ Itzhak Fisher
------------------------------------
Itzhak Fisher
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Itzhak Fisher his true and lawful
attorney-in-fact and agent, acting alone, with full power of substitution and
resubstitution, for him and in his name, place, and stead, in any and all
capacities, to sign any or all amendments (including post-effective amendments)
to this Registration Statement, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite or necessary
to be done in and about the premises, as fully for all intents and purposes as
such person might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this 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 AUGUST , 1998
(RONALD S. LAUDER) BOARD OF DIRECTORS
/s/ ITZHAK FISHER
- ---------------------------- DIRECTOR, PRESIDENT AND AUGUST , 1998
(ITZHAK FISHER) CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE
OFFICER)
/s/ JACOB Z. SCHUSTER DIRECTOR, EXECUTIVE VICE AUGUST , 1998
- ---------------------------- PRESIDENT, CHIEF FINANCIAL
(JACOB Z. SCHUSTER) OFFICER, ASSISTANT SECRETARY
AND TREASURER
(PRINCIPAL FINANCIAL
OFFICER)
</TABLE>
II-9
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------- ---------------------------- ------------------
<S> <C> <C>
/s/ MARK J. HIRSCHHORN VICE PRESIDENT-FINANCE, AUGUST , 1998
- ---------------------------- GLOBAL CONTROLLER AND
(MARK J. HIRSCHHORN) ASSISTANT SECRETARY
(CONTROLLER AND PRINCIPAL
ACCOUNTING OFFICER)
DIRECTOR AUGUST , 1998
- ----------------------------
(GUSTAVO A. CISNEROS)
/s/ FRED H. LANGHAMMER DIRECTOR AUGUST , 1998
- ----------------------------
(FRED H. LANGHAMMER)
DIRECTOR AUGUST , 1998
- ----------------------------
(LEONARD A. LAUDER)
/s/ EUGENE SEKULOW DIRECTOR AUGUST , 1998
- ----------------------------
(EUGENE SEKULOW)
/s/ NICOLAS G. TROLLOPE DIRECTOR AUGUST , 1998
- ----------------------------
(NICOLAS G. TROLLOPE)
</TABLE>
II-10
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of RSL Communications, Ltd.
on Form S-1 of our report dated 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, which is part of this
Registration Statement.
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
August 26, 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
Current Assets.......................... $ 201,734 $ 212,568
Marketable Securities--Held to
maturity.............................. 104,370 68,836
Property and Equipment.................. 31,941 64,649
Other Assets............................ 88,820 190,633
----------------- -------------
Total................................. $ 426,865 $ 536,686
----------------- -------------
----------------- -------------
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current Liabilities..................... $ 74,948 $ 122,672
Long Term Debt.......................... 94,556 257,448
Senior Notes, 12 1/4% Due 2006.......... 300,000 300,000
Shareholders' Deficiency................ (42,639) (143,434)
----------------- -------------
Total................................. $ 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
Cost of Services............................. 98,461 235,150
------------ ----------
Gross Profit............................ 14,796 30,992
Expenses..................................... 41,619 100,118
------------ ----------
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 Sales of Marketable
Securities................................. 14,701 41,038
(Purchase) Proceeds 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
</TABLE>
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
JANUARY 1, COSTS AND OTHER DECEMBER 31,
1996 EXPENSES ACCOUNTS DEDUCTIONS 1996
---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Bad debt provision... $ 1,596 $ 2,829 $ -- $ (544) $ 3,881
</TABLE>
<TABLE>
<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
*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.
++10.5 -- Form of 12 1/4% Senior Note due 2006.
+++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.
**10.83 -- International Telecommunication Services Agreement, dated
July 1, 1995, between International Telecommunications
Corporation and TELECOM Denmark.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
<S> <C> <C>
- -------- ------------------------------------------------------------ ----------
**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.
****21.1 -- Subsidiaries of the Company.
23.1 -- Consent of Deloitte & Touche LLP (included on page II-10).
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)
(Footnotes continued on next page)
<PAGE>
(Footnotes continued from previous page)
*** Confidential Treatment was granted by the Commission with respect to
certain information contained in this exhibit.
**** To be filed by amendment.
+ 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).
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 319,613
<SECURITIES> 85,516
<RECEIVABLES> 100,602
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 501,906
<PP&E> 134,711
<DEPRECIATION> 23,035
<TOTAL-ASSETS> 985,388
<CURRENT-LIABILITIES> 198,881
<BONDS> 680,997
0
0
<COMMON> 195
<OTHER-SE> 31,204
<TOTAL-LIABILITY-AND-EQUITY> 985,388
<SALES> 0
<TOTAL-REVENUES> 298,202
<CGS> 0
<TOTAL-COSTS> 251,865
<OTHER-EXPENSES> (1,552)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33,330
<INCOME-PRETAX> (75,876)
<INCOME-TAX> 634
<INCOME-CONTINUING> (76,510)
<DISCONTINUED> 0
<EXTRAORDINARY> 20,800
<CHANGES> 0
<NET-INCOME> (97,310)
<EPS-PRIMARY> (2.32)
<EPS-DILUTED> (2.32)
</TABLE>
