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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
|X| Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1998
|_| Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period
from ____________________ to ___________________
Commission file number 0-23139
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
Organization) Code Number)
Clarendon House
Church Street
Hamilton HM CX Bermuda
(441) 295-2832
----------------------
(Address and telephone
number of
registrant's principal
executive offices)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Class A Common Shares, par value $.00457 per share
--------------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
As of March 24, 1999, 26,724,580 Class A Common Shares of the registrant
were outstanding and 26,245,315 Class B Common Shares of the registrant were
outstanding and the aggregate market value of the voting stock (computed based
on the average of the last bid and asked price on such date) held by
non-affiliates was approximately $715.2 million.
DOCUMENTS INCORPORATED BY REFERENCE
Location in Form 10-K in Which
Document Document is Incorporated
-------- ------------------------------
Registrant's 1999 Proxy Statement PART III
to be filed with the Commission
no later than April 30, 1999
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Table of Contents
PART I
Item 1. BUSINESS
Item 2. PROPERTIES
Item 3. LEGAL PROCEEDINGS
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Item 6. SELECTED FINANCIAL DATA
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Item 11. EXECUTIVE COMPENSATION
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
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PART I
ITEM 1. BUSINESS
COMPANY OVERVIEW
RSL Communications, Ltd. (together with its subsidiaries, the "Company") is
a rapidly growing multinational telecommunications company which provides a
broad array of services, with a focus on international long distance voice
services, to small and medium-sized businesses in key markets. The Company's
services include international and national fixed and wireless, calling card,
fax, data, Internet, private line and other value-added telecommunications
services. The Company began operations in the United States in 1995 and has
since grown rapidly through acquisitions, strategic investments, joint ventures
and alliances and the start-up of its own operations in key markets. The Company
generates revenue in 19 countries in which approximately 70% of all
international long distance telecommunications minutes were originated in 1997.
COMPANY OPERATIONS
The Company conducts its operations in four principal regions: North
America, Europe, Asia/Pacific Rim and Latin America. The Company has developed a
different strategy for each region, driven in part by the pace of local
deregulation. In each region, the Company conducts its operations within a given
country through a local subsidiary (a "Local Operator").
NORTH AMERICA. The Company began operations in the U.S. in 1995 through RSL
COM U.S.A., Inc. ("RSL USA"). Through recent acquisitions, the Company has
enhanced its U.S. network and its ability to originate and terminate U.S. long
distance traffic, 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 a cash purchase price of $91.2 million and
the assumption of certain liabilities in the amount of $38.3 million. WestComm
provides voice telephony, data services (including frame relay and TCP/IP
networks) and Internet access to a customer base consisting primarily of small
to medium-sized businesses through a network of six national switches. The
Company is integrating WestComm's network, complementary customer base and sales
and distribution channels with the Company's existing operations, and is
offering 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 outside the U.S. and, as a result, will soon be able to terminate
traffic on "RSL-NET," the Company's integrated digital telecommunications
network, in certain regions of Canada and Mexico, the two largest country
destinations for U.S. originated traffic. In July 1998, the Company acquired
Westel Telecommunications Ltd. ("Westel") from British Columbia Railway Company
for approximately $37.6 million. Westel is a telecommunications company that
provides a broad range of enhanced telecommunications services, including long
distance, data, private line and Internet access throughout British Columbia.
Also, the Company, through certain subsidiaries of RSL COM Latin America, Ltd.,
acquired switches and fiber optic cable covering 14 cities in Mexico, which were
fully installed in 1998.
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EUROPE. The Company currently has operations in 14 countries in Europe. In
anticipation of deregulation, the Company has established a significant presence
in most major EU markets through a series of acquisitions. Pursuing its "first
to market" entry strategy, the Company has made significant investments in
advance of customer acquisition to establish operations, retain qualified
personnel and build a recognized brand name. In the fully deregulated European
markets in which it operates, the Company (i) has been permitted to interconnect
its switches directly with the local exchange network, instead of through more
expensive means, such as leased lines or dial-in access, and (ii) has linked, or
is in the process of linking, with RSL-NET through owned international
transmission facilities directly, instead of entering into long-term lease
agreements for international capacity at a high fixed cost or purchasing
per-minute of use termination rates from the dominant 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.
During 1998, the Company completed a number of alliances and acquisitions
in Europe in order to significantly expand its distribution channels and broaden
its customer base and product offerings.
o The Company acquired the business of Motorola Tel.co in the United Kingdom
and Germany from Motorola Inc. for approximately $68.1 million in cash and
the assumption of certain liabilities in the amount of $10.6 million.
Motorola Tel.co resells wireless services and related products in these
countries to a base of over 350,000 subscribers. This transaction
significantly increases the number of direct customer relationships in
Europe and allows the Company to cross-sell long distance and wireless
services.
o The Company entered into a marketing and distribution services agreement
with Metro Holding AG ("Metro Holding"), the management holding company for
Metro AG, one of the largest retailers in Europe with 750 operating units
in 18 European countries. Under this agreement, Metro Holding will assist
the Company in promoting, marketing, selling and distributing the Company's
services through Metro AG's wholesale and retail operations in Europe. This
arrangement is designed to provide the Company access to Metro AG's
extensive distribution network and customer base (which includes a large
number of small and medium- sized businesses) and is expected to
significantly accelerate the Company's penetration into key European
markets. In connection with its alliance with the Company, Metro Holding
initially acquired in April 1998 a 12.5% equity interest in RSL COM Europe,
Ltd. ("RSL Europe"). In June 1998, Metro Holding converted all of its
interest in RSL Europe into 1,607,142 shares of Class A Common Stock (based
on value for value) and purchased an equal number of Class A Common Stock
from certain shareholders of the Company. As of December 31, 1998, Metro
Holding held approximately 6.1% of the outstanding stock of the Company in
the aggregate, which it is required to hold until at least April 1, 2001.
o The Company acquired a majority interest in Telegate Holding GmbH
("Telegate Holding"), the controlling holding company of Telegate AG
("Telegate"), Europe's third largest directory information provider, for
approximately $33.6 million. An affiliate of Metro Holding owns a minority
interest in Telegate and Telegate Holding. The Company, together with
Telegate, plans to expand Telegate's services and provide international
directory services and call completion throughout Europe utilizing RSL-NET.
The Company may, in certain limited circumstances, be required to issue
shares of Class A Common Stock to Metro Holding and its affiliates in
exchange for their interests (approximately 25%) in Telegate Holding
("Telegate Exchange").
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o The Company purchased 90% of the equity of Telecenter Oy, an independent
sales agent in Finland, for approximately $14.4 million.
In February 1999, the Company, through its subsidiary RSL COM Deutschland
GmbH, entered into an agreement with Debitel Kommunikationstechnik GmbH & Co. KG
("Debitel"), Europe's largest mobile reseller, pursuant to which Debitel will
utilize the Company's fixed wire network for certain new services that will be
provided by Debitel to German customers.
ASIA/PACIFIC RIM. Most markets in the Asia/Pacific Rim region are in the
earliest stages of deregulation, with the notable exception of Australia, which
is at a significantly more advanced stage of deregulation. The Company began
operations in Australia in April 1997 and has established a significant presence
in that market. The Company also initiated start-up operations in Japan in July
1998.
In March 1998, the Company acquired the customer base of First Direct
Communications Pty, Limited and Link Telecommunications Pty. Ltd., two
switchless mobile telecommunications resellers, for approximately $19.6 million.
The Company is evaluating acquisition opportunities in other Asia/Pacific
Rim markets consistent with its global strategy.
LATIN AMERICA. Most markets in Latin America are in the earliest stages of
deregulation. The Company's strategy is to develop, through local operating
companies formed in conjunction with local partners, a pan-Latin American
network and operations spanning Central and South America and the Caribbean. In
mid-1997, the Company formed a joint venture to pursue this strategy with
entities controlled by the Cisneros Group of Companies, a group of companies
owned by the Cisneros family or in which members of the Cisneros family have an
interest that are engaged in a number of diverse commercial enterprises in a
variety of countries around the world. Revenues from the Company's Latin
American operations accounted for less than 1% of the Company's consolidated
revenues for 1997 and 1998.
INDUSTRY OVERVIEW
According to industry sources, international long distance switched
telecommunications traffic worldwide increased from 28 billion minutes in 1989
to 81.8 billion minutes in 1997 and is projected to reach between approximately
128.7 and 158.6 billion minutes by the year 2001. The 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.
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
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growing and the decline in prices generally has been more than offset by an
increase in telecommunications usage.
U.S. INTERNATIONAL LONG DISTANCE MARKET
The U.S. international long distance market is large and growing. 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 existing government-owned post, telegraph and telephone
monopolies ("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
(the rates paid to other carriers to terminate an international call) and billed
revenues. Increased competition arising from deregulation and privatization and
pressure arising from increased global trade have brought about reductions in
settlement rates and end-user prices, reducing termination costs for United
States based carriers. The Company believes that as settlement rates and costs
for leased capacity continue to decline, international long distance will
continue to provide high revenue and gross profit per minute, although there can
be no assurance in this regard.
EUROPEAN INTERNATIONAL LONG DISTANCE MARKET
In Europe, 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. The EC has enacted several directives requiring EU
member states to liberalize the market for telecommunications services,
including a 1990 EC directive (the "1990 Directive") requiring each member state
to liberalize by 1992 all telephony services offered over its public switched
telephone network ("PSTN"), with the exception of basic "voice telephony" and
specified other services and a 1996 EC directive (the "Full Competition
Directive"), requiring member states to liberalize "Open Voice Telephony
Services," effective January 1, 1998, except for certain member states who were
granted extensions for a specified period of time. Some member states have been
late in implementing such directives, however, and there can be no assurance
regarding the timing or extent of liberalization in any particular country or
the EU in general. In response to these European regulatory changes, a number of
different competitors, including the Company, are emerging to compete with the
European PTTs.
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, an international agreement executed in
February 1997 that requires signatories to open their telecommunications markets
to competition, and have committed to open their markets to competition.
Australia, the Philippines and New
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Zealand have already opened their markets to full competition and Hong Kong,
Indonesia, Japan, South Korea and Malaysia have legalized the provision of
value-added services. Singapore licensed two new operators in 1998.
LATIN AMERICAN INTERNATIONAL LONG DISTANCE MARKET
Various countries in Latin America have taken initial steps towards
deregulation in the telecommunications market during the last few years. Certain
countries have competitive local and/or long distance sectors, most notably
Chile, which has competitive operators in all sectors. Colombia has granted two
long distance operating licenses to local companies, ending the monopoly of
Colombia's PTT. In addition, various Latin American countries have completely or
partially privatized their national carriers, including Argentina, Brazil,
Chile, Mexico, Peru and Venezuela. Venezuela has also legalized value-added
services and has targeted January 1, 2000 as the date for deregulation. Brazil
privatized its PTT, Telebras, in July 1998, and has also established an
independent regulator, ANATEL, to oversee its telecommunications industry. In
Mexico, the former PTT has been privatized and its exclusive long distance
concession was modified in 1990 to allow other participants to render long
distance services as of August 1996. Additionally, the PTT has been required to
interconnect with the networks of competitors since January 1997. Competition in
Mexico has been initiated and an independent regulator has been established.
Peru opened its market to competition in August 1998, ending the monopoly of its
PTT, Telefonica del Peru, one year earlier than scheduled.
OTHER MARKETS
Despite the growth and deregulatory trends in the global telecommunications
market, the pace of change and emergence of competition in many countries,
particularly in parts of Africa, remains slow, with domestic and international
traffic still dominated by the government-controlled PTTs. The Company believes
that international carriers like the Company that 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. 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.
COMPANY STRATEGY
The Company's strategy is to capitalize on the growth, deregulation and
profitability of the international long distance market. The key elements of
this strategy are as follows:
FOCUS ON PROVIDING INTERNATIONAL LONG DISTANCE SERVICES
The 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.
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IDENTIFY AND ENTER KEY MARKETS AHEAD OF FULL DEREGULATION
The Company seeks to identify markets that originate or terminate
significant levels of international traffic and are being deregulated. The
Company then seeks to enter these markets ahead of full deregulation to gain
competitive advantages over carriers that enter after deregulation is complete.
These advantages include (i) developing multiple sales and distribution channels
and a customer base prior to widespread competition, (ii) acquiring experienced
management, including technical and marketing personnel, (iii) achieving name
recognition as an early competitor to the incumbent PTTs, and (iv) a greater
chance of obtaining necessary licenses. 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 by offering the allowed services, then subsequently leverages the
advantages of its early entry, including name recognition and established
marketing and distribution capabilities, to take advantage of full deregulation.
TARGET SMALL AND MEDIUM-SIZED BUSINESSES
The Company focuses on offering high quality products and services to small
and medium-sized businesses that originate in excess of $500 per month in
international telephone calls. The Company believes that this segment accounts
for a significant percentage of international calling traffic in most markets
and offers significant market opportunities because it has traditionally been
underserved by the major global telecommunications carriers and the PTTs. By
offering a broad range of interrelated services and continuing its commitment to
provide high quality customer service, the Company seeks to strengthen its
direct relationships with a diverse and rapidly growing customer base and build
customer loyalty.
BUILD A COST COMPETITIVE GLOBAL NETWORK
By integrating its current and future owned switching facilities, known as
points of presence ("POPs"), into RSL-NET, the Company believes that it will be
able to originate, transport and terminate traffic utilizing its own network,
thereby bypassing the high costs associated with the transport of the
international portion of a call through a third party carrier. Substantially all
of the Local Operators have network switching facilities to provide
international voice and other telecommunications services in their markets. The
Company currently connects its facilities principally by a combination of
ownership interests in fiber optic systems and private leased lines. The Company
intends to continue to make significant investments in its own fiber routes and
other transmission facilities where such facilities become available and if such
investments are cost effective and warranted by traffic patterns.
EXPAND MARKETING AND DISTRIBUTION CHANNELS
The Company will continue to develop marketing and distribution channels to
expand its customer base, particularly in its target market of small to
medium-sized businesses. The Company has been innovative in seeking marketing
partners to better identify potential customers and penetrate markets on a
cost-efficient basis. Also, the Company capitalizes on cross-selling
opportunities as it adds new customer bases and
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products through acquisitions and strategic alliances. In addition, the Company
plans to introduce a universal brand image to create worldwide name recognition.
PURSUE STRATEGIC ACQUISITIONS AND ALLIANCES
The Company seeks to acquire control of businesses with an established
customer base, compatible operations, licenses to operate as an international
carrier, experience with additional or emerging telecommunications products and
technologies, and experienced management. In addition, the Company seeks to
enter into strategic alliances that the Company believes will enable an
accelerated and cost effective expansion of its business.
LEVERAGE EXPERTISE OF MANAGEMENT TEAM
The Company has attracted experienced management from the
telecommunications industry to facilitate the integration of its regional
operations. Many of its key managers have had significant experience with
incumbent providers and early competitors in deregulating markets. In addition,
the Company generally retains key management in the companies it acquires. As a
result, the Company believes that it is well positioned to manage the
integration of acquisitions and the rapid growth of its customer base and
network infrastructure.
EXPAND INTERNET-BASED TELEPHONY AND ON-LINE SERVICE OFFERINGS
Through Delta Three, Inc. ("Delta Three"), its wholly-owned subsidiary, the
Company seeks to expand its Internet Protocol ("IP") telephony service offerings
by increasing its investment in Internet gateway servers and expanding its sales
and marketing channels. Delta Three uses IP protocol as a transmission standard
for voice communications over the public Internet and private intranets,
extranets and dedicated leased lines, at substantially reduced transmission and
termination costs. Delta Three allows customers to place long distance and
international phone calls over Internet or IP networks using standard telephones
without requiring additional equipment. Delta Three also offers prepaid calling
card services, PC to phone and phone to PC services to retail customers, and
termination to wholesale customers. In addition to offering IP telephony
services, the Company plans to develop value added services on the Internet and
to provide on-line customer service and billing. The Company believes that Delta
Three positions the Company at the forefront of the rapidly emerging IP
telephony industry. See "Business--Delta Three Operations."
NETWORK
The Company generally utilizes a single switch technology platform
(Ericsson AXE-10 switches) for its international telephony gateway switches. The
Company believes that a single switch platform gives the Company a strategic
advantage in developing new services and allows the Company to upgrade network
software on a more efficient basis when compared to those other global carriers
that employ multiple switch technologies. The Company is also pursuing
alternative transmission technologies such as the Internet and managed IP
networks in order to minimize its operating costs. See "--IP Telephony."
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OWNED FACILITIES
The Company's owned facilities include switches and interests in
international fiber optic cable systems. The Company's 17 international
telephony gateway switches are located in New York, Los Angeles, London,
Stockholm, Paris, Frankfurt, Helsinki, Vienna, Milan, Copenhagen, Lisbon,
Sydney, Zurich and Tokyo. In addition, the Company operates 16 national switches
throughout its operations. The Company's existing international telephony
gateway switches conform to international signaling and transmission standards
provided for in International Telegraph and Telephone Constructive Committee
("CCITT") recommendations and allow the Company to interconnect its network to
existing PTT and carrier networks around the world while maintaining quality and
dependable services.
The Company also owns capacity on various international digital fiber optic
cable systems. The Company's U.S. operations own indefeasible rights of use
("IRUs") or minimum investment units ("MIUs") on 19 submarine and 2 terrestrial
cable systems. The Company's Swedish, U.K. and Australian operations own IRUs on
5, 8 and 4 submarine cable systems, respectively. The Company's Australian
operation also owns IRUs in 2 terrestrial cable systems. In addition, the
Company has currently committed to purchase capacity on 4 other cable systems
and is currently in negotiations to purchase capacity in various other cable
systems.
Recently, the Company, together with its joint venture partner in Mexico,
acquired switches and fiber cable covering 14 cities in Mexico, which were fully
installed in 1998.
OPERATING AGREEMENTS
The Company's operating agreements provide the Company with ability to
transmit traffic directly to foreign carriers over jointly-owned facilities
rather than utilizing leased capacity. The Company's U.S. operations currently
hold 23 operating agreements (one of which allows the Company to transmit
traffic into three countries), which provide potential direct access to 22
countries. 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.
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
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which it originates traffic to transmit domestic calls from its end-users to its
switch. While the Company intends to purchase or construct transmission
facilities where such facilities are available for purchase or may be
constructed and such purchase or construction is cost-effective and warranted by
traffic patterns, a significant percentage of its transmission facilities will
continue to be leased. Leased capacity is typically obtained on a per minute
basis or a point-to-point fixed cost basis. The Company utilizes leased
satellite facilities for traffic to and from those countries where digital
undersea fiber optic cables are not available or cost-effective. Leased
satellite facilities are also used for redundancy when digital undersea cable
service is temporarily interrupted.
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 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.
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 locally is accomplished through
transmission capacity leased on a per minute basis, except where the Company
provides private line service. As the Company's operations in a given country
grow, the Company generally will install additional POPs and invest in
transmission capacity (on a point-to-point fixed cost basis) to connect the new
POP to its international gateway switch. This will enable the Company to reduce
its dependence on relatively high cost-per-minute leases by reducing the
distance calls will travel over capacity leased on that basis.
PRODUCTS AND SERVICES
The Company offers a variety of fixed and wireless local, long distance and
international products and services to its customers, as well as certain
value-added services. Although the Company focuses on providing international
service, it also provides domestic long distance services, where permitted under
relevant regulations, to accommodate customer demands. In addition, the Company
provides, or plans to
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provide, local services as a competitive Local Exchange Carrier ("LEC") in
certain U.S. States by reselling the services of facilities-based LECs.
The Company provides the services described below to the extent permitted
by local regulation in each of its markets.
LONG DISTANCE SERVICES
The Company provides domestic and international long distance services to
its customers. In nearly every country in which the Company operates in Europe,
the Company provides domestic long distance services. In the United States, the
Company is certified and tariffed or otherwise authorized to originate
intrastate, interexchange calls in 49 States and the District of Columbia and
can terminate calls throughout the United States.
PRIVATE LINE SERVICE
The Company can provide dedicated point-to-point connections to businesses
requiring dedicated private telephone lines for high volumes of voice and data
between the customer's offices in certain countries where the Company has
revenue generating operations.
CALLING CARDS
The Company's calling cards are either prepaid cards or post paid cards
(for which calls are billed in arrears). The Company's calling cards provide
international call access to or between many countries that have direct dial
service with the United States. Prepaid calling cards are similar products to
other calling cards, but differ in marketing focus as well as the method of
payment. A customer purchases a prepaid card that entitles the customer to make
phone calls on the card up to a certain limit. The Company also offers prepaid
calling cards that are rechargeable. In all cases, the card number is
proprietary to the customer and is secured by means of a personal identification
number. The Company currently offers these products in most of its existing
operations.
VALUE-ADDED SERVICES
The Company currently offers facsimile services in all of its operations,
toll-free dialing in the United States, the United Kingdom and Sweden and
Internet access in the United States, Sweden and Canada and, in the future,
intends to offer most of these services in all markets where it is allowed to do
so. The Company also intends to introduce the following services: (i)
video-teleconferencing, (ii) on-line billing services, (iii) consolidated
billing for all services offered by the Company, (iv) on-line directory
assistance, (v) on-line conference calling, and (vi) international directory
assistance. In addition, through Delta Three, the Company can offer
international long distance voice service to niche markets utilizing IP
telephony at discounts to standard international calls.
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INTERNATIONAL TERMINATION AND TRANSIT
International termination on a wholesale basis involves the sale of long
distance services to another long distance company that resells the services to
its customers. Selling bulk capacity to other carriers generates traffic
sufficient to allow the Company to obtain volume discounts when it leases
capacity on a per-minute basis and allows it to generate revenues from otherwise
unused capacity on its MIUs, IRUs and point-to-point leases. Transit traffic
originates and terminates outside of a particular country, but is transported
through that country on a carrier's network to take advantage of lower costs.
WIRELESS SERVICES
The Company provides wireless services to corporate, business and
residential subscribers. Through its agreements with network operators, the
Company provides subscribers with connection and access to wireless networks and
sells airtime services. The Company charges its subscribers for service
activation, monthly access, per-minute airtime and custom calling features, and
generally offers a variety of pricing options, most of which combine a fixed
monthly access fee and per-minute charges. Subscribers are also offered a wide
range of cellular telephones and accessories. Currently, the Company provides
wireless services in the United Kingdom, Germany and Australia. The Company
cross-sells its long distance services to these subscribers.
DATA SERVICES
The Company offers a range of data transmission services to its customers
in the U.S. and Canada, including frame relay, TCP/IP networks, Internet access,
remote access, e-mail, packet switching, LAN integration and network and
facilities management.
CUSTOMERS
SMALL AND MEDIUM SIZED BUSINESSES. The Company focuses on offering high
quality products and services to small and medium-sized businesses with
significant international telephone usage (i.e., generally in excess of $500 per
month in international phone calls). The Company has focused on industries which
traditionally have significant volumes of international traffic. The Company
believes that small and medium-sized businesses have generally been underserved
by the major global telecommunications carriers and the PTTs, which have focused
on offering their lowest rates and best services primarily to higher volume
multinational business customers. The Company offers these companies
significantly discounted international calling rates as compared to the standard
rates charged by the major carriers and PTTs.
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.
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RESIDENTIAL CUSTOMERS. The Company targets residential customers in
neighborhoods with large immigrant populations and/or with high international
calling patterns. The Company intends to capitalize on global immigration
patterns to target ethnic communities, primarily for its prepaid calling cards.
LARGE CORPORATIONS. Primarily as a result of the WestComm acquisition, the
Company services a number of large corporations in the United States. The
Company also targets large corporations on those routes where the Company's cost
structure allows it to compete effectively.
CUSTOMER MANAGEMENT
The Company strives to provide competitive pricing, high quality services
and superior customer care service and believes that these factors are important
to its ability to compete effectively. The Company works closely with its
customers to develop competitively priced telecommunications and value-added
services (such as customized billing) that are tailored to their needs. The
Company has invested significant resources in developing information systems to
allow it to provide accurate and timely responses to customer inquiries. In
addition, each of the Local Operators has customer service and engineering
personnel available to address service and technical problems as they arise.
MARKETING AND SALES
The Company has developed a wide range of marketing and distribution
channels focused on reaching a broad range of customers in the most
cost-effective manner. The Company markets its products and services through (i)
its direct sales forces, (ii) strategic alliances with companies that have
access to significant customer bases, (iii) networks of independent agents and
distributors, (iv) strategic alliances with resellers and (v) telemarketing
organizations. The Company's services are currently marketed independently by
the Local Operators in each country.
The Company continually seeks innovative ways to expand the scope of its
marketing channels and to enhance its ability to identify and retain customers.
For example, the Company has recently entered into a strategic alliance with
Metro Holding. The Company's alliance with Metro Holding will assist the Company
in promoting, marketing, selling and distributing the Company's services through
Metro AG's wholesale and retail operations in Europe. In addition, the Company
capitalizes on cross-selling opportunities as it adds new customer bases and
products through acquisitions and strategic alliances. As a result of its
acquisition of Motorola Tel.co, the Company cross-sells its fixed wire and other
traditional long distance services to the Motorola Tel.co subscriber base and
Motorola Tel.co's wireless services to existing customers.
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.
BILLING SYSTEMS
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
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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 Company has also implemented a customer care and
trouble management system, as well as developed an 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.
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. 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.
HEADQUARTERS OPERATIONS
The Company (meaning, only as used in this section "Headquarters
Operations," RSL Communications, Ltd. apart from its subsidiaries) 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
headquarters level. The Company also continuously reviews and considers
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
headquarters 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
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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 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. 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.
IP TELEPHONY
Delta Three utilizes the Internet and managed IP networks traditionally
used for data communications, as a transmission medium for ordinary telephone
calls. The primary service offered by Delta Three enables customers to place
long distance and international phone calls to be carried over the Internet
while using a standard telephone, without any additional equipment. Delta Three
also offers a service that enables customers to place long distance calls from a
personal computer to a standard telephone. Delta Three offers these services at
a price which is at a significant discount to standard international calls.
Delta Three operates as a wholesale carrier for international long distance
resellers on a point-to-point basis and as a retail carrier, servicing its own
network and marketing the use of its network to residential customers in
designated areas and corporations. Currently, most of the minutes sold by Delta
Three are sold to the Company on a wholesale basis.
Delta Three 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
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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 Internet gateway servers ("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 L.M. Ericsson A.B. ("Ericsson") to develop IP
Telephony Gateways and application technology.
COMPETITION
The telecommunications services markets are extremely competitive. Prices
for long distance calls are decreasing substantially in most of the Company's
markets as a result of deregulation and technological advances. Competition for
customers is primarily on the basis of price and, to a lesser extent, on the
type and quality of services offered and customer service. The Company attempts
to discount its services from the prices charged by the PTT or major carriers in
each of the Company's markets. The Company has no control over the prices set by
the Company's competitors, and some of the Company's larger competitors may be
able to use their substantial financial resources to cause severe price
competition in the countries in which the Company operates. In certain
deregulated markets severe price competition has occurred, and as deregulation
progresses in other markets the Company may encounter severe price competition
in those markets.
NORTH AMERICA
United States. In the U.S.,the Company competes with AT&T, Sprint, MCI
WorldCom and many other U.S.-based and foreign carriers, some of which have
considerably greater financial and other resources than the Company. Certain of
the larger U.S. based carriers have entered into joint ventures with foreign
carriers to provide international services. In addition, certain foreign
carriers have entered into joint ventures with other foreign carriers to provide
international services and have begun to compete or invest in the U.S. market,
creating greater competitive pressures on the Company.
Canada. 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
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provinces of Canada. The Company also faces increasing competition from cable
companies, such as Rogers Communications Inc. and Shaw Cable, cellular service
providers and Personal Communications Service ("PCS") providers such as
Microcell Solutions, Mobility Canada and Clearnet.
EUROPE
The Company must compete with a variety of other telecommunications
providers in each of the Company's European markets, including:
o the PTTs and other dominant carriers;
o alliances such as AT&T's alliance with British Telecom and AT&T's alliance
with Unisource (itself an alliance among PTT Telecom Netherlands, Telia AB
and Swiss Telecom PTT) and the corresponding alliance with WorldPartners,
and Sprint's alliance with Deutsche Telekom and France Telecom, known as
"Global One";
o international fixed wire and wireless resellers; and
o other companies with business plans similar to the Company's business plan.
Austria. The Company's competitors in Austria include Telecom Austria, the
leading telecommunications provider, UTA and others, including local Austrian
affiliates of global carriers such as Global One and Swisscom. In addition, the
Company is competing with resellers in the Austrian market.
Belgium. The Company's primary competitor is Belgacom (the former PTT). The
Company also competes with local Belgian affiliates of global carriers, such as
Global One and Unisource, local resellers, as well as subsidiaries of other U.S.
and European telecommunication companies, such as WorldxChange, C&W Telemart,
and others. The Company also competes for wireless subscribers with the two
Belgian wireless network operators, Proximus and Mobistar, as well as other
wireless service providers.
Denmark. Tele Danmark (the former PTT) is the Company's main competitor in
Denmark. In January 1998, the Danish government sold a controlling interest in
Tele Danmark to U.S.-based Ameritech. The Company also faces competition from
various other carriers, primarily Telia (the Swedish PTT), the smaller Tele 2
(NetCom Systems), Mobilix A/S (the Danish subsidiary of France Telecom) and
Global One, which are all connected to Tele Danmark's fixed line network via
interconnect agreements. Recently, several of these carriers have entered into
agreements with Powercom, a subsidiary of two Danish power suppliers, to offer
telecommunications services over Powercom's fixed line network, which has
hitherto been used to manage power transmission. Mobilix A/S has also entered
into an agreement with the Danish national railway agency to develop the
agency's fixed line network for telecommunications services. 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.
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Finland. The Company competes in Finland primarily with Sonera Corporation.
The Company also faces competition from companies like Finnnet, Telia, Global
One and Faciliacom, who are in the process of constructing facilities-based
networks and have been licensed as public telephone operators.
France. The Company's principal competitor in France is France Telecom.
Competition also comes from Modulance Global r3 and TRF, who offer discount long
distance services to the largest commercial customers. Companies such as MCI
WorldCom, Colt, Siris, Cegetel and Bouygues are constructing fiber networks in
major metropolitan areas and are interconnected to France Telecom. The Company
also faces competition from resellers, including Omnicom and Esprit. As
deregulation continues, alternative networks for domestic traffic are expected
to come on-line.
Germany. Facilities-based carriers, wireless network operators and
resellers all compete with the Company in the market for telecommunications
services in Germany; principal among them is Deutsche Telekom, the former PTT in
Germany. The Company also faces competition from newly licensed operations like
Arcor (Mannesmann and DBKom), O.telo (RWE and VEBA) and VIAG Interkom (VIAG and
British Telecom) that are building their own facilities-based networks in
Germany. Further competition comes from resellers, including MCI WorldCom,
call-back providers, such as TelePassport, and wireless network operators, such
as Mannesmann Mobilfunk and E-Plus Mobilfunk.
Italy. In Italy, Telecom Italia is the Company's leading competitor. The
Company also competes with the local Italian affiliates of global carriers such
as British Telecom, Global One and MCI WorldCom. In addition, the Company
competes with telecommunications providers in the Italian market such as
Infostrada (a joint venture between Olivetti and Mannesmann) and Wind (a joint
venture among Deutsche Telecom, France Telecom and ENEL, the Italian energy
public utility).
The Netherlands. Telecom Netherlands, the PTT in The Netherlands, is the
Company's main competitor in The Netherlands. The Company also faces competition
from companies like MCI WorldCom, who are in the process of constructing
facilities-based networks and have been licensed as public telephone operators.
Mega-carriers such as Concert and Global One also provide competition in the
Netherlands. Assuming deregulation occurs, it is expected that alternative
networks currently under construction will become available to route and
terminate voice traffic.
Portugal. The Company operates in Portugal through its 39% investment in
Maxitel Servicos e Gestao de Telecomunicacoes, SA ("Maxitel"). Maxitel's largest
competitor is Portugal Telecom, the dominant supplier of telecommunications
services in Portugal. Maxitel also competes with the local Portuguese affiliates
of global carriers such as Global One and with resellers.
Spain. Telefonica de Espana, the company that has traditionally enjoyed a
monopoly in the provision of telecommunications in Spain, is the Company's main
competitor. 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 Uni2, which was awarded a third nation-wide license to provide
voice telephony services, but has not yet started to operate. Retevision started
operations at the beginning of 1998. Cable operators have been authorized to
provide voice telephony services since January 1998. The Company also faces
competition from resellers,
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which at present, generally, have small operations in Spain, and from
mega-carriers interested in long distance services upon deregulation of the
market.
Sweden. In Sweden, the Company's largest competitor is Telia, the leading
telecommunications provider in Sweden. The Company also faces competition from
newly licensed operations like Tele 2 and MCI WorldCom that are building their
own facilities-based networks in Sweden. Reseller competitors of the Company
include Telenordia, Telecom Finland and Tele 8. Upon the completion of the
construction of new fiber networks, the Company will have alternative means of
routing and terminating calls.
Switzerland. The Company's competitors in Switzerland include Swisscom,
Diax, Sunrise, GlobalOne, Colt, MCI WorldCom, Equant and other smaller
resellers.
United Kingdom. The Company competes in the United Kingdom primarily with
British Telecom and C&W. The Company also faces competition from emerging
licensed public telephone operators (who are constructing their own
facilities-based networks) such as Energis, and from resellers including MCI
WorldCom, Esprit and Global One. The Company also competes in the wireless
service market with the four wireless network operators (Vodafone, CellNet,
Orange and One-to-One), as well as other wireless service providers.
LATIN AMERICA
Venezuela. The Company competes in Venezuela primarily with CANTV, the
leading telecommunications supplier in Venezuela. The Company 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.
ASIA/PACIFIC RIM
Australia. The two licensed general carriers in Australia are Telstra
Corporation Limited (the former PTT) and C & W Optus Limited. Each of these
competitors provides a bundle of services including mobile, local, and domestic
and international long distance. In addition, the Company faces competition from
switch-based and switchless resellers such as AAPT Limited, Primus Limited,
WorldCom Limited, One-Tel Limited, Macquarie Corporate Pty Limited, Hutchison
Telecommunications Pty Limited and Vodatone Pty Limited.
REGULATORY ENVIRONMENT
UNITED STATES
The Company's U.S. operations are subject to extensive federal and state
regulation. Federal laws and FCC regulations apply to interstate
telecommunications (including international telecommunications that originate or
terminate in the United States), while particular state regulatory authorities
have jurisdiction over telecommunications originating and terminating within the
state. There can be no assurance that future regulatory, judicial and
legislative changes will not have a material adverse effect on the Company, that
domestic or international regulators or third parties will not raise material
issues with regard to the
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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 its domestic and international long distance services as well as
its competitive local exchange 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 Regional Bell Operating Companies ("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, Italy, Ireland, Hong Kong, Japan and the United Kingdom, and to
provide international telecommunication services by acquiring circuits on
various undersea cables or leasing satellite facilities. The FCC reserves the
right to condition, modify or revoke such domestic and international authority
for violations of the Communications Act or the FCC's regulations, rules or
policies promulgated thereunder. Although the Company believes the probability
to be remote, a rescission by the FCC of the Company's domestic or international
authority or a refusal by the FCC to grant additional international authority
would have a material adverse effect on the Company.
Both domestic and international non-dominant carriers must maintain tariffs
on file with the FCC. The Company must file tariffs containing detailed actual
rate schedules. In reliance on the FCC's past relaxed tariff filing requirements
for non-dominant domestic carriers, the Company and most of its competitors did
not maintain detailed rate schedules for domestic offerings in their tariffs, as
the FCC's rules currently
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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, Italy, Ireland, Hong Kong, Japan and the United
Kingdom and the Company is authorized to resell international private lines to
these points for the provision of basic services interconnected to the PSTN.
The FCC has promulgated certain rules governing the offering of
international switched telecommunications services. Such calls typically involve
a bilateral, correspondent relationship between a carrier in the United States
and a carrier in the foreign country. Until recently, the United States was one
of a few countries to allow multiple carriers to handle international calls;
almost all foreign countries authorized only a single carrier, often a
state-owned monopoly, to provide telecommunications services. In light of the
disparate bargaining positions of the United States carriers, the FCC imposed
certain requirements to try to minimize the opportunities that dominant foreign
telecommunications providers would have to favor one United States carrier over
another. These policies include provisions of the International Settlement
Policy, which requires the equal division of accounting rates,
non-discriminatory treatment of U.S. carriers, and that return minutes from a
foreign carrier must be proportional to the traffic that the United States
carrier terminates to a foreign carrier. In 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
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remedy a growing U.S. settlement deficit, which results from the imbalance of
outbound and inbound call volume. The settlement rate for terminating
international calls was estimated to be approximately 70% higher than the actual
cost of terminating international calls by the FCC in August of 1997. Three
benchmarks were established to fit the income level of foreign countries, with a
low of $0.15 per minute for high income countries and a high of $0.23 per minute
for low income countries. Implementation periods, ranging from one year for high
income nations to five years for nations with less than one telephone line for
every 100 inhabitants, were also adopted. The FCC also determined that it would
condition any carrier's authorization to provide international facilities-based
switched service from the United States to an affiliated market on the carrier's
foreign affiliate offering U.S. international carriers a settlement rate at or
below the relevant benchmark. If, after the carrier has commenced service to an
affiliated market, the FCC learns that the carrier's service offering has
distorted market performance, the FCC will take enforcement action. The new
benchmarks are intended to promote a competitive environment in which rates will
more closely reflect costs; officials also hope that the FCC's order will
encourage multilateral negotiations and lead to an international agreement to
reduce costs further.
The Commission's initiatives have had some measure of success: in the first
six months of 1998, the average accounting rate for calls originating from the
United States fell by 14.1%, almost doubling the rate of decline for the same
period in 1997. Moreover, an increasing number of foreign carriers, whose
countries account for over 50% of the total U.S. net settlement minutes, have
negotiated agreements with U.S. carriers that satisfy, or will satisfy, the
FCC's benchmark settlement rates.
The FCC has recently proposed to no longer require U.S. carriers to comply
with its International Settlements Policy with respect to arrangements between
U.S. carriers and foreign carriers that lack market power in WTO member
countries, and with foreign carriers in WTO member countries to which U.S.
carriers are authorized by the FCC to provide international simple resale. The
Commission has also proposed to modify its flexibility policy to allow carriers
to obtain authority to enter into flexible settlement arrangements for
agreements affecting less than 25% of the traffic on a particular route without
naming the foreign correspondent and without filing the terms and conditions of
the actual agreement.
The GBT Agreement, executed in February 1997, requires signatories to open
their telecommunications markets to competition. Consistent with the commitments
made by the U.S. under the GBT Agreement, the FCC has revised its rules to
establish an open entry standard for applicants from WTO member countries
seeking authority to provide international telecommunications service in the
U.S., and has adopted a rebuttable presumption that the U.S. affiliates of a
foreign carrier with less than 50% market share in its home market should be
treated as non-dominant. These open entry policies will apply to applicants of
all WTO member countries, including those who are not signatories to the GBT
Agreement.
Additionally, the FCC enforces certain requirements which derive from the
regulations of the ITU. These regulations may further circumscribe the
correspondent relationships described above. In addition to settlement rates,
these regulations govern certain aspects of transit arrangements, wherein the
originating carrier may contract with an interim carrier in a second country to
terminate service in a third country. The Company has transit agreements with
foreign carriers. Such agreements may allow 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
24
<PAGE>
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 and the competitive
local exchange 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.
The vast majority of states require carriers to apply for certification to
provide telecommunications services before commencing intrastate service and to
file and maintain detailed tariffs listing the rates for intrastate service.
Many states also impose various reporting requirements and require prior
approval for all transfers of control of certified carriers, assignments of
carrier assets, carrier stock offerings and the incurrence by carriers of
certain debt obligations. In some states, regulatory approval may be required
for acquisitions of telecommunications operations. In the past, the Company has
sought and successfully obtained such approval for its acquisitions.
EUROPE
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 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.
The EC issued, in 1997, an interconnect directive (the "Interconnect
Directive"), which was to be implemented in various countries at different times
during 1998 and is expected to require the incumbent PTTs to interconnect to
other carriers. Such connection will provide "Calling Line Identity" ("CLI"),
also known as ANI or PIC, which will allow the Company's customers to access
more easily the Company's local switch (e.g., through prefix dialing instead of
dial-in access) and will remove the local access fee levied in addition to the
Company's charge for the call. After interconnection, rates charged by the PTT
for the PSTN portion of the call are expected to be incurred by carriers at
cost-oriented transparent rates and it is expected that carriers will be allowed
to compete against the PTT in the domestic long distance market, as well as the
25
<PAGE>
international market. However, the effective implementation of this or any EC
directive by member states is subject to substantial delay.
The EC also issued in 1997 a Directive designed to harmonize licensing
procedures in the EU (the "Licensing Directive"). Among other things, the
Licensing Directive prevents member states from limiting the number of new
entrants unless required to ensure efficient use of radio frequencies/numbers.
The Licensing Directive encourages the use of general authorizations rather than
individual licenses, but specifically allows member states to grant individual
licenses for the provision of voice telephony services. Member states were
required to implement the Licensing Directive by January 1, 1998 and most member
states have introduced implementing measures. Notwithstanding the general intent
of the Licensing Directive, the licensing regimes vary considerably across
member states as do the requirements that must be satisfied for the grant of a
license leading to potential expense and delay.
Member states have limited flexibility in interpreting EC directives. If
the EC determines that a member state's legislation has not properly implemented
an EC directive, the EC may commence legal proceedings in the European Court of
Justice. This process is time consuming. Accordingly, while a date has been set
for the liberalization of voice telephony services generally within the EU, the
actual date on which liberalization actually occurs could be months or years
later.
There also may be practical considerations in implementing a directive
which could result in a delay of its implementation, as there are considerable
doubts as to the preparedness of many EC countries for wide-ranging change. For
example, notwithstanding the time parameters set down by relevant Directives,
the negotiation and implementation of interconnection agreements can take a
significant amount of time. Even after such agreements are negotiated and
implemented, substantial ongoing disputes with the incumbent PTTs regarding
capacity, prices and billing are to be expected.
In an attempt to speed the market entry of new operators despite the
obstacles referred to above, the Full Competition Directive allowed alternative
entities to the PTTs (typically utility and cable television companies) to
supply infrastructure, beginning July 1, 1996. This permits the Company to
purchase cable capacity from companies other than the local PTTs as such
companies build transmission facilities. To date, however, there has not been
substantial construction of such facilities by competitors to the PTTs in many
EU countries, although several member states have enacted national legislation
to adopt the Full Competition Directive.
Although interconnect has been implemented in most countries in Europe, as
discussed above, there are practical difficulties in securing commercial
agreements with the incumbent PTTs. In European countries where interconnect has
not been implemented, the current regulatory scheme, nevertheless, provides an
opportunity for the Company to provide a range of services immediately in such
countries, while putting in place adequate infrastructure to capitalize on final
deregulation when it occurs. The Company provides value-added services and, in
certain EC countries at some point prior to interconnection, the Company will be
able to 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.
26
<PAGE>
LATIN AMERICA
Many Latin American countries have begun moving towards deregulation. Some
of their local and/or long distance markets have become competitive. Chile has
competitive operations in all sectors, while Colombia has ended the monopoly of
its PTT. Argentina, Brazil, Chile, Mexico, Peru and Venezuela among others have
completely or partially privatized their national carriers. Venezuela has
legalized value-added services and has targeted January 1, 2000 as the date for
deregulation. Peru ended the monopoly of Telefonica del Peru in August 1998, one
year earlier than scheduled. In Mexico, the exclusive long distance concession
of its former PTT has been modified to allow other operators to provide long
distance services. Interconnect with other carriers was implemented in 1997 in
Mexico, and an independent regulator has been established to oversee
competition.
ASIA/PACIFIC RIM
Deregulation is spreading throughout many of the major markets in Asia and
the Pacific Rim. A significant number of countries in these regions are
signatories of the GBT Agreement and have committed to open their markets to
competition. Australia, the Philippines and New Zealand have already opened
their markets to full competition and Hong Kong, Indonesia, Japan, South Korea
and Malaysia have legalized the provision of value-added services. Singapore
licensed two new operators in 1998.
EMPLOYEES
As of December 31, 1998, the Company employed approximately 2,500 people,
including officers, administrative and salaried selling personnel. The Company
considers its relationship with its employees to be good.
EXECUTIVE OFFICERS AND OTHER OFFICERS OF THE COMPANY
Certain information concerning executive officers and other officers of the
Company and certain of its subsidiaries is set forth below:
Name Age Position
---- --- --------
Itzhak Fisher.............. 42 Director, Chief Executive Officer President
Donald R. Shassian......... 43 Executive Vice President, Chief Financial
Officer and Treasurer
Jacob Z. Schuster.......... 50 Director, Executive Vice President and
Assistant Secretary
Richard E. Williams........ 46 Chief Executive Officer and President
of RSL Europe
Adrian Coote............... 44 Managing Director of RSL Australia
Edmond J. Thomas........... 55 Chief Executive Officer and President of
RSL USA
Karen van de Vrande........ 48 Vice President of Marketing
Nir Tarlovsky.............. 32 Vice President of Business Development
27
<PAGE>
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...... 52 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 Vice President of Legal Affairs and General
Counsel
Michael Ashford......... 52 Secretary
With the exception of Mr. Fisher and Mr. Schuster, set forth below is
certain information with respect to the executive officers and other officers of
the Company. Information with respect to Mr. Fisher and Mr. Schuster is
incorporated herein by reference to the section entitled "Election of Directors"
in the Company's 1999 Proxy Statement to be filed with the Commission no later
than April 30, 1999.
Donald R. Shassian has served as Executive Vice President, Chief Financial
Officer and Treasurer of the Company since January 1999. From 1993 through 1998,
Mr. Shassian served as Senior Vice President and Chief Financial Officer of
Southern New England Telecommunications Corporation ("SNET") with management
responsibility for all of the financial, information technology and corporate
development activities of SNET. From 1988 through 1993, Mr. Shassian served as a
Partner at Arthur Andersen L.L.P. providing audit and business advisory services
to a variety of companies in the telecommunications industry. In 1992, Mr.
Shassian was named the Partner-In-Charge of Arthur Andersen's telecommunications
industry practice group for North America. From 1977 through 1988, Mr. Shassian
served in various other capacities at Arthur Andersen providing audit and other
business advisory services primarily to companies in the telecommunications
industry.
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 COM Australia Holdings Pty
Limited ("RSL Australia"), a subsidiary of the Company, 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
28
<PAGE>
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 of 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.
Nir Tarlovsky has been Vice President of Business Development of the
Company since April 1995 and served as a director of the Company from April 1,
1995 until March 1997. Mr. Tarlovsky is also Vice President of RSL North
America. From 1992 to March 1995, Mr. Tarlovsky served as Senior Economist of
Clal, where he was responsible for oversight of the operations and budgets of
150 of Clal's subsidiaries. While at Clal, he was also responsible for the
development of new international telecommunications ventures. Prior to 1992, Mr.
Tarlovsky served as an officer in the Israeli Army, where he was responsible for
management and financial oversight of international research and development
projects.
Nesim N. Bildirici has been Vice President of Mergers and Acquisitions of
the Company since 1995 and served as a director of the Company from April 1995
until March 1997. From August 15, 1993 to December 31, 1996, Mr. Bildirici was
employed by both R.S. Lauder, Gaspar & Co., L.P. ("RSLAG") and the Company. Mr.
Bildirici was a Managing Director of RSLAG from 1996 until recently. Prior to
joining RSLAG, Mr. Bildirici was an investment banker at Morgan Stanley & Co.
Incorporated from 1989 to 1991. From 1991 to 1993, Mr. Bildirici was a graduate
student at Harvard Business School, where he received his MBA.
Mark J. Hirschhorn has been Vice President-Finance of the Company since
August 1997 and has been Global Controller of the Company since January 1996.
Mr. Hirschhorn has also served as the Assistant Secretary of the Company since
September 1996. From October 1987 to December 1995, Mr. Hirschhorn was employed
at Deloitte & Touche LLP, most recently as a Senior Manager specializing in
emerging business and multinational consumer product companies.
Roland T. Mallcott has been Vice President of Engineering of the Company
since February 1997. From December 1995 until January 1997, Mr. Mallcott served
as Director of Joint Ventures of Concert, through British Telecom and MCI, in
Canada, Mexico and Germany. From January 1991 to December 1995, Mr. Mallcott
served as Director of Engineering and Operations for British Telecom (US)
responsible for building and managing the British Telecom and Concert global
data and voice networks. Prior to 1991, Mr. Mallcott served in various network
engineering capacities for British Telecom.
29
<PAGE>
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 Vice President of Legal Affairs and General
Counsel since January 1999 and 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.
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.
ITEM 2. 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 $521,000.
The Company also maintains a 3,040 square foot office at 60 Hudson Street,
New York, New York which houses the Company's international telephony gateway
and domestic switches located in New York. The lease extends until March 2006
and provides for annual lease payments of $312,240.
30
<PAGE>
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 has entered into a lease to maintain a 31,500 square foot of
additional office space for RSL USA at 360 West 31st Street, 21 Penn Plaza, New
York, York. The lease extends until December 30, 2008 and provides for annual
lease payments of $472,500.
The Company maintains a 15,000 square foot office at 5550 Topanga Canyon
Boulevard, Woodland Hills, California which houses RSL USA's western offices.
The lease for such space extends until January 15, 2003 and provides for annual
lease payments of $333,000.
The Company, as a result of the acquisition of WestComm, leases office
space in Pittsburgh, Pennsylvania and various other sales offices for annualized
aggregate rent of approximately $1.8 million. The lease for the principal office
in Pittsburgh extends until July 31, 2008.
The Company maintains an office at Churchill House, 142-146 Old Street,
London, England which is used as the location for the London international
gateway switch and the London domestic switch. The lease extends until October
1, 2005 and provides for annual lease payments of $90,000 until October 2000 and
may be increased thereafter.
The Company maintains office space at Victoria House, London Square, Cross
Lanes, Guildford, Surrey, which is RSL Europe's headquarters. The lease extends
until August 20, 2006 and provides for annual lease payments of approximately
$245,000, which may increase in December 1999 and December 2004.
The Company maintains additional office space for RSL Europe at 21/27
Tabernacle Street, London, England. The lease extends until 2008 and provides
for annual lease payments of approximately $420,000, and may be increased in
July 2003. The space is rent free until April 1999.
In addition, the Company maintains offices with respect to its other
foreign operations, for which the aggregate annual lease payments equal
approximately $4.7 million.
The Company, through its direct and indirect subsidiaries, also leases
additional office spaces for its operations.
ITEM 3. LEGAL PROCEEDINGS
The Company 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
31
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET PRICE OF THE REGISTRANT'S COMMON EQUITY
The Company's Class A common shares, par value $.00457 per share (the
"Class A Common Stock") is traded on The Nasdaq Stock Market National Market
("NASDAQ"). Prior to October 1, 1997, the date on which the Class A Common Stock
began trading on NASDAQ, there was no public market for the Class A Common
Stock. The quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commissions, and may not necessarily reflect actual transactions.
On March 24, 1999, the last reported price for the Common Stock was $32.375 per
share. There is no public market for the Company's Class B common shares, par
value $.00457 per share (the "Class B Common Stock" and together with the Class
A Common Stock, the "Common Stock"). There were approximately 99 holders of
record for the Class A Common Stock as of March 24, 1999, including nominees for
an unknown number of beneficial holders, and 13 holders of record of the Class
B Common Stock.
The following table sets forth the range of high and low sale prices for
the Class A Common Stock for the fourth quarter of 1998 and the first quarter of
1999.
Price Period High Low
------------ ---- ---
1998
Fourth Quarter............ $31.0625 $15.0625
1999
First Quarter............. $42.00 $24.00
(through March 24, 1999)
DIVIDEND POLICY
The Company has never paid dividends on any class of Common Stock and does
not anticipate paying any dividends on the Class A Common Stock or any other
class of Common Stock in the foreseeable future. Certain of the Company's credit
facilities and the indentures governing senior notes issued by RSL
Communications PLC, a wholly owned subsidiary of the Company ("RSL PLC") contain
restrictions on the Company's ability to declare and pay dividends on the Common
Stock. The declaration and payment of dividends by the Company are subject to
the discretion of the Board of Directors. Any determination as to the payment of
dividends in the future will depend upon results of operations, capital
requirements, restrictions in loan agreements, if any, and any such other
factors as the Board of Directors may deem relevant.
32
<PAGE>
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 U.S.
As an exempted company, the Company is liable to pay in Bermuda a
registration fee based upon its authorized share capital and the premium on its
issued shares at a rate not exceeding $25,000 per annum.
RECENT SALES OF UNREGISTERED SECURITIES
In November 1998, the Company, through RSL PLC, issued $100 million
aggregate principal amount at maturity of 12% Senior Notes due 2008 (the "12%
Notes") unconditionally guaranteed by the Company pursuant to an indenture
governing the 12% Notes. The placement agent for the offering of the 12% Notes
was Goldman, Sachs & Co. The aggregate commissions were approximately $3.0
million. The 12% Notes were sold outside the U.S. to non-U.S. persons in
reliance on Regulation S under the Securities Act and in the U.S. only
to"qualified institutional buyers" in reliance on Rule 144A under the Securities
Act.
In December 1998, the Company, through RSL PLC, issued $200 million
aggregate principal amount at maturity of 10 1/2% Senior Notes due 2008 (the
"10 1/2% Notes") unconditionally guaranteed by the Company pursuant to an
indenture governing the 10 1/2% Notes. The placement agents for the offering of
the 10 1/2% Notes were Morgan Stanley & Co., Inc. and Lehman Brothers, Inc. The
aggregate commissions were approximately $2.1 million. The 10 1/2% Notes were
sold outside the U.S. to non-U.S. persons in reliance on Regulation S under the
Securities Act and in the U.S. only to "qualified institutional buyers" in
reliance on Rule 144A under the Securities Act.
In January 1999, the Company issued to Paul G. Black Family Trust 25,000
shares of the Company's Class A Common Stock in exchange for stock options to
purchase 72.67 shares of RSL USA. The issuance of such shares of Class A Common
Stock was exempt from registration under the Securities Act pursuant to Section
4(2) thereof.
In February 1999, the Company issued to Serge Farman 9,490 shares of the
Company's Class A Common Stock in exchange for 4.52 shares of RSL USA and
options to acquire 2.26 shares of RSL USA. The issuance of such shares of Class
A Common Stock was exempt from registration under the Securities Act pursuant to
Section 4(2) thereof.
33
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Set forth below are selected consolidated financial data for each of
the years in the five year period ended December 31, 1998. The selected
consolidated financial data presented below with respect to the years ended
December 31, 1998, 1997 and 1996 have been derived from the Consolidated
Financial Statements appearing elsewhere in this Annual Report on Form 10-K. The
Consolidated Financial Statements for the four year period ended December 31,
1998 have been audited by Deloitte & Touche LLP, independent auditors. The
selected consolidated statements of operations data for the year ended December
31, 1995 and balance sheet data as of December 31, 1995 and 1996 are derived
from audited financial statements not included herein. 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 COM North America, Inc.
("RSL North America"), formerly International Telecommunications Group, Ltd.
("ITG").
The information set forth below is qualified by reference to and should be
read in conjunction with the Consolidated Financial Statements and notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
PREDECESSOR
1994 1995(1) 1996 1997 1998
----------- ------- -------- -------- ---------
($ AND SHARES IN THOUSANDS, EXCEPT LOSS PER SHARE)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Revenues............................. $ 4,702 $ 18,617 $ 113,257 $ 300,796 $ 885,938
Operating costs and expenses:
Cost of services (exclusive of
depreciation and amortization
shown separately below)......... (4,923) (17,510) (98,461) (265,321) (702,602)
Selling, general and administrative
expenses........................ (2,395) (9,639) (38,893) (94,712) (238,141)
Depreciation and amortization..... (240) (849) (6,655) (21,819) (75,445)
-------- -------- --------- --------- ----------
(7,558) (27,998) (144,009) (381,852) (1,016,188)
-------- -------- --------- --------- ----------
Loss from operations................. (2,856) (9,381) (30,752) (81,056) (130,250)
Interest income...................... -- 173 3,976 13,826 16,104
Interest expense..................... (225) (194) (11,359) (39,373) (75,431)
Other income--net.................... -- -- 470 6,595(2) 739
Foreign exchange transaction loss.... -- -- -- -- (11,055)
Minority interest.................... -- -- (180) 210 6,079
Loss in equity interest of
unconsolidated subsidiaries....... -- -- -- -- (3,276)
Income taxes......................... -- -- (395) (401) (1,334)
-------- -------- --------- --------- ----------
Loss before extraordinary item....... (3,081) (9,402) (38,240) (100,199) (198,424)
Extraordinary item(3)................ -- -- -- -- (20,800)
-------- -------- --------- --------- ---------
Net loss............................. $ (3,081) $ (9,402) $ (38,240) $(100,199) $ (219,224)
======== ======== ========= ========= ==========
Loss per share of Common Stock before
extraordinary item(3)(4).......... $ (15.41) $ (1.67) $ (5.13) $ (5.27) $ (4.52)
Extraordinary item per share of
Common Stock...................... $ -- $ -- $ -- $ -- $ (0.47)
Net loss per share of Common Stock(4) $ (15.41) $ (1.67) $ (5.13) $ (5.27) $ (4.99)
Weighted average number of shares of
Common Stock outstanding(4)....... 200 5,641 7,448 19,008 43,913
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
PREDECESSOR
1994 1995(1) 1996 1997 1998
----------- ------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
EBITDA(as defined)(5).................. $ (2,616) $ (8,532) $ (24,097) $ (59,237) $ (54,805)
Capital expenditures(6)................ 1,126 6,074 23,880 49,417 247,665
Cash used in operating activities...... (1,987) 3,554 (10,475) (91,812) (82,752)
Cash (used in) provided by investing
activities.......................... (478) (16,537) (225,000) (18,821) (509,438)
Cash (used in) provided by financing
activities.......................... 2,888 18,143 335,031 152,035 815,476
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------------------------------
PREDECESSOR
1994 1995 1996 1997 1998
----------- ------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............. $ 452 $ 5,163 $ 104,068 $ 144,894 $ 367,823
Marketable securities available for
sale................................... -- -- 67,828 13,858 111,548
Restricted marketable securities(7).... -- -- 104,370 68,836 20,159
Total assets........................... 3,682 53,072 427,969 605,664 1,714,593
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 36,130
Long-term debt and capital lease
obligations(8)...................... 1,404 6,648 314,425 316,608 1,089,375
Shareholders' (deficiency) equity...... (3,651) 5,705 20,843 126,699 133,484
</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--Net 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 12 1/4% Senior Notes due 2006 (the "1996 Notes").
(4) Loss per share is calculated by dividing the loss attributable to Common
Stock by the weighted average number of shares of Common Stock
outstanding, and has been retroactively restated to reflect the
2.19-for-one stock split. Shares issuable pursuant to (i) outstanding
stock options, (ii) unexercised Warrants (as defined), (iii) the warrants
to purchase 459,900 shares of Class B Common Stock of the Company at an
exercise price of $.00457 per share, subject to adjustment issued to
Ronald S. Lauder as consideration for his guarantee of a revolving credit
facility of the Company with The Chase Manhattan Bank, (iv) options
granted by the Company to a number of minority shareholders of its
subsidiaries, exercisable on the occurrence of certain events, to exchange
their shares in the respective subsidiaries for, in certain circumstances,
shares of Class A Common Stock or, in certain circumstances, cash (v)
options granted by the Company to certain employees of its subsidiaries to
acquire shares of such subsidiaries or similar rights ("Incentive Units"),
some of which are currently exercisable, and the right to exchange such
Incentive Units for shares of Class A Common Stock or, in certain
circumstances, at the Company's option, cash or (vi) the potential
Telegate Exchange, are not included in the loss per share of common stock
calculation as their effect is anti-dilutive.
(5) EBITDA (as defined) consists of loss before depreciation and amortization,
interest, other income--net, foreign exchange transaction loss, minority
interest, loss in equity interest of unconsolidated subsidiaries, income
taxes and extraordinary item. EBITDA (as defined) is provided because it
is a measure commonly used in the telecommunications industry. It is
presented to enhance an understanding of the Company's operating results
and is not intended to represent cash flow or results of operations in
accordance with U.S. GAAP for the periods indicated.
35
<PAGE>
(6) Capital expenditures include assets acquired through capital lease
financing and other debt.
(7) The Restricted Marketable Securities--Held to Maturity consist of U.S.
government securities pledged to secure the payment of interest on the
principal amount of the 1996 Notes.
(8) As of December 31, 1998, the Company had approximately $115.6 million of
available (undrawn) borrowing capacity under its current bank and vendor
facilities.
ITEM 7. 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 Annual Report on Form 10-K. 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 Annual
Report on Form 10- K, including, without limitation, information contained in
this section of the Annual Report on Form 10-K and information under "Business,"
identifies important factors that could cause such differences.
OVERVIEW
GENERAL
The Company is a rapidly growing multinational communications company
which provides a broad array of services, with a focus on international long
distance voice services to small and medium-sized businesses in key markets. The
Company's services include international and national fixed and wireless,
calling card, fax, data, Internet, private line and other value-added
telecommunications services. The Company currently has revenue generating
operations in Australia, Austria, Belgium, Canada, Denmark, Finland, France,
Germany, Italy, Japan, Luxembourg, The Netherlands, Portugal, Spain, Sweden,
Switzerland, the United Kingdom, the United States and Venezuela. In 1997,
approximately 70% of all international long distance telecommunications minutes
originated in these markets. The Company is also in the process of commencing
start-up operations through its investments in an entity in Mexico. The Company
plans to expand its operations and network into one to three additional markets
which account for a significant portion of the world's remaining international
traffic.
North America. The Company commenced operations in the U.S. in 1995 and
has since implemented solutions designed to improve the operations of RSL USA.
The Company added key members to its management and purchased and developed
additional management software systems which provide current traffic
provisioning and an enhanced ability to predict future traffic volume. The
Company also successfully negotiated and continues to negotiate rate reductions
and more appropriate transmission capacity arrangements based on the Company's
current and anticipated capacity requirements. In addition, the Company
anticipates that expanded utilization of its own facilities (as such component
of RSL-NET continues to grow) will result in more cost-efficient methods of
transport for its U.S. business.
As of December 31, 1998, the Company had recorded approximately $284.8
million of goodwill in connection with its North American acquisitions.
36
<PAGE>
Goodwill represents the excess of cost over the fair value of the net
assets of acquired entities. The Company's component cost and purchase price
allocation for its North American acquisitions for each of the four years ended
December 31, 1995, 1996, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
COMPONENT COST AND PURCHASE PRICE ALLOCATION
------------------------------------------------------------------
1995 1996 1997 1998
----------- ----------- ------------ ------------
($ IN MILLIONS)
<S> <C> <C> <C> <C>
ASSETS ACQUIRED:
Cash and cash equivalents................ 7.4 -- 5.0 1.1
Accounts receivable...................... 9.0 -- 5.2 29.6
Telecommunications equipment............. 4.5 -- 0.8 28.7
Deposits and others...................... 1.9 -- 0.5 5.5
Intangible assets--goodwill.............. 29.3 27.6 80.3 147.6
Intangible assets--customer base.......... -- -- 0.7 22.2
LIABILITIES ASSUMED:
Accounts payable and other long-term
liabilities............................ 32.6 8.1 12.3 91.3
Long-term debt........................... 5.1 -- -- --
EQUITY:
Increase to shareholders' equity......... -- -- 38.2 9.5
TOTAL CASH INVESTED......................... 14.4 19.5 42.0 133.9
TOTAL NET LIABILITIES ASSUMED............... 14.9 8.1 0.8 26.4
TOTAL STOCK ISSUED.......................... -- -- 38.2 9.5
---- ---- ---- -----
TOTAL PURCHASE PRICE........................ 29.3 27.6 81.0 169.8
==== ==== ==== =====
</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 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 EU member state, calling for
such legislative body to implement such directive through the passage of
national legislation.
Although interconnection was not available and implemented in most EU
countries by January 1, 1998 (as called for by an EC directive), the current
regulatory scheme in the EU nevertheless provides an opportunity for the Company
to provide a range of services immediately in many countries, while putting
37
<PAGE>
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 member states, the Company is already providing
dial-in access, coupled, when possible, with autodialers or the programming of
customers' phone systems to dial access codes, to route traffic over the
domestic PSTN to the Company's switches.
As of December 31, 1998, the Company had recorded an aggregate of
approximately $187.8 million of goodwill in connection with its European
acquisitions. Goodwill represents the excess of cost over the fair value of the
net assets of acquired entities. The Company's component cost and purchase price
allocation for its European acquisitions for each of the four years ended
December 31, 1995, 1996, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
COMPONENT COST AND PURCHASE PRICE ALLOCATION
------------------------------------------------------------------
1995 1996 1997 1998
----------- ----------- ------------ ------------
($ IN MILLIONS)
<S> <C> <C> <C> <C>
ASSETS ACQUIRED:
Cash..................................... -- 2.3 1.4 0.0
Accounts receivable...................... 0.2 0.7 2.3 28.7
Telecommunications equipment............. -- 2.3 0.8 8.2
Deposits and others...................... -- 0.1 0.8 13.1
Intangible assets--goodwill.............. 0.9 24.2 31.4 131.3
Intangible assets--customer base......... -- -- -- 5.2
Intangible assets--name.................. -- -- -- 10.0
LIABILITIES ASSUMED:
Accounts payable and other long-term
liabilities............................ 0.2 5.3 5.3 62.4
Lease commitments........................ -- 2.4 -- --
EQUITY:
Increase to shareholders' equity......... -- -- 3.4 --
TOTAL CASH INVESTED......................... 0.9 21.9 28.0 134.1
TOTAL NET LIABILITIES (ASSETS) ASSUMED...... -- 2.3 -- 12.4
TOTAL STOCK ISSUED.......................... -- -- 3.4 --
---- ---- ---- -----
TOTAL PURCHASE PRICE........................ 0.9 24.2 31.4 146.5
==== ==== ==== =====
</TABLE>
REVENUES
The Company provides both domestic and international long distance voice
communications services. Revenues are derived from the number of minutes of use
(or fractions thereof) billed by the Company 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.
38
<PAGE>
NORTH AMERICAN OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
PREDECESSOR
1994 1995 1996 1997 1998
----------- -------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PERCENTAGE OF CONSOLIDATED REVENUES)
<S> <C> <C> <C> <C> <C>
Revenues............................... $ 4,702 $ 18,461 $ 85,843 $ 194,518 $ 449,974
Percentage of consolidated
revenues............................. 100.0% 99.2% 75.8% 64.7% 50.8%
Operating costs and expenses:
Cost of services (exclusive of
depreciation and amortization
shown separately below)........... (4,923) (17,367) (76,892) (176,780) (366,267)
Selling, general and administrative
expenses.......................... (2,395) (7,444) (17,606) (38,207) (86,110)
Depreciation and amortization........ (240) (619) (3,047) (5,650) (18,758)
-------- -------- --------- --------- ---------
(7,558) (25,430) (97,545) (220,637) (471,135)
-------- -------- --------- --------- ---------
Loss from operations................... $ (2,856) $ (6,969) $(11,702) $ (26,119) $ (21,161)
======== ======== ========= ========= =========
</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 retail basis to
commercial customers, on a bulk discount basis to distributors of prepaid
calling cards, and on a wholesale basis to other carriers. The Company
experiences significant month to month changes in revenues generated by its
carrier customers (i.e., customers who acquire the Company's services for the
purpose of reselling such services on a wholesale basis to other carriers or on
a retail basis to end users). The Company believes such carrier customers will
react to temporary price fluctuations and spot market availability that will
impact the Company's carrier revenues. Over the past two years, the Company has
shifted its marketing focus in the United States to small and medium-sized
businesses and has restructured its pricing of wholesale services to other
carriers. The Company believes that as a result of these changes to its business
and as a result of utilizing a greater proportion of owned versus leased
facilities, the Company has begun to experience decreasing quarterly losses
commencing in January 1998. The Company has
39
<PAGE>
derived increased revenues from its commercial customers, and it continues to
reduce its reliance on wholesale carrier revenues. The Company has begun
deriving additional North American revenues as a result of its recent
acquisition of Westel in Canada and WestComm in the U.S. See "Business--Company
Operations--North America."
EUROPEAN OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1995 1996 1997 1998
-------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PERCENTAGE OF CONSOLIDATED REVENUES)
<S> <C> <C> <C> <C>
Revenues.................................... $ 156 $ 27,414 $ 73,653 $ 306,289
Percentage of consolidated 0.8% 24.2% 24.5% 34.6%
revenues..................................
Operating costs and expenses:
Cost of services (exclusive of
depreciation and amortization shown
separately below)...................... (143) (21,569) (59,516) (232,977)
Selling, general and administrative
expenses............................... (539) (17,377) (43,004) (103,874)
Depreciation and amortization............. (12) (1,906) (7,038) (25,829)
------ --------- --------- --------
(694) (40,852) (109,558) (362,680)
------ --------- --------- ---------
Loss from operations........................ $ (538) $ (13,438) $ (35,905) $ (56,391)
====== ========= ========= =========
</TABLE>
The Company commenced European operations in certain countries in the
second quarter of 1996 and has since established operations in many additional
European countries.
The Company derives its revenues from the provision of international and
domestic long distance voice services, as well as the resale of wireless
services in certain countries in which the Company operates. Substantially all
revenues from the Company's European operations are derived from commercial
sales to end-users. Sales are targeted at small to medium-sized corporate
customers, as well as to niche consumer markets (including selected ethnic
communities). To reduce its credit risk to such niche consumer markets, the
Company primarily offers prepaid products to its targeted consumer. Each of the
countries in which the Company operates has experienced different levels of
deregulation, resulting in various levels of competition and differing ranges of
services which the Company is permitted to offer its customers. The Company also
believes that as it pursues its strategic growth strategy it will continue to
encounter various degrees of start-up time.
Effect of Deregulation on European Revenues. The Company operates 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. 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
40
<PAGE>
benefit from the anticipated continued deregulation of European markets.
However, there can be no assurance regarding the timing or extent of
deregulation in any particular country. See "Business--Industry
Overview--European Long Distance Market" and "Regulatory Environment."
ASIA/PACIFIC RIM OPERATIONS
<TABLE>
<CAPTION>
INCEPTION
(APRIL 1997 THROUGH YEAR ENDED
DECEMBER 31, 1997) DECEMBER 31, 1998
-------------------- -----------------
(IN THOUSANDS, EXCEPT PERCENTAGE OF CONSOLIDATED REVENUES)
<S> <C> <C>
Revenues...................................... $ 32,333 $ 128,881
Percentage of consolidated revenues........... 10.7% 14.5%
Operating costs and expenses:
Cost of services (exclusive of depreciation
and amortization shown separately
below)................................... (28,873) (102,621)
Selling, general and administrative
expenses................................. (5,827) (29,734)
Depreciation and amortization............... (824) (7,231)
-------- ---------
(35,524) (139,586)
-------- ---------
Loss from operations.......................... $ (3,191) $ (10,705)
======== =========
</TABLE>
The Company commenced Asia/Pacific Rim revenue producing operations
through its Australian entity with the acquisition of a customer base in
Australia in the second quarter of 1997. The Company initiated operations in
Japan through RSL COM Japan K.K. in July 1998.
LATIN AMERICAN OPERATIONS
The Company commenced Latin American revenue producing operations in
Venezuela in the third quarter of 1997. The Company's operations in Venezuela
have generated approximately $292,000 and $794,000 in revenues in 1997 and 1998,
respectively.
COST OF SERVICES (EXCLUSIVE OF DEPRECIATION AND AMORTIZATION)
The Company's cost of services is comprised of costs associated with
gaining local access and the transport and termination of calls over RSL-NET.
The majority of the Company's cost of services are variable, including local
access charges and transmission capacity leased on a per-minute of use basis.
The Company plans to make significant investments in IRUs, MIUs and domestic
circuits and, as a result, expects an increasing amount of its total operating
costs to become fixed, as the volume of the Company's calls carried over its own
facilities increases. As the Company migrates increasing amounts of traffic from
leased facilities to owned facilities, the Company experiences improving
operating results in those operations where such traffic migration occurs. The
depreciation expense with respect to the Company's MIUs and IRUs is not
accounted for in cost of services. In addition, the Company intends to lower its
variable cost of
41
<PAGE>
termination as a percentage of revenues by carrying traffic pursuant to more of
its existing operating agreements and by negotiating additional operating
agreements on strategic routes. The Company has directly linked certain of its
Local Operators in Europe and the United States utilizing lines leased on a
fixed cost point-to-point basis and MIUs and IRUs. To the extent traffic can be
transported between two Local Operators over MIUs or IRUs, there is only
marginal cost to the Company with respect to the international portion of a call
other than the fixed lease payment or the capital expenditure incurred in
connection with the purchase of the MIUs or IRUs. The Company's cost of
transport and termination will decrease to the extent that it is able to bypass
the settlement rates associated with the transport of international traffic.
While the Company intends to purchase or construct intranational transmission
facilities where such facilities are available for purchase or may be
constructed and such investments are cost effective and warranted by traffic
patterns, a significant percentage of its intranational transmission facilities
will continue to be leased on a variable cost basis. Accordingly, variable costs
will continue to be a majority of the Company's cost of services for the
foreseeable future.
EFFECT OF DEREGULATION ON EUROPEAN COST OF SERVICES (EXCLUSIVE OF DEPRECIATION
AND AMORTIZATION)
The Company's current cost structure varies from country to country, in
part, as a result of the different level of regulatory policies in place in each
country. In general, the Company's cost structure is lower in countries that
have been substantially deregulated than in those which are partially
deregulated and certain of the Company's European operations have become cash
flow positive. In countries that are not substantially deregulated, the
Company's access to the local exchange network is through more expensive means
(i.e., leased lines or dial-in access). This results in higher costs to the
Company for carrying international traffic originating within one country and
terminating in another country. In addition, local regulations in many countries
restrict the Company from purchasing capacity on international cable and fiber
systems. The Company must instead either enter into long-term lease agreements
for international capacity at a high fixed cost or purchase per-minute of use
termination rates from the dominant carrier. Deregulation in countries in which
the Company operates is expected to permit the Company to (i) interconnect its
switches with the local exchange network and (ii) purchase its own international
facilities. The Company believes that deregulation will result in improved
European operating results. Deregulation in a particular country is also
expected to permit the Company to terminate international inbound traffic in
such country which will result in an improved cost structure for the Company as
a whole. However, the foregoing is a forward-looking statement and there can be
no assurance that deregulation will proceed as expected or lower the Company's
cost of services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The Company's selling, general and administrative expenses consist of
costs incurred to support the continued expansion of RSL-NET, the introduction
of new services and the provision of ongoing customer service. These costs are
principally comprised of costs associated with employee compensation, occupancy,
insurance, professional fees, sales and marketing (including sales commissions)
and bad debt expenses. In addition, as the Company commences operations in
different countries, it incurs significant start-up costs, which are expensed in
the period incurred, particularly for hiring, training and retention of
personnel, leasing of office space and advertising.
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
42
<PAGE>
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.
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 to 20 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 "Quantitative and Qualitative
Disclosures About Market Risk."
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
Revenues. Revenues increased to $885.9 million for the year ended December
31, 1998 compared to $300.8 million for the year ended December 31, 1997, an
increase of 195%. This increase is due primarily to an increase in the Company's
North American revenues from $194.5 million for the year ended December 31, 1997
to $450.0 million for the same period this year and the Company's European
revenues, which increased to $306.3 million for the year ended December 31, 1998
from $73.7 million for the same period of 1997. The Company had revenue
generating operations in the United States, Canada, 14 European countries,
Venezuela, Australia and Japan during the year ended December 31, 1998. The
increase in the Company's North American revenues was primarily due to
acquisitions, which contributed $150.8 million and $11.2 for the years ended
December 31, 1998 and 1997, respectively, a significant increase in the
Company's U.S. commercial customer base and increased traffic volume from
existing customers. Revenues from the Company's European operations increased as
a result of increased sales of prepaid calling cards, which contributed $24.6
million and $3.0 for the years ended December 31, 1998 and 1997, respectively,
through acquisitions, primarily the Motorola Tel.co acquisition, completed after
December 31, 1997, which contributed $153.7 million to the Company's December
31, 1998 European revenues, and an increase in the European customer base.
Revenues from the Company's Asia/Pacific Rim operations increased to $128.9
million for the year ended December 31, 1998, compared with $32.3 million for
the same period of 1997, primarily as a result of various acquisitions which had
taken place throughout the period.
43
<PAGE>
Cost of Services (Exclusive of Depreciation and Amortization Discussed
Separately Below). Cost of services increased to $702.6 million for the year
ended December 31, 1998 from $265.3 million for the year ended December 31,
1997, an increase of 165%. 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 79.3% for the year
ended December 31, 1998 from 88.2% for the year ended December 31, 1997. The
decrease in cost of services as a percentage of revenues is primarily
attributable to the increased diversification in the Company's customer base,
increase in commercial accounts and mobile subscribers which positively impacted
the Company's profitability, and the improvement in the Company's North American
operations' costs of services which represented 52.1% of the Company's total
cost of services in the period. This was offset by the Company's European
operations which experienced problems in purchasing capacity in Germany and
France due to certain delays in implementing deregulation in these countries.
Accordingly, traffic arising from increased prepaid card sales in these
countries had to be carried over uneconomical overflow capacity which produced
low and in certain cases negative gross margins for the Company's prepaid
operations in Germany and France. The Company believes that these capacity
problems were temporary and have since been corrected. In order to reduce costs,
the Company intends to purchase additional capacity, if and when regulations
permit, in each of the Company's respective countries of operation, on routes on
which it has experienced, or anticipates experiencing, overflow traffic.
Selling, General and Administrative Expense. Selling, general and
administrative expense for the year ended December 31, 1998 increased by $143.4
million, or 151%, to $238.1 million from $94.7 million for the year ended
December 31, 1997. This increase is primarily attributable to costs of start-ups
in and expansion of the Company's European operations, costs associated with the
hiring of new personnel in Europe and as a result of acquisitions in North
America and Australia. The Company's European operations contributed $103.9
million or 43.6% of the Company's consolidated selling, general and
administrative expense for the year ended December 31, 1998, although such
operations accounted for only 34.6% of the Company's total revenues in such
period. European selling, general and administrative expense increased as a
result of the Motorola Tel.co acquisition and the significant increase in
employees in many of the Company's European operations. Selling, general and
administrative expense will continue to increase as a result of start-up costs
and infrastructure expansion and start-up costs attributable to new local
operations.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased 246% to $75.4 million for the year ended December 31, 1998
from $21.8 million for the year ended December 31, 1997. This increase is
primarily attributable to the increased amortization of goodwill recorded as a
result of the Company's acquisitions, as well as an increase in investment in
property and equipment. Depreciation and amortization expense is expected to
increase in the future as a result of the Company's acquisition of additional
assets.
Interest Income. Interest income increased to $16.1 million for the year
ended December 31, 1998 from $13.8 million for the year ended December 31, 1997,
primarily as a result of interest earned on the remaining net proceeds of the
1998 Notes (as defined).
Interest Expense. Interest expense increased to $75.4 million for the year
ended December 31, 1998 from $39.4 million for the year ended December 31, 1997,
primarily as a result of interest related to the 1998 Notes.
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Foreign Exchange Transaction Loss. The Company experienced a foreign
exchange transaction loss of $11.1 million for the year ended December 31, 1998,
primarily as a result of the increase in the Deutsche mark against the U.S.
dollar in connection with the DM Notes (as defined).
Loss in Equity Interest of Unconsolidated Subsidiaries. The Company
recorded a loss in equity interest of unconsolidated subsidiaries of $3.3
million for the year ended December 31, 1998 to account for the Company's
pro-rata allocable loss in its investment in each of Maxitel, Telegate and MK
Telecom Network, Inc. ("MK Network").
Loss Before Extraordinary Item. Loss before extraordinary item increased
to $198.4 million for the year ended December 31, 1998, as compared to a net
loss of $100.2 million for the year ended December 31, 1997 due to the factors
described above. An extraordinary item of $20.8 million for the year ended
December 31, 1998 represents primarily the premium paid to retire approximately
$127.5 million of the original $300.0 million of the Company's 1996 Notes. The
Company had no such expense in the year ended December 31, 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 year ended December 31, 1997 and the Company's
European revenues, which increased from $27.4 million for the year ended
December 31, 1996 to $73.7 million for the year ended December 31, 1997. The
Company generated revenues in the United States, in 10 European countries, and
in Australia and Venezuela during the fourth quarter of 1997. The Company had
revenue producing operations in only the United States and five European
countries in 1996. The increase in U.S. revenues was primarily due to increased
traffic volume from existing customers, increases in the Company's U.S.
commercial customer base and the LDM acquisition on October 1, 1997 which
contributed $13.1 million (for the period October 1, 1997 to December 31, 1997)
to the Company's December 31, 1997 revenue. The increase in the Company's
European revenues was primarily due to increased traffic volume from existing
customers, increases in the Company's commercial customer base in the United
Kingdom, Sweden, Finland, Germany and The Netherlands. The Company's 1996
European acquisitions in France, Germany and The Netherlands contributed $32.7
million in revenue for the full 1997 year end compared to revenues of $16.5
million recorded from the dates of their respective acquisitions to December 31,
1996.
Cost of Services (Exclusive of Depreciation and Amortization Discussed
Separately Below). Cost of services increased to $265.3 million for the year
ended December 31, 1997 from $98.5 million for the year ended December 31, 1996,
an increase of 169.5%. This increase was primarily due to increased traffic and
increased rates paid to the Company's carrier vendors. As a percentage of
revenues, cost of services increased to 88.2% for the year ended December 31,
1997 from 86.9% for the year ended December 31, 1996. The increase in cost of
services as a percentage of revenues was primarily attributable to the Company's
U.S. operations' cost of services, which represented 66.6% of the Company's
total cost of services. Although the Company anticipated a decrease in U.S. and
European cost of services during 1997, rapid revenue growth in excess of the
Company's expectations continued to cause traffic overflow resulting in higher
cost of services, and increased operating losses.
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Selling, General and Administrative Expense. Selling, general and
administrative expense for the year ended December 31, 1997 increased by $55.8
million, or 143.5%, to $94.7 million from $38.9 million for the year ended
December 31, 1996. This increase is primarily attributable to the costs
associated with the Company's expansion into nine new markets and the concurrent
hiring of more than 1,000 new personnel. The Company also recognized all of the
costs associated with opening new offices, commencing advertising campaigns and
product development. As a percent of U.S. revenues, the Company's U.S. selling,
general and administrative expense decreased to 19.6% for the year ended
December 31, 1997 from 20.5% for the prior year. The Company's U.S. bad debt
expense for the year ended December 31, 1997 increased by $8.1 million or 289%
to $10.9 million from $2.8 million for the year ended December 31, 1996. This
increase was primarily attributable to a 127% increase in the Company's U.S.
revenues for the same period and increased credit exposure primarily due to the
increased diversity in the Company's customer base. Additionally, the Company's
1997 bad debt expense included approximately $3.0 million of bad debt recorded
in connection with the bankruptcy filing of one of the Company's major
customers, Cherry Communications. As a percent of European revenues, the
Company's European selling, general and administrative expense decreased to
58.4% for the year ended December 31, 1997 from 63.4% for the prior year. The
Company's consolidated selling, general and administrative expense in Europe was
45.4% of its total consolidated selling, general and administrative expense,
despite such operations accounting for only 24.5% of the Company's total
revenues because of a greater proportion of start-up and expansion costs.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased 227.9% to $21.8 million for the year ended December 31, 1997
from $6.7 million for the year ended December 31, 1996, an increase of $15.1
million. This increase was primarily attributable to the increased amortization
of goodwill recorded as a result of the Company's acquisitions.
Interest Income. Interest income increased to $13.8 million for the year
ended December 31, 1997 from $4.0 million for the year ended December 31, 1996,
primarily as a result of interest earned on the remaining net proceeds of the
1996 Units Offering (as defined) and the net proceeds from the initial public
offering of Class A Common Stock in October 1997 (the "IPO").
Interest Expense. Interest expense increased to $39.4 million for the year
ended December 31, 1997 from $11.4 million for the year ended December 31, 1996,
an increase of approximately $28.0 million, as a result of interest related to
the 1996 Notes.
Net Loss. Net loss increased to $100.2 million for the year ended December
31, 1997, as compared to a net loss of $38.2 million for the year ended December
31, 1996 due to the factors described above.
YEARS ENDED DECEMBER 31, 1996 AND 1995
Revenues. Revenues increased to $113.3 million for the year ended December
31, 1996 from $18.6 million for the year ended December 31, 1995, an increase of
509%. This increase was due primarily to the full year of U.S. operations
consolidated in the 1996 results of operations compared to only three months of
the Company's U.S. operations consolidated in the historical statement of
operations for 1995. The Company experienced an increase in commercial customers
at each of the Company's operations. The Company's Swedish, Finnish and U.K.
operations began generating revenues in May 1996 and contributed approximately
$7.8 million to 1996 revenues. The Company purchased Sprint's international
voice operations in France and Germany in May 1996. These operations contributed
approximately $13.1 million
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to 1996 revenues. The Company's European operations generated minimal revenues
in 1995. For the year ended December 31, 1996, approximately 24% of the
Company's revenues were generated from the Company's European operations.
In connection with the Company's shift in marketing focus to small and
medium-sized businesses, the Company determined in December 1995 that certain
carrier customers provided the Company with margins below its targeted levels
for margin contribution. Accordingly, the Company established new pricing
structures and terminated service to the low or zero margin customers which did
not agree to the new pricing structures. In addition, the Company terminated
service in February 1996 to its largest wholesale customer because of such
customer's inability to pay for past services. This customer represented
approximately 11% of RSL North America's revenues in 1995. The Company commenced
legal proceedings to recover amounts owed to the Company by such customer. The
Company also instituted stricter credit criteria to reduce its bad debt
exposure.
To compensate for the loss of such revenues, the Company accelerated its
U.S. sales efforts to small and medium-sized businesses during 1996, resulting
in increased sales to this segment.
Cost of Services (Exclusive of Depreciation and Amortization Discussed
Separately Below). Cost of services increased to $98.5 million for the year
ended December 31, 1996 from $17.5 million for the year ended December 31, 1995,
an increase of 463%. This increase was due primarily to the full year of U.S.
operations that is consolidated in the 1996 results of operations compared to
only three months of the Company's U.S. operations consolidated in the
historical statement of operations for 1995. As a percentage of revenues, cost
of services decreased to 86.9% for the year ended December 31, 1996 from 94.1%
for the year ended December 31, 1995. The decrease in cost of services as a
percentage of revenues was primarily attributable to the Company's increased
European revenues.
Selling, General and Administrative Expense. Selling, general and
administrative expense for the year ended December 31, 1996 increased to $38.9
million from $9.6 million for the year ended December 31, 1995. This increase
was primarily attributable to the Company's investment in sales personnel and
marketing expense in order to generate increased revenue. Costs for start-up and
expansion of the Company's U.K., Dutch, Finnish and Swedish Local Operators
represented 30.1% and 5.6% of the Company's total selling, general and
administrative expense for the years ended 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 (i) an
offering completed in October 1996 (the "1996 Units Offering") of units
consisting in the
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aggregate of 300,000 warrants, each to purchase 3.975 shares of Class A Common
Stock of the Company at an exercise price of $.00457 per share, subject to
adjustment (the "Warrants") and $300.0 million of the 1996 Notes and (ii) the
IPO.
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 Company's revolving credit
facility (the "Revolving Credit Facility") with The Chase Manhattan Bank,
guaranteed by the Company's Chairman ($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 years ended December 31, 1996,
1997 and 1998 equaled $10.5 million, $91.8 million and $82.8 million,
respectively. Capital expenditures for the years ended December 31, 1996, 1997
and 1998 were $23.9 million, $49.4 million and $247.7 million, respectively.
These capital expenditures were principally for domestic and international
gateway switches and related telecommunications equipment. The Company intends
to continue its capital expenditures at a level comparable to that which it
experienced in 1998 in order to expand and develop the Company's infrastructure,
in part by replacing leased transmission facilities with owned transmission
lines, purchasing IRUs and interests in inter-city fiber routes in European
countries and installing additional national and international telephone gateway
switches. Funds expended for acquisitions during the years ended December 31,
1996, 1997 and 1998 were $38.6 million, $77.8 million and $287.0 million,
respectively. During 1996, the Company funded its operating losses, capital
expenditures and acquisitions with borrowings of $44.5 million and a portion of
the net proceeds of the 1996 Units Offering. During 1997, the Company funded its
operating losses, capital expenditures and acquisitions with a portion of the
net proceeds of the 1996 Units Offering and a portion of the net proceeds of the
IPO. During 1998, the Company funded its operating losses, capital expenditures
and acquisitions with a portion of the net proceeds of the IPO, a portion of the
net proceeds of the offerings of the Existing Notes (as defined) and a portion
of the net proceeds of the 1998 Equity Offering. At December 31, 1998, the
Company had $255.2 million of working capital as compared to $83.1 million of
working capital at December 31, 1997.
The Company's indebtedness was approximately $1,024.8 million at December
31, 1998, of which $1,013.3 million represented long-term debt and $11.5 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 PLC
and guaranteed by the Company.
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 ("U.S. Dollar Senior Notes")
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and $328.1 million ($200.0 million initial accreted value) of 10 1/8% Senior
Discount Notes due 2008 ("U.S. Dollar Senior Discount Notes"). In March 1998,
RSL PLC consummated the offering of DM296.0 million (approximately $99.1 million
initial accreted value) of 10% Senior Discount Notes ("DM Notes" and, together
with the U.S. Dollar Senior Notes and the U.S. Dollar Senior Discount Notes, the
"1998 Notes"). On November 9, 1998, RSL PLC issued the 12% Notes, in the
principal amount at maturity of $100 million ($94.5 million initial accreted
value). In addition, on December 8, 1998, RSL PLC issued the 10 1/2% Notes, in
the principal amount of $200 million. The foregoing debt securities (the
"Existing Notes") were issued under indentures containing certain restrictive
covenants which impose limitations on the Company's ability to, among other
things: (i) incur additional indebtedness, (ii) pay dividends or make certain
other distributions, (iii) issue capital stock of certain subsidiaries, (iv)
guarantee debt, (v) enter into transactions with shareholders and affiliates,
(vi) create liens, (vii) enter into sale-leaseback transactions, and (viii) sell
assets.
Under the terms of the Existing Notes, the Company was required to offer
to exchange each of the Existing Notes for substantially identical notes
registered under the Securities Act of 1933. The Company has successfully
completed all such exchange offers.
In connection with the issuance of the 1996 Notes, the Company was
required to purchase and maintain restricted marketable securities, which are
held by the indenture trustee for the 1996 Notes, in order to secure the payment
of the first six scheduled interest payments on the 1996 Notes. The market value
of such securities at December 31, 1998, as adjusted to reflect the redemption
of $127.5 million of the 1996 Notes, was $20.7 million.
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 $3.7 million of the commitment under the facility was
utilized at December 31, 1998. The Revolving Credit Facility is payable on June
30, 1999 and accrues interest at the lender's prime rate per annum (7.75% at
December 31, 1998).
The Company, through LDM, has a $10.0 million revolving credit facility.
There was $6.5 million utilized under this facility at December 31, 1998. This
facility is payable in full on September 30, 2000 and accrues interest at prime
rate plus 2.5% per annum(10.25% at December 31, 1998).
The Company, through Telegate, has a $8.1 million revolving credit
facility. There was $2.6 million utilized under this facility at December 31,
1998. This facility is payable in annual payments through December 31, 2002 and
accrues interest at a variable interest rate not to exceed 5.5% per annum (4.3%
at December 31, 1998).
At December 31, 1998, Telegate had $12.6 million of revolving credit
facilities with various banks that accrue interest at a rate of 6.5%, all of
which was available.
Telegate had various secured and unsecured 6% debentures consisting of
loans from its former shareholders of $3.2 million and $5.6 million,
respectively, as of December 31, 1998. These loans are payable in four
semiannual installments beginning June 30, 2001.
One of the Company's primary equipment vendors has also provided to
certain of the Company's subsidiaries $175.0 million in vendor financing
commitments to fund the purchase of additional switching and related
telecommunications capital equipment. At December 31, 1998, there was
approximately $82.0 million utilized under this facility. Borrowings under this
vendor facility accrue interest at a rate of LIBOR plus either 5.25% or 4.5% per
annum depending on the equipment purchased.
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On December 1, 1998, the Company issued 7,000,000 shares of Class A Common
Stock in a public offering (the "1998 Primary Offering"). An additional 544,278
shares of Class A Common Stock were issued by the Company on December 15, 1998
pursuant to underwriters' over-allotment options granted as a part of the 1998
Equity Offering (the "Green Shoe" and, together with the 1998 Primary Offering,
the "1998 Equity Offering"). The net total proceeds to the Company were
approximately $169.0 million after deducting the underwriting discount and
estimated expenses.
The Company plans to raise additional capital in 1999. The Company
believes that the remaining net proceeds from the issuance of the Existing Notes
and the 1998 Equity Offering, together with 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 its capital
expenditures and operations for the next 12 to 18 months. However, the Company
may be required to raise additional capital regardless of market conditions if
the Company's plans or assumptions change or prove to be inaccurate, if the
Company identifies additional required or desirable infrastructure investments
or acquisitions, if the Company experiences unanticipated costs or competitive
pressures or if the remaining net proceeds from the issuance of the Existing
Notes and the 1998 Equity Offering, together with other sources of liquidity,
otherwise prove to be insufficient. Regardless, the Company plans to raise
additional capital in 1999 to ensure that adequate funding is available for
capital expenditures and operations for the year 2000 and beyond.
EFFECTS OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards for derivative instruments and hedging activities. Generally, it
requires that an entity recognize all derivatives as either an asset or
liability and measure those instruments at fair value, as well as identify the
conditions for which a derivative may be specifically designed as a hedge. SFAS
No. 133 is effective for fiscal years beginning after June 15, 1999. Management
is currently addressing the financial reporting measures that will be needed in
order to comply with this disclosure. The Company has not participated in any
hedging activities in connection with foreign currency exposure.
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
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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, or other computer errors, causing disruptions of operations.
The potential for failures encompasses all aspects of the Company's business,
including computer systems and voice networks, and could cause, among other
things, a temporary inability to process transactions, billing and customer
service or to engage in similar normal business activities.
The Company is implementing a comprehensive program of analysis of and/or
changes to 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 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. The Company has also retained a Year 2000 solution provider as a
consultant to assist the Company in its assessment and remediation projects and
to manage and coordinate Year 2000 compliance for each of the Local Operators on
a global basis.
In addition to assessing its own systems, the Company is conducting an
external review of its vendors and suppliers, including equipment and systems
providers and other telecommunications service providers, to determine their
vulnerability to Year 2000 problems and any potential impact on the Company.
Based on discussions with Ericsson, the Company's primary equipment vendor, the
Company believes that the equipment provided to the Company by Ericsson will be
Year 2000 compliant. The Company may experience problems to the extent that
other telecommunications carriers whose services are resold by the Company or to
which the Company sends traffic for termination are not Year 2000 compliant.
There can be no assurance that such problems will not have a material adverse
effect on the Company.
The Company expects to complete all of the phases of the process described
above by June 30, 1999 and further expects that all of its computer systems will
be fully Year 2000 compliant before the end of 1999. There can be no assurance,
however, that the Company will achieve full Year 2000 compliance before the end
of 1999 or that effective contingency plans will be developed or implemented. A
failure of the Company's computer systems or the failure of the Company's
vendors or customers to effectively upgrade their software and systems for
transition to the year 2000 could have a material adverse effect on the
Company's business, financial position and results of operations.
The Company has completed numerous acquisitions during recent periods and
is in the process of integrating the systems of the acquired businesses into the
Company's operations. Those systems are included in the Company's Year 2000
review and remediation project. 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 approximately $10
million to become Year 2000 compliant. Costs associated with software
modification are expensed by the Company when incurred, and resulted in $47,000
of expense as of December 31, 1998.
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Following the completion of the Company's Year 2000 assessment and the
implementation of the Company's Year 2000 project, the Company plans to
determine the nature and extent of any contingency plans that may be required.
Even if the Company's assessment is completed without identifying any additional
material non-compliant systems operated by, or under the control of, the
Company, or of third parties, the most likely worst case scenario would be a
systems failure beyond the control of the Company to remedy. Such a failure
could materially prevent the Company from operating its business. The Company
believes that such a failure would likely lead to lost revenues, increased
operating costs, loss of customers or other business interruptions of a material
nature, in addition to potential claims against the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has not entered into any financial instruments for trading or
hedging purposes.
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 $0.9 million for the year ended December 31, 1998. 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. As of December
31, 1998, the Company had recorded a foreign currency transaction loss of
approximately $11.1 million, primarily as a result of the increase in the
Deutsche mark against the U.S. dollar in connection with the DM Notes (as
defined). The Company incurs settlement costs when it exchanges traffic via
operating agreements with foreign correspondents. These costs currently
represent a small portion of the total costs of services; however, as the
Company's international operations increase, it expects that these costs will
become a more significant portion of its cost of services. Such costs are
settled by utilizing a net settlement process with the Company's foreign
correspondents comprised of special drawing rights ("SDRs"). SDRs are the
established method of settlement among international telecommunications
carriers. The SDRs are valued based upon a basket of foreign currencies and the
Company believes that this mitigates, to some extent, its foreign currency
exposure. The Company has monitored and will continue to monitor its currency
exposure, and, if necessary, may enter into forward contracts and/or similar
instruments to mitigate the potential impacts of such risks.
The Company is currently not exposed to material future earnings or cash
flow exposures from changes in interest rates on long-term debt obligations
since the majority of the Company's long-term debt obligations are at fixed
rates. The Company is exposed to interest rate risk, as additional financing may
be required due to the large operating losses and capital expenditures
associated with establishing and expanding the Company's networks and
facilities. The interest rate that the Company will be able to obtain on
additional financing will depend on market conditions at that time, and may
differ from the rates the Company has secured on its current debt. The Company
does not currently anticipate entering into interest rate swap and/or similar
instruments.
The Company's carrying value of cash and cash equivalents, accounts
receivable, accounts payable, marektable securities--available for sale,
restricted marketable securities--held to maturity, accrued expenses and notes
payable is a reasonable approximation of their fair value.
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At December 31, 1998, the fair value of the Company's long-term debt was
estimated to be $937.0 million based on the overall weighted average rate of the
Company's long-term debt of 10.53% and an overall weighted average maturity of
9.1 years compared to terms and rates currently available in long-term financing
markets. Market risk is estimated as the potential decrease in fair value of the
Company's long-term debt resulting from a hypothetical increase of 105 basis
points in interest rates (ten percent of the Company's overall weighted average
borrowing rate). Such an increase in interest rates would result in
approximately a $9.8 million decrease in fair value of the Company's long-term
debt.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See page F-1 for a listing of the consolidated financial statements submitted as
part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated herein by reference to
the section entitled "Election of Directors" in the Company's 1999 Proxy
Statement to be filed with the Commission no later than April 30, 1999 and to
the section entitled "Business--Executive Officers and Other Officers of the
Company" in this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference to
the sections entitled "Executive Compensation," "Compensation Committee Report
on Executive Compensation" and "Performance Graph" in the Company's 1999 Proxy
Statement to be filed with the Commission no later than April 30, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference to
the section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Company's 1999 Proxy Statement to be filed with the
Commission no later than April 30, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference to
the section entitled "Certain Relationships and Related Transactions" in the
Company's 1999 Proxy Statement to be filed with the Commission no later than
April 30, 1999.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)(1) THE FOLLOWING FINANCIAL STATEMENTS OF THE COMPANY ARE INCLUDED IN
PART II, ITEM 8 OF THIS REPORT:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1997 and December 31, 1998
Consolidated Statements of Operations and Comprehensive Loss for the Years Ended
December 31, 1996, December 31, 1997 and December 31, 1998
Consolidated Statements of Shareholders' Equity for the Years Ended December 31,
1996, December 31, 1997 and December 31, 1998
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996,
December 31, 1997 and December 31, 1998
Notes to Consolidated Financial Statements
(A)(2) SEE (D) BELOW FOR A LISTING OF FINANCIAL STATEMENT SCHEDULES INCLUDED AS
A PART OF THIS REPORT.
(A)(3) SEE (C) BELOW FOR A LISTING OF THE EXHIBITS INCLUDED AS PART OF THIS
REPORT.
(B) CURRENT REPORTS ON FORM 8-K:
The Company filed a Form 8-K with the Commission on November 6, 1998,
reporting that it had completing its offering of $100 million 12% Senior Notes
due 2008. The press release announcing such offering was filed as an exhibit to
the Form 8-K.
The Company filed a Form 8-K with the Commission on December 22, 1998,
reporting that it had completing its offering of $200 million 10 1/2% Senior
Notes due 2008. The press release announcing such offering was filed as an
exhibit to the Form 8-K.
(C) THE FOLLOWING EXHIBITS ARE INCLUDED IN THIS REPORT:
EXHIBIT
NUMBER DESCRIPTION
-------- ------------------------------------------------------------
*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.
*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 -- 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.
*10.3 -- Collateral Pledge and Security Agreement, dated October 3,
1996, by and among RSL Communications PLC and Trustee.
55
<PAGE>
++++10.4 -- 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.
++++10.5 -- 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.
++++10.6 -- Indenture, dated as of February 27, 1998, by RSL
Communications PLC and RSL Communications, Ltd. to The Chase
Manhattan Bank as Trustee.
++++10.7 -- Indenture, dated as of February 27, 1998, by RSL
Communications PLC and RSL Communications, Ltd. to The Chase
Manhattan Bank as Trustee.
++++10.8 -- Note Deposit Agreement, dated as of March 16, 1998, by and
between RSL Communications PLC and The Chase Manhattan Bank as
Book-Entry Depositary.
++++10.9 -- Indenture, dated as of March 16, 1998, by RSL Communications
PLC and RSL Communications, Ltd. to The Chase Manhattan Bank
as Trustee.
*10.10 -- Warrant Agreement, dated October 3, 1996, between RSL
Communications, Ltd., as Issuer, and The Chase Manhattan Bank, as
warrant agent.
*10.11 -- Warrant Registration Rights Agreement, dated October 3, 1996,
between RSL Communications, Ltd., as issuer, and The Chase
Manhattan Bank, as warrant agent.
*10.12 -- Amendment to the Revolving Credit Facility, dated August 20,
1996, from The Chase Manhattan Bank to RSL Communications, Inc.
*10.13 -- Amendment to the Revolving Credit Facility, dated September
10, 1996, from The Chase Manhattan Bank to RSL Communications,
Ltd.
*10.14 -- Subordinated Promissory Note, dated September 10, 1996, from
RSL Communications, Ltd. to Ronald S. Lauder.
*10.15 -- Warrant for 210,000 shares of Class B Common Stock of RSL
Communications, Ltd. issued to Ronald S. Lauder on
September 10, 1996.
*10.16 -- Standby Facility Agreement, dated October 1, 1996, by and
between RSL Communications, Ltd. and Ronald S. Lauder.
*10.17 -- RSL Communications, Ltd.'s 1995 Amended and Restated Stock
Option Plan.
*10.18 -- Memorandum of Agreement, dated July 30, 1996, between
International Telecommunications Corporation and Codetel.
*10.19 -- General Purchase Agreement, dated September 14, 1995,
between Ericsson Inc. and International Telecommunications
Corporation.
*10.20 -- Lease Agreement between AB LM Ericsson Finans and
International Telecommunications Corporation.
*10.21 -- Lease Agreement, dated April 10, 1996, between RSL COM
Europe Ltd. and AB LM Ericsson Finans.
*10.22 -- Lease Agreement, dated December 30, 1996, between RSL COM
Europe Ltd. and AB LM Ericsson Finans.
*10.23 -- Asset Purchase Agreement, dated as of May 8, 1996, by and
between RSL COM France S.A. and Sprint Telecommunications
France Inc.
*10.24 -- Asset Purchase Agreement, dated as of May 8, 1996, by and
among Siena Vermogensverwaltungs-GmbH, Sprint Telecommunication
Services GmbH and Sprint Fon Inc.
*10.25 -- Asset Purchase Agreement, August 12, 1996, by and between RSL
COM UK Limited and Incom (UK) Ltd.
*10.26 -- Stock Purchase Agreement, dated July 3, 1996, between RSL
Communications Limited, Charles Piluso and International
Telecommunications Group, Ltd.
*10.27 -- Stock Purchase Agreement, dated September 9, 1996, between
RSL Communications PLC, Richard Rebetti, Jr. and
International Telecommunications Group, Ltd.
56
<PAGE>
*10.28 -- Agreement and Plan of Reorganization, dated September 9, 1996,
among RSL Communications PLC, RSL Communications, Ltd.
and Charles Piluso.
*10.29 -- Tax Agreement, dated September 9, 1996, between RSL
Communications PLC, RSL Communications, Ltd. and Charles
Piluso.
*10.30 -- Stock Purchase Agreement, dated September 22, 1995, by and
between RSL Communications, Inc. and Charles Piluso.
*10.31 -- Stock Purchase Agreement, dated September 22, 1995, by and
between Richard Rebetti and RSL Communications, Inc.
*10.32 -- Amendment to the Stock Purchase Agreement, dated
September 22, 1995, between and among International
Telecommunications Group, Ltd., International
Telecommunications Corporation and RSL Communications, Inc.
*10.33 -- Stock Purchase Agreement, dated March 10, 1995, between RSL
Communication, Inc., International Telecommunications Group,
Ltd. and International Telecommunications Corporation.
*10.34 -- Indemnity Agreement, dated March 10, 1995, between and among
International Telecommunications Group, Ltd., International
Telecommunications Corporation and RSL Communications, Inc.
*10.35 -- Sublease, dated July 18, 1996, between RSL Communications,
Ltd. and RSL Management Corporation.
*10.36 -- Lease, dated as of January 15, 1997, between Longstreet
Associates L.P. and RSL COM U.S.A., Inc.
*10.37 -- Employment Agreement, dated January 31, 1997, between Roland
T. Mallcott and RSL Communications, Ltd.
*10.38 -- Amendment of Lease, dated as of December 6, 1995, between
Hudson Telegraph Associates and International
Telecommunications Corporation.
**10.39 -- 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.
**,***10.40 -- Delta Three, Inc. Services Agreement.
**10.41 -- Employment Agreement, dated July 31, 1997, between Andrew C.
Shields and RSL Communications, Ltd.
+10.42 -- RSL Communications, Ltd. 1997 Performance Incentive Plan.
+10.43 -- RSL Communications, Ltd. 1997 Stock Incentive Plan.
**10.44 -- Lease Agreement, dated June 19, 1997 for property at 430 Park
Avenue, New York, New York.
**10.45 -- Stock Purchase Agreement of Delta Three, Inc.
**10.46 -- Employment Agreement, dated September 2, 1997, between
Itzhak Fisher and RSL Communications, Ltd.
**10.47 -- Employment Agreement, dated September 2, 1997, between
Itzhak Fisher and International Telecommunications Group,
Ltd.
+10.48 -- RSL Communications Ltd. 1997 Directors' Compensation Plan.
**10.49 -- Registration Rights Agreement, dated September 2, 1997,
among RSL Communications, Ltd., Ronald S. Lauder, Itzhak
Fisher and Coral Gate Investments Ltd.
**10.50 -- International Telecommunication Services Agreement, dated
July 1, 1995, between International Telecommunications
Corporation and TELECOM Denmark.
**10.51 -- International Telecommunication Operating Agreement, dated
July 15, 1995 between Telenor Carrier Services A.S. and
International Telecommunications Corporation.
**10.52 -- International Telecommunication Services Agreement, dated
May 10, 1994, between Mercury Communications Limited and
International Telecommunications Corporation.
**10.53 -- Agreement Concerning Voice Distribution of International
Telephony Traffic, undated, between Unisource Carrier
Services AG and International Telecommunications
Corporation.
**10.54 -- International Telecommunications Service Agreement, dated
May 31, 1994, between Compania Dominicana De Telefonos, C.
Por A. and International Telecommunications Corporation.
**10.55 -- Second Supplementary Agreement to the UK-Netherlands 14 Cable
System Construction & Maintenance Agreement, effective February
18, 1997, among the parties on the Annex thereto.
57
<PAGE>
**10.56 -- Fourth Supplementary Agreement to the ODIN Construction and
Maintenance Agreement, dated October 24, 1996, among the parties
on the Annex thereto.
**10.57 -- Second Supplementary Agreement to Antillas I Construction &
Maintenance Agreement, dated February 13, 1997, among the parties
on the Annex thereto.
**10.58 -- Canus I Cable System Indefeasible Right of Use Agreement and
Financing Agreement, dated June 4, 1996, between Optel
Communications, Inc. and International Telecommunications
Corporation.
**10.59 -- 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.
**10.60 -- PTAT-1 Submarine System Indefeasible Right of Use Agreement,
dated May 12, 1994, between Private Transatlantic
Telecommunications System, Inc. and International
Telecommunications Corporation.
**10.61 -- 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.
*10.62 -- 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.
+++10.63 -- Asset Purchase Agreement, dated as of April 23, 1998, by and
between CBS Corporation and RSL COM U.S.A., Inc.
*****10.64 -- Restated Umbrella Agreement, dated as of June 26, 1998, among
Motorola Limited, SA Motorola NV, Motorola Electronic GmbH,
Motorola SA and RSL Communications, Ltd.
***10.65 -- Share Subscription, Share Option and Shareholders Agreement,
dated June 10, 1998, among RSL COM Europe Ltd., RSL
Communications, Ltd. and Metro Holding AG.
***10.66 -- Marketing and Distribution Services Agreement, dated as of
June 10, 1998, between RSL Com Europe Ltd. and Metro Holding
AG.
***10.67 -- Exchange Agreement, dated July 22, 1998, among Ligapart AG,
Metro Holding AG and RSL Communications, Ltd.
***10.68 -- Amended and Restated Share Subscription, Share Option and
Shareholders Agreement, dated July 22, 1998, among RSL COM
Europe Ltd., RSL Communications, Ltd. and Metro Holding AG.
***10.69 -- Share Purchase Agreement, dated June 24, 1988, between
British Columbia Railway Company and RSL Com Holdings
Canada, Inc.
****10.70 -- Note Deposit Agreement, dated November 9, 1998, among RSL
Communications PLC, RSL Communications, Ltd. and The Chase
Manhattan Bank as Book-Entry Depositary.
****10.71 -- Indenture, dated November 9, 1998, by RSL Communications PLC
and RSL Communications, Ltd. to The Chase Manhattan Bank as
Trustee.
******10.72 -- Note Deposit Agreement, dated December 8, 1998, among RSL
Communications PLC, RSL Communications, Ltd., and The Chase
Manhattan Bank as Book-Entry Depository.
******10.73 -- Indenture, dated December 8, 1998, by RSL Communications PLC
and RSL Communications, Ltd. to The Chase Manhattan Bank as
Trustee.
******10.74 -- Employment Agreement between RSL Communications, Ltd. and
Richard Williams.
******10.75 -- Employment Agreement between RSL Communications, Ltd. and
Donald Shassian.
****21.1 -- Subsidiaries of the Company.
27.1 -- Financial Data Schedule.
58
<PAGE>
* Incorporated by reference to Registrant's Registration Statement on Form
S-4 (Registration No.333-25749).
** Incorporated by reference to Registrant's Registration Statement on Form
S-1 (Registration No. 333-34281)
*** Confidential Treatment was granted by the Commission with respect to
certain information contained in this exhibit.
**** Incorporated by reference to Registrant's Registration Statement on Form
S-1 (Registration No. 333-62325).
***** Incorporated by reference to the Registrant's report on Form 8-K dated
August 14, 1998.
****** Incorporated by reference to Registrant's Registration Statement on Form
S-4 (Registration No. 333-70023).
+ 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).
(D) SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF RSL COMMUNICATIONS PLC
(INCLUDED AT PAGE S-1).
SCHEDULE II - SCHEDULE OF VALUATION ALLOWANCES OF RSL COMMUNICATIONS, LTD.
(INCLUDED AT PAGE S-4).
59
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
RSL COMMUNICATIONS, LTD.
Independent Auditors' Report...........................................................................F-2
Consolidated Balance Sheets as of December 31, 1997 and December 31, 1998..............................F-3
Consolidated Statements of Operations and Comprehensive Loss for the Years Ended
December 31, 1996, December 31, 1997 and December 31, 1998........................................F-5
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1996, December 31, 1997 and December 31, 1998........................................F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996,
December 31, 1997 and December 31, 1998...........................................................F-8
Notes to Consolidated Financial Statements............................................................F-10
</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, 1998 and 1997, and the related consolidated
statements of operations and comprehensive loss, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. Our
audits also included the consolidated financial statement schedules listed in
the Index as Item 14(d) in Part IV. 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, 1998 and 1997, and the results of their
operations and comprehensive loss and their cash flows for each of the three
years in the period ended December 31, 1998 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.
New York, New York
February 19, 1999
F-2
<PAGE>
RSL COMMUNICATIONS, LTD.
CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................. $ 144,894 $ 367,823
Accounts receivable--net ................................... 70,610 181,845
Marketable securities--available for sale .................. 13,858 98,637
Prepaid expenses and other current assets .................. 16,073 77,772
--------- ----------
Total current assets ......................................... 245,435 726,077
--------- ----------
Restricted marketable securities--held to maturity ........... 68,836 20,159
--------- ----------
Marketable securities--available for sale .................... -- 12,911
--------- ----------
Property and equipment:
Telecommunications equipment ............................... 63,998 300,647
Furniture, fixtures and other .............................. 21,583 68,861
--------- ----------
85,581 369,508
Less accumulated depreciation .............................. (13,804) (45,785)
--------- ----------
Property and equipment--net ................................ 71,777 323,723
--------- ----------
Investment in unconsolidated subsidiaries .................... -- 8,446
--------- ----------
Goodwill and other intangible assets--net of accumulated
amortization ............................................... 214,983 589,517
--------- ----------
Deposits and other assets .................................... 4,633 33,760
-------- ----------
Total assets ................................................. $ 605,664 $1,714,593
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable ........................................... $ 94,149 $ 170,135
Accrued expenses ........................................... 49,965 191,234
Notes payable .............................................. 4,604 11,537
Deferred revenue ........................................... 5,368 23,647
Capital lease obligations--current portion ................. 3,429 24,593
Other liabilities .......................................... 4,842 49,781
--------- ----------
Total current liabilities .................................... 162,357 470,927
--------- ----------
Other liabilities--noncurrent ................................ -- 20,807
--------- ----------
Long-term debt--less current portion ......................... -- 12,643
--------- ----------
Senior notes--net ............................................ 296,500 998,868
--------- ----------
Capital lease obligations--less current portion .............. 20,108 77,864
--------- ----------
Total liabilities ............................................ 478,965 1,581,109
--------- ----------
Commitments and contingencies
Shareholders' equity
Common Stock, Class A--par value $0.00457; 10,872,568 and
26,529,479 issued and outstanding at December 31, 1997
and 1998, respectively ................................. 49 121
F-3
<PAGE>
Common Stock, Class B--par value $0.00457; 30,760,726 and
26,245,315 issued and outstanding at December 31, 1997
and 1998, respectively.................................. 141 120
Common Stock, Class C--par value $0.00457; 0 shares issued -- --
Preferred Stock--par value $0.00457; 65,700,000 shares
authorized, 0 shares issued............................. -- --
Warrants--Common Stock, exercise price of $0.00457............ 5,544 5,544
Additional paid-in capital.................................... 274,192 500,292
Accumulated deficit........................................... (147,939) (367,163)
Accumulated other comprehensive loss.......................... (5,288) (5,430)
--------- ----------
Total shareholders' equity.................................... 126,699 133,484
--------- ----------
Total liabilities and shareholders' equity.................... $ 605,664 $1,714,593
========= ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
RSL COMMUNICATIONS, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
($ AND SHARES IN THOUSANDS, EXCEPT LOSS PER SHARE)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES ...................................... $113,257 $ 300,796 $ 885,938
OPERATING COSTS AND EXPENSES:
Cost of services (exclusive of depreciation
and amortization shown separately below) 98,461 265,321 702,602
Selling, general and administrative expenses 38,893 94,712 238,141
Depreciation and amortization ............... 6,655 21,819 75,445
-------- --------- ----------
144,009 381,852 1,016,188
-------- --------- ----------
Loss from operations .......................... (30,752) (81,056) (130,250)
Interest income ............................. 3,976 13,826 16,104
Interest expense ............................ (11,359) (39,373) (75,431)
Other income--net ........................... 470 6,595 739
Foreign exchange transaction loss ........... -- -- (11,055)
Minority interest ........................... (180) 210 6,079
Loss in equity interest of unconsolidated
subsidiaries ............................. -- -- (3,276)
Income taxes ................................ (395) (401) (1,334)
-------- --------- ----------
Loss before extraordinary item ................ (38,240) (100,199) (198,424)
Extraordinary item ............................ -- -- (20,800)
-------- --------- ----------
Net loss ...................................... (38,240) (100,199) (219,224)
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign exchange translation adjustment ..... (622) (4,666) 897
Unrealized loss on securities ............... -- -- (1,039)
-------- --------- ----------
Comprehensive loss ............................ $(38,862) $(104,865) $ (219,366)
======== ========= ==========
Loss per share of common stock before
extraordinary item ....................... $ (5.13) $ (5.27) $ (4.52)
Extraordinary item per share of common stock... $ -- $ -- $ (0.47)
Net loss per share of common stock ............ $ (5.13) $ (5.27) $ (4.99)
Weighted average number of shares of common
stock outstanding ........................ 7,448 19,008 43,913
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
RSL COMMUNICATIONS, LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
($ AND SHARES IN THOUSANDS)
<TABLE>
<CAPTION>
Class A Class B
Common Stock Common Stock Preferred Stock
------------------ -------------------- -------------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE JANUARY 1, 1996 ......... -- $ -- 6,411 $ 29 9,244 $ 93
Issuance of Warrants
in connection with
1996 Notes Offering .......... -- -- -- -- -- --
Issuance of Warrants
in connection with
shareholder standby
facility and revolving
credit facility .............. -- -- -- -- -- --
Issuance of Common Stock ........ -- -- 4,118 19 -- --
Foreign currency
translation
adjustment ................... -- -- -- -- -- --
Net loss ........................ -- -- -- -- -- --
----- ------ ------ ------ ------ ------
BALANCE DECEMBER 31, 1996 ....... -- -- 10,529 48 9,244 93
Initial Public Offering of
Class A Common Stock ......... 8,280 38 -- -- -- --
Issuance of Class A Common
Stock for acquisition of
certain minority interests,
warrants and options
exercised .................... 2,593 11 -- -- -- --
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 ........................ -- -- -- -- -- --
----- ------ ------ ------ ------ ------
<CAPTION>
Common Stock Accumulated
Warrants Additional Other Deferred
----------------- Paid-In Accumulated Comprehensive Financing
Shares Amount Capital Deficit Loss Costs Total
------ ------ ---------- ----------- ------------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE JANUARY 1, 1996 ......... -- $ -- $ 15,083 $ (9,500) $ -- $ -- $ 5,705
Issuance of Warrants
in connection with
1996 Notes Offering .......... 657 4,000 -- -- -- -- 4,000
Issuance of Warrants
in connection with
shareholder standby
facility and revolving
credit facility .............. 460 1,544 -- -- -- (1,544) --
Issuance of Common Stock ........ -- -- 49,981 -- -- -- 50,000
Foreign currency
translation
adjustment ................... -- -- -- -- (622) -- (622)
Net loss ........................ -- -- -- (38,240) -- -- (38,240)
----- ------ -------- --------- ------- ------- ---------
BALANCE DECEMBER 31, 1996 ....... 1,117 5,544 65,064 (47,740) (622) (1,544) 20,843
Initial Public Offering of
Class A Common Stock ......... -- -- 167,504 -- -- -- 167,542
Issuance of Class A Common
Stock for acquisition of
certain minority interests,
warrants and options
exercised .................... -- -- 41,624 -- -- -- 41,635
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) -- -- (100,199)
----- ------ -------- --------- ------- ------- ---------
F-6
<PAGE>
<CAPTION>
Class A Class B
Common Stock Common Stock Preferred Stock
------------------ -------------------- -------------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1997 ....... 10,873 49 30,761 141 -- --
Secondary offering of
Class A Common
Stock ........................ 7,544 34 -- -- -- --
Issuance of Class A Common
Stock for acquisition of
certain minority interests,
distribution rights, warrants
and options exercised ........ 3,596 17 -- -- -- --
Conversion of Class B
Common Stock in
exchange for Class A
Common Stock ................. 4,516 21 (4,516) (21) -- --
Change in minority
interest from step
acquisition .................. -- -- -- -- -- --
Foreign currency translation
adjustment ................... -- -- -- -- -- --
Unrealized loss on
securities ................... -- -- -- -- -- --
Net loss ........................ -- -- -- -- -- --
------ ------ ------ ------ ----- ------
BALANCE DECEMBER 31, 1998 ....... 26,529 $ 121 26,245 $ 120 -- $ --
====== ====== ====== ====== ===== ======
<CAPTION>
Common Stock Accumulated
Warrants Additional Other Deferred
----------------- Paid-In Accumulated Comprehensive Financing
Shares Amount Capital Deficit Loss Costs Total
------ ------ ---------- ----------- ------------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1997 ....... 1,117 5,544 274,192 (147,939) (5,288) -- 126,699
Secondary offering of
Class A Common
Stock ........................ -- -- 169,955 -- -- -- 169,989
Issuance of Class A Common
Stock for acquisition of
certain minority interests,
distribution rights, warrants
and options exercised ........ -- -- 56,249 -- -- -- 56,266
Conversion of Class B
Common Stock in
exchange for Class A
Common Stock ................. -- -- -- -- -- -- --
Change in minority
interest from step
acquisition .................. -- -- (104) -- -- -- (104)
Foreign currency translation
adjustment ................... -- -- -- -- 897 -- 897
Unrealized loss on
securities ................... -- -- -- -- (1,039) -- (1,039)
Net loss ........................ -- -- -- (219,224) -- -- (219,224)
----- ------ -------- --------- ------- ------ ---------
BALANCE DECEMBER 31, 1998 ....... 1,117 $5,544 $500,292 $(367,163) $(5,430) $ -- $ 133,484
===== ====== ======== ========= ======= ====== =========
</TABLE>
F-7
<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,
1996 1997 1998
------------ ----------- ------------
<S> <C> <C> <C>
Cash flows used in operating activities:
Net loss ............................................................... $ (38,240) $(100,199) $(219,224)
Adjustments to reconcile net loss to net cash used in operating
activities, net of effects of purchase of subsidiaries:
Accretion of interest expense on senior discount notes ............. -- -- 25,706
Accretion of interest receivable on restricted marketable
securities ....................................................... (1,562) (5,504) (2,727)
Depreciation and amortization ...................................... 6,655 21,819 75,445
Equity loss on investment in unconsolidated subsidiaries ........... -- -- 3,276
Extraordinary loss ................................................. -- -- 20,800
Foreign currency transaction (gain) loss ........................... (788) -- 6,441
Loss on disposal of property and equipment ......................... 368 -- --
Loss on sales of marketable securities ............................. -- -- 367
Provision for losses on accounts receivable ........................ 2,830 10,908 9,043
Reversal of accrued liabilities .................................... -- (7,000) --
Changes in assets and liabilities:
Increase in accounts receivable--net ............................... (17,034) (45,069) (49,321)
Increase in deposits and other assets .............................. (3,249) (2,929) (48,869)
Increase in prepaid expenses and other current assets .............. (925) (13,196) (65,842)
Increase in accounts payable and accrued expenses .................. 44,243 56,354 123,813
Increase (decrease) in deferred revenue and other current
liabilities ...................................................... 4,279 (2,155) 38,018
Increase (decrease) in other long-term liabilities ................. (7,052) (4,841) 322
--------- --------- ---------
Net cash used in operating activities .................................. (10,475) (91,812) (82,752)
--------- --------- ---------
Cash flows used in investing activities:
Acquisition of subsidiaries ........................................ (38,552) (77,813) (287,044)
Purchase of marketable securities .................................. (82,529) -- (134,275)
Proceeds from maturities of marketable securities .................. -- 26,492 23,684
Proceeds from sales of marketable securities ....................... 14,701 27,675 35,757
Purchase of restricted marketable securities ....................... (102,808) -- --
Proceeds from maturities of restricted marketable
securities ....................................................... -- 41,038 29,141
Purchase of property and equipment ................................. (15,983) (36,357) (181,937)
Proceeds from sale of property and equipment ....................... 171 144 5,236
--------- --------- ---------
Net cash used in investing activities .................................. (225,000) (18,821) (509,438)
--------- --------- ---------
See notes to consolidated financial statements.
F-8
<PAGE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
------------ ----------- ------------
<S> <C> <C> <C>
Cash flows provided by financing activities:
Proceeds from issuance of common and preferred stock
and warrants ..................................................... 50,000 182,160 180,807
Underwriting fees and expenses ..................................... -- (14,618) (10,131)
Proceeds from notes payable ........................................ -- -- 1,306
Payment of notes payable ........................................... (3,000) (3,348) --
Proceeds from issuance of Notes .................................... 300,000 -- 791,992
Payment of offering costs .......................................... (10,989) -- (10,940)
Proceeds from long-term debt ....................................... 44,000 -- 13,386
Payment of long-term debt .......................................... (44,598) (9,402) (1,548)
Retirement of 1996 Notes ........................................... -- -- (127,493)
Premium paid for the retirement of 1996 Notes ...................... -- -- (16,662)
Principal payments under capital lease obligations ................. (382) (2,757) (5,241)
--------- --------- ---------
Net cash provided by financing activities .............................. 335,031 152,035 815,476
--------- --------- ---------
Increase in cash and cash equivalents .............................. 99,556 41,402 223,286
Effects of foreign currency exchange rates on cash ................. (651) (576) (357)
Cash and cash equivalents at beginning of period ................... 5,163 104,068 144,894
--------- --------- ---------
Cash and cash equivalents at end of period ......................... $ 104,068 $ 144,894 $ 367,823
========= ========= =========
Supplemental disclosure of cash flows information:
Cash paid for:
Interest ......................................................... $ 1,639 $ 41,285 $ 46,930
========= ========= =========
Supplemental schedule of noncash investing and financing
activities:
Assets acquired under capital lease obligations .................... $ 7,897 $ 13,060 $ 65,728
========= ========= =========
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 $ 54,524
========= ========= =========
Acquisition costs included in current liabilities .................. $ -- $ 17,929 $ 1,900
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-9
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
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
communications 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, Canada, the United Kingdom, Austria, Belgium, Denmark, Finland,
France, Germany, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden,
Switzerland, Australia, Japan and Venezuela. In 1997, approximately 70% of the
world's international long distance telecommunications minutes originated in
these markets.
2. ACQUISITIONS
1998 ACQUISITIONS
TELECENTER OY
In January 1998, RSL COM Finland Oy, a subsidiary of the Company, purchased
90% of the equity of Telecenter OY, an independent sales agent in Finland. The
Company paid approximately $14.4 million and recorded approximately $8.1 million
as goodwill.
FIRST DIRECT COMMUNICATIONS PTY. LIMITED AND LINK TELECOMMUNICATIONS
PTY LTD.
In March 1998, RSL COM Australia Pty. Ltd. ("RSL Australia"), 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 $19.6 million and recorded the
same amount as a customer base.
TELE 2001
In May 1998, RSL COM Sweden AB, a subsidiary of the Company, purchased 100%
of the equity of Tele 2001, a Swedish Telecommunications reseller, for
approximately $1.0 million and recorded the same amount as goodwill.
F-10
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
WESTINGHOUSE COMMUNICATIONS
In July 1998, the Company acquired the business of Westinghouse
Communications ("WestComm"), a division of CBS Corporation, for a cash purchase
price of approximately $91.2 million plus the assumption of certain liabilities
amounting to $38.3 million. WestComm provides both voice telephony and data
services to a customer base consisting primarily of small to medium size
businesses in the United States. In connection with this purchase, the Company
recorded approximately $129.5 million as goodwill.
WESTEL TELECOMMUNICATIONS LTD.
In July 1998, the Company acquired 100% of Westel Telecommunications Ltd.
("Westel") from British Columbia Railway Company for a cash purchase price of
approximately $37.6 million (the "Westel Acquisition"). Westel offers a broad
range of enhanced telecommunications services (including long distance, data,
private line and Internet access) to a customer base consisting primarily of
commercial and residential customers located in British Columbia. In connection
with this purchase, the Company recorded approximately $9.0 million as goodwill.
MK TELECOM NETWORK INC.
In connection with the Westel Acquisition and in compliance with the
Canadian Telecommunications Act (the "Telecom Act"), the Company agreed to
transfer (the "MK Network Transfer") Westel's "telecommunications facilities"
(as defined in the Telecom Act) to MK Telecom Network Inc. ("MK Network"), an
entity in which the Company owns a 46.7% beneficial interest, for a purchase
price of approximately $6.5 million, the net realizable value of the assets
transferred to MK Network (such assets were purchased in the Westel
acquisition). The MK Network Transfer was effective as of July 31, 1998. The
Company recorded its investment in MK Network as an equity investment which was
completed through a transfer of assets, which were recorded at the Company's
historical cost basis (which also approximates net realizable value). The assets
transferred consist of telecommunications microwave facilities. Neither Westel
nor MK Network and their respective owners are related parties.
COMESA
In July 1998, RSL COM Italia S.r.l. ("RSL Italy"), a subsidiary of the
Company, acquired 75% of the equity of Comesa, a telecommunications company
located in Northern Italy. The Company paid approximately $1.0 million and
recorded approximately $1.5 million as goodwill.
GEOVOX SARL
In July 1998, RSL COM France S.A., a subsidiary of the Company, purchased
100% of the equity of Geovox SARL, a prepaid calling card company operating in
Paris, France for approximately $1.9 million in cash plus the assumption of
certain liabilities amounting to $2.8 million. In connection with this purchase
the Company recorded approximately $4.7 million as goodwill.
F-11
<PAGE>
TC TELECOM GMBH
In July 1998, RSL COM Austria AG, a subsidiary of the Company, acquired
100% of the equity of TC Telecom GmbH, a telecommunications reseller located in
Austria, for approximately $1.1 million and recorded the same amount as
goodwill.
MOTOROLA TEL.CO
In August 1998, the Company acquired the business of Motorola Tel.co
("Motorola Tel.co") in the United Kingdom and Germany from Motorola Inc.
Motorola Tel.co resells wireless services and related products in these
countries to a base of over 350,000 subscribers. The Company paid approximately
$68.1 million plus the assumption of certain liabilities amounting to $10.6
million and recorded approximately $78.7 million as goodwill.
ONE STEP BILLING INC.
In October 1998, the Company acquired a customer base from One Step Billing
Inc. in the United States for approximately $15.1 million and recorded an equal
amount as customer base.
TDL
In December 1998, the Company acquired the business of TDL, a reseller of
telecommunications services based in the United Kingdom. The Company paid
approximately $2.1 million plus the assumption of certain liabilities amounting
to $1.7 million and recorded approximately $3.8 million as goodwill.
TELEGATE HOLDING GMBH
In May 1998, the Company acquired a 49.86% ownership interest in Telegate
Holding GmbH ("Telegate Holding"), which holds a 54.55% ownership interest in
Telegate AG ("Telegate"), resulting in a 27.19% economic interest in Telegate.
Telegate is a directory information provider in Germany. In December 1998, the
Company increased its shareholdings in Telegate Holding to 50.2%, no additional
contribution was paid related to this increment. The Company paid $33.6 million
and recorded approximately $35.6 million as goodwill.
1997 ACQUISITIONS/NEW OPERATIONS
DELTA THREE, INC.
During 1997, the Company acquired a majority interest in Delta Three, Inc.
("Delta Three"). The Company paid approximately $8.8 million for approximately
72% ownership of Delta Three. The Company acquired an additional 28% interest
during 1998 for approximately $2.9 million in cash and
F-12
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
$8.7 million through the issuance of stock. In connection with this transaction,
the Company recorded approximately $15.4 million as goodwill.
MAXITEL
In April 1997, RSL Com Europe Ltd ("RSL Europe") acquired a 30.4% interest
in Maxitel Servicos e Gestao de Telecommunicacoes, S.A. ("Maxitel"), a
Portuguese international telecommunications carrier for $2.1 million, and has
since increased its ownership interest in Maxitel to 39% in 1998 for an
additional $1.3 million. The total investment in Maxitel is approximately $3.4
million.
PACIFIC STAR COMMUNICATIONS LIMITED
In April 1997, the Company acquired substantially all of the commercial
customer contracts of Pacific Star Communications Limited, an Australian based
company. The Company paid approximately $1.5 million in cash and recorded this
amount as a customer base.
NEWTELCO
In August 1997, RSL Europe purchased 90% of the stock of Newtelco Telekom
AG, 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, an
Italian telecommunications reseller. The Company paid approximately $1.7 million
for its investment in RSL Italy.
EZI PHONECARD HOLDINGS PTY. LIMITED
In October 1997, 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 as 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
1998, the Company paid a final payment of $1.0 million plus an assumption of
liabilities of approximately $2.9 million. In connection with this purchase, RSL
Australia recorded approximately $28.4 million as goodwill.
F-13
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
LDM SYSTEMS, INC.
In October 1997, the Company acquired 100% of the outstanding common stock
of LDM Systems, Inc. ("LDM"). In connection with this acquisition, the Company
paid approximately $14.9 million in 1997 and recorded a purchase price
adjustment of approximately $4.0 million in 1998. In connection with this
transaction, the Company recorded approximately $18.9 million as goodwill.
CALLCOM AG FUR TELEKOMMUNIKATION
In December 1997, RSL Europe acquired a 78.5% interest in Callcom AG fur
TeleKommunikation ("RSL Switzerland") for $2.1 million in cash.
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 in 1997 and $0.3
million in 1998 for this acquisition and recorded approximately $19.1 million as
goodwill.
1996 ACQUISITIONS/NEW OPERATIONS
CERTAIN ASSETS OF SPRINT IN FRANCE AND GERMANY
In May 1996, the Company acquired the net assets, principally
telecommunications equipment and facilities, constituting the international long
distance voice businesses of Sprint in France and Germany through its
wholly-owned subsidiaries RSL COM France S.A., a French corporation ("RSL
France"), and RSL COM Deutschland GmbH, a German limited liability company ("RSL
Germany"). Pursuant to the applicable asset purchase agreements, the Company
cannot disclose the purchase price of the net assets. In connection with this
transaction, the Company recorded approximately $7.9 million as 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 as goodwill.
F-14
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
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 as goodwill.
ACCOUNTING TREATMENT
For all years, the acquisitions, unless otherwise stated, have been
accounted for by the purchase method of accounting and, accordingly, the
purchase prices have been allocated to the assets acquired, primarily fixed
assets, accounts receivable and customer bases, 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 to twenty years. The
valuation of the Company's acquired assets and liabilities for the 1998
acquisitions are 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, 1997 and 1998 as
though the acquisitions of Westinghouse, Westel, LDM, Call Australia Group, and
EZI had occurred on January 1, 1997. All other acquisitions had insignificant
operations prior to the date of acquisition. The unaudited pro forma
consolidated statements do not necessarily represent what the Company's results
of operations would have been had such acquisitions actually occurred on such
date.
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
----------------- ------------------
Revenues............................. $ 556,500 $1,015,422
========= ==========
Net loss............................. $(102,891) $ (223,588)
========= ==========
Net loss per share................... $ (5.41) $ (5.09)
========= ==========
MARKETING AGREEMENT
In June 1998, the Company entered into a marketing and distribution
services agreement with Metro Holding AG ("Metro Holding"), the management
holding company for Metro AG, one of the largest retailers in Europe. Under this
agreement, Metro Holding will assist the Company in promoting, marketing,
selling and distributing the Company's services through Metro AG's wholesale and
F-15
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
retail operations in Europe. This arrangement is designed to provide the Company
access to Metro AG's extensive distribution network and customer base (which
includes a large number of small and medium-sized businesses) and is expected to
significantly accelerate the Company's penetration into key European markets. In
connection with its alliance with the Company, Metro Holding initially acquired
in April 1998 a 12.5% equity interest in RSL Europe. In June 1998, Metro Holding
converted all of its interest in RSL Europe into 1,607,142 shares of Class A
Common Stock (based on value for value) and purchased an equal number of Class A
Common Stock from certain shareholders of the Company. In the aggregate at
December 31, 1998, Metro Holding holds approximately 6.1% of the outstanding
stock of the Company, which it is required to hold until at least April 1, 2001.
The Company has recorded in the consolidated financial statements the issuance
of such equity at fair market value, $45 million, based on the quoted market
value of the Company's stock at the time of the transaction, and has recorded
the distribution rights as an intangible asset in a like amount which is being
amortized over the five-year life of the agreement.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation. The consolidated
financial statements include the accounts of RSL Communications, Ltd. and its
majority-owned subsidiaries from the date of acquisition or commencement of
operations.
For the year ended December 31, 1996 the Company has, since the Company's
acquisition or startup of its subsidiaries, included 100% of all of such
subsidiaries' operating losses, because the minority investments in each of
those entities have been reduced to zero as of the relevant year-end dates. For
the years ended December 31, 1997 and 1998, the Company has included 100% of its
wholly owned subsidiaries' operating losses and the Company has recorded
minority interest, an asset representing the Company's minority shareholder's
proportionate share of operating losses for RSL COM Australia Holding Pty.
Limited, RSL COM Austria AG, RSL COM Italia S.r.l., RSL COM Latin America, RSL
COM Mexico S.A., RSL Communications Spain, S.A., RSL COM Schweiz AG, RSL COM
Venezuela C.A., European Telecom S.A./N.V. and European Telecom SARL. In the
event additional capital in any such subsidiary is required to fund operating
losses, the minority shareholders of such subsidiary are contractually obligated
to invest, to the extent necessary to fund the operations, based on their pro
rata ownership of the total outstanding stock of such subsidiary. If a
shareholder does not invest its pro rata amount, then such shareholder's equity
interest will be diluted and the contributing shareholders' equity in such
subsidiary will be increased. The Company believes that all of its minority
shareholders have the financial wherewithal to meet its obligations to the
Company with respect to its proportionate share of operating losses. Each of the
Company's other subsidiaries' operating losses have been recorded in full.
The Company has majority ownership of all of its subsidiaries except for
Maxitel and MK Network, for which the Company accounts for its investments under
the equity method of accounting.
F-16
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
The Company accounts for its 39% investment in Maxitel using the equity
method. During 1997, the Company formed a joint venture with entities controlled
by the Cisneros Group of Companies to pursue the Company's Latin American
expansion. The Company owns 51% of this joint venture and has, since the joint
venture's formation, consolidated 100% of this joint venture and recognized
minority interest for 49% of the operating losses of the joint venture. The
receivable for the minority shareholder's share of the joint venture loss of
$3.1 million is included in other assets.
Management Assumptions. The preparation of the consolidated financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities and the reported amounts of revenues and expenses. Such
estimates primarily relate to reserves recorded for doubtful accounts and
accruals for other claims. Actual results could differ from these estimates.
Foreign Currency Translation and Transaction. Local currencies are
considered the functional currencies of the Company's foreign operating
entities. 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. 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 other comprehensive loss in equity. Gains and losses from foreign
currency transactions are included in the consolidated statements of operations
and comprehensive loss. Foreign currency transaction losses for the year ended
December 31, 1998 were approximately $11,055,000, primarily as a result of the
increase in the Deutsche mark against the U.S. dollar in connection with the
Company's 1998 Deutsche mark denominated Senior Discount Notes.
Cash and Cash Equivalents. The Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents.
Accounts Receivable. Accounts receivable are stated net of the allowance
for doubtful accounts of approximately $12,000,000 and $14,000,000 at December
31, 1997 and 1998, respectively. The Company recorded bad debt expense of
approximately $2,800,000, $10,900,000 and $9,000,000 for the years ended
December 31, 1996, 1997 and 1998, respectively.
Accrued Expenses. Accrued expenses for the years ended December 31, 1997
and 1998 consist primarily of accrued interest, accrued acquisition costs and
accrued transmission costs.
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
cost. 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
F-17
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
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 value 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 and are amortized over the remainder of
the life. Depreciation is calculated using the straight-line method over the
estimated useful lives of the depreciable assets, which range from three to
fifteen years. Improvements are capitalized, while repair and maintenance costs
are charged to operations as incurred. Depreciation expense was $3,462,000,
$9,794,000 and $32,439,000 for the years ended December 31, 1996, 1997 and 1998,
respectively.
Impairment of Assets. The Company's long-lived assets and identifiable
intangibles are reviewed for impairment whenever events or changes in
circumstances indicate that the net carrying amount may not be recoverable. When
such events occur, the Company measures impairment by comparing the carrying
value of the long-lived asset to the estimated undiscounted future cash flows
expected to result from the use of the assets and their eventual disposition. If
the sum of the expected undiscounted future cash flows is less than the carrying
amount of the assets, the Company would recognize an impairment loss. The
impairment loss, if determined to be necessary, would be measured as the amount
by which the carrying amount of the asset exceeds the fair value of the asset.
The Company determined that, as of December 31, 1997 and 1998, there had been no
impairment in the carrying value of the long-lived assets.
Goodwill and Related Amortization. Goodwill represents the excess of cost
over the fair value of the net assets of acquired entities, and is being
amortized using the straight-line method over fifteen to twenty 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 as
of December 31, 1997 and 1998.
Other Intangible Assets. Other Intangible assets acquired through purchase
acquisitions included distribution rights, customer bases and operating licenses
which are being amortized over lives ranging from two to five years using the
straight-line method. 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
F-18
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
calling card services and services to be supplied under contractual agreements
as deferred revenue until such related services are provided.
Other Liabilities. Other liabilities consists primarily of purchase
accounting adjustments in connection with the Westinghouse Acquisition of $24.7
million, value-added tax and others as of December 31, 1998.
Cost of Services. Cost of services is comprised primarily of transmission
costs.
Selling Expenses. Selling costs such as recurring commissions and marketing
costs are treated as period costs. Customer acquisition costs, primarily related
to the Company's cellular reseller business, are amortized over the average
lives of the contracts of approximately twelve months. Such costs are recorded
in selling, general and administrative expenses in the Company's consolidated
statements of operations and comprehensive loss.
Income Taxes. The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes". SFAS No. 109 establishes financial accounting and reporting
standards for the effect of income taxes that result from activities during the
current and preceding years. SFAS No. 109 requires an asset and liability
approach for financial reporting for income taxes. The Company's foreign
subsidiaries file separate income tax returns in the jurisdiction of their
operations. The Company's United States subsidiaries file stand-alone United
States income tax returns.
Loss per Common Share. In accordance with the Company's adoption of SFAS
No. 128, "Earnings Per Share", the loss per common share is calculated by
dividing the loss attributable to 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 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards for derivative instruments and hedging activities. Generally, it
requires that an entity recognize all derivatives as either an asset or
liability and measure those instruments at fair value, as well as identify the
conditions for which a derivative may be specifically designed as a hedge. SFAS
No. 133 is effective for fiscal years beginning after June 15, 1999. Management
is currently addressing the financial reporting measures that will be needed in
order to comply with this disclosure. The Company has not participated in any
hedging activities in connection with foreign currency exposure.
F-19
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
RECLASSIFICATION
Certain previously reported amounts have been reclassified to conform with
the current period presentation.
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, maintain
significant receivable balances with certain carriers. If the financial
condition and operations of these customers deteriorate below critical levels,
the Company's operating results could be adversely affected.
The Company maintains its cash with high quality credit institutions, and
its cash equivalents and marketable securities are in high quality securities.
5. MARKETABLE SECURITIES
A summary of the Company's available for sale marketable securities at
December 31, 1997 and December 31, 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998
---------------------- -----------------------
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
--------- -------- ---------- --------
<S> <C> <C> <C> <C>
Corporate Notes ................... $ 2,500 $ 2,500 $ 6,651 $ 6,640
Medium-Term Notes ................. -- -- 5,023 5,006
Commercial Paper .................. 4,390 4,388 86,963 86,997
Federal Agency Notes .............. 6,968 6,973 -- --
------- -------- -------- --------
13,858 13,861 98,637 98,643
Mutual Funds--Long-Term ........... -- -- 13,950 12,911
------- -------- -------- --------
$13,858 $ 13,861 $112,587 $111,554
======= ======== ======== ========
</TABLE>
The Company has recorded its available for sale marketable securities at
the lower of amortized cost or market value. The difference between amortized
cost and market value has been recorded as unrealized loss on securities within
shareholders' equity.
The carrying value of the available for sale marketable securities by
maturity date at December 31, 1997 and December 31, 1998 is as follows (in
thousands):
F-20
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
Matures in one year................................ $11,856 $98,637
Matures after one year through three years......... 2,002 12,911
------- --------
Total.............................................. $13,858 $111,548
======= ========
</TABLE>
Proceeds from the sale of available for sale marketable securities for the
years ended December 31, 1996, 1997 and 1998 were $14,701,000, $27,675,000 and
$35,757,000, respectively. Gross gains (losses) of $56,000, $(2,000) and
$(367,000) were realized on these sales for the years ended December 31, 1996,
1997 and 1998.
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, 1997 and
1998 are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998
-------------------------- --------------------------
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Matures in one year................................. $35,455 $35,522 $20,159 $20,723
Matures after one year through three years.......... 33,381 33,377 -- --
------- ------- ------- -------
Total............................................... $68,836 $68,899 $20,159 $20,723
======= ======= ======= =======
</TABLE>
6. INCOME TAXES
The Company has incurred losses since inception for both book and tax
purposes. The Company's Netherlands and Finland subsidiaries recorded income tax
expense of approximately $395,000, $401,000 and $1,334,000 for the years ended
December 31, 1996, 1997 and 1998, respectively. As of December 31, 1996, 1997
and 1998, the Company had net operating loss carryforwards generated primarily
in the United States and the United Kingdom of approximately $47,000,000,
$147,000,000 and $367,000,000, respectively. The net operating loss
carryforwards will expire at various dates beginning in 2009 through 2013 if not
utilized. The utilization of the net operating loss carryforwards is subject to
certain limitations.
In accordance with SFAS No. 109, the Company has computed the components of
deferred income taxes as of December 31, 1997 and 1998 as follows (in
thousands):
F-21
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
DECEMBER 31,
-------------------------
1997 1998
-------- ---------
Deferred tax assets............................... $ 59,000 $ 147,000
Less valuation allowance.......................... (59,000) (147,000)
-------- ---------
Net deferred tax assets........................... $ -- $ --
======== =========
The Company's net operating losses generated the deferred tax assets. At
December 31, 1997 and 1998, a valuation allowance of $59,000,000 and
$147,000,000, respectively, is provided as the realization of the deferred tax
assets are not assured.
7. NOTES PAYABLE AND LONG-TERM DEBT
SENIOR NOTES
On October 3, 1996, RSL Communications PLC ("RSL PLC"), a wholly-owned
subsidiary of RSL Communications, Ltd. (apart from its subsidiaries, the
"Guarantor"), issued (the "Debt Offering") 300,000 Units, each consisting of an
aggregate of one $1,000 Senior Note (collectively, the "1996 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 $0.00457.
The value ascribed to the Warrants was $4,000,000. The unamortized discount
is recorded as a reduction against the face value of the 1996 Notes, and is
amortized over the life of the 1996 Notes. Such unamortized discount was
$3,500,000 and $1,783,000 at December 31, 1997 and December 31, 1998,
respectively.
The 1996 Notes, which are guaranteed by the Guarantor, 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 their principal
amount subsequent to November 15, 2003. The 1996 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 April 1998, the Company used approximately $101.0 million of the net
proceeds from its initial public offering of shares of Class A Common Stock (the
"IPO") in 1997 to redeem (the "Equity Clawback") $90.0 million of the 1996 Notes
at a premium of $11.0 million, as permitted under the 1996 Indenture. In April
1998, the Company used approximately $43.1 million to redeem (the "Buyback")
$37.5 million of the 1996 Notes at a premium of $5.6 million, as permitted under
the 1996 Indenture.
F-22
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
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.
In connection with the issuance of the 1996 Notes, the Company is required
to maintain restricted marketable securities in order to make the first six
scheduled interest payments on the 1996 Notes. Such restricted marketable
securities amounted to $68,836,000 and $20,159,000 at December 31, 1997 and
December 31, 1998, respectively.
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 "1998 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.
In connection with the 1998 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, the Guarantor 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 November 1998, RSL PLC issued (the "12% Notes Offering") $100 million
aggregate principal amount at maturity of 12% Senior Notes due 2008 (the "12%
Notes"). The 12% Notes generated gross proceeds to the Company of approximately
$94.5 million.
In December 1998, RSL PLC issued (the "10 1/2% Notes Offering" and,
together with the 12% Notes Offering, the "New Notes Offerings") $200 million
aggregate principal amount of 10 1/2% Senior Notes due 2008 (the "10 1/2% Notes"
and, together with the 12% Notes, the "New Notes"). The 10 1/2% Notes generated
gross proceeds to the Company of approximately $198.5 million.
In connection with the New Notes Offerings, RSL PLC entered into
registration rights agreements for the benefit of the holders of the New Notes
(the "New Notes Registration Rights Agreements"), pursuant to which RSL PLC
agreed to offer to exchange the New Notes for substantially identical notes
registered under the Securities Act. In February and March of 1999, in
accordance with the New Notes Registration Rights Agreements, RSL and RSL PLC
offered for exchange the New Notes for substantially identical notes registered
under the Securities Act. The Company's Registration Statement
F-23
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
on Form S-4 (Registration No.333-70023) filed with the Commission with respect
to such offering was declared effective by the Commission on January 26, 1999.
The 1996 Notes, the 1998 Notes, and the New Notes are collectively
referred to herein as the "Notes." The Notes are fully and unconditionally
guaranteed as to payment of principal, interest and any other amounts thereof by
the Guarantor.
The indentures pursuant to which the Notes were issued contains certain
restrictive covenants which impose limitations on RSL and certain of its
subsidiaries ability to, among other things: (i) incur additional indebtedness,
(ii) pay dividends or make certain other distributions, (iii) issue capital
stock of certain subsidiaries, (iv) guarantee debt, (v) enter into transactions
with shareholders and affiliates, (vi) create liens, (vii) enter into
sale-leaseback transactions, and (viii) sell assets. Notwithstanding the
foregoing, these indentures do not impose restrictions on RSL's ability to
obtain funds by dividends or loans from its subsidiaries.
At December 31, 1997 and 1998, the Company was in compliance with the
above restrictive covenants.
CREDIT FACILITIES
At December 31, 1997 and 1998, the Company had a $7,500,000 and $5,000,000
revolving credit facility with a bank, respectively, (the "Revolving Credit
Facility"), guaranteed by the Company's Chairman. The facility is payable on
June 30, 1999 and accrues interest at the lender's prime rate per annum.
Approximately $0 and $3.7 million of the $7.5 million and $5.0 million
commitments under the facility was utilized at December 31, 1997 and 1998,
respectively.
The Company, through LDM, has a $10.0 million revolving credit facility.
There was $3.6 million and $6.5 million utilized under this facility at December
31, 1997 and December 31, 1998, respectively. This facility is payable in full
on September 30, 2000 and accrues interest at the prime rate (7.75% at December
31, 1998) plus 2.5% per annum (10.25% at December 31, 1998).
The Company, through Telegate, has a $8.1 million revolving credit
facility. There was $2.6 million utilized under this facility at December 31,
1998. This facility is payable in annual payments through December 31, 2002 and
accrues interest at a variable interest rate not to exceed 5.5% per annum (4.3%
at December 31, 1998).
At December 31, 1998, Telegate had $12.6 million of revolving credit
facilities with various banks that accrue interest at a rate of 6.5%, all of
which was available.
Telegate had various secured and unsecured 6% debentures consisting of
loans from its former shareholders of $3.2 million and $5.6 million,
respectively, as of December 31, 1998. These loans are payable in four
semiannual installments beginning June 30, 2001.
F-24
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
VENDOR FINANCING
At December 31, 1997 and 1998, RSL USA had a series of current notes
payable to different vendors in the amount of $976,000 and $587,000,
respectively, which bear interest at rates ranging 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 $175 million in vendor financing
commitments to fund the purchase of additional equipment. At December 31, 1997
and 1998, approximately $34.2 million and $82.0 million were utilized,
respectively. Borrowings under this vendor facility accrue interest at a rate of
LIBOR plus either 5.25% or 4.5% per annum depending on the equipment purchased.
Long-term debt maturities at December 31, 1998 are as follows (in
thousands):
YEAR ENDED
----------
1999............................................ $ 11,537
2000............................................ 718
2001............................................ 5,029
2002............................................ 6,896
2003............................................ --
2004 and thereafter............................. 1,000,651
----------
Total........................................... 1,024,831
Less Current Maturities......................... (11,537)
----------
Long-Term Debt.................................. $1,013,294
==========
At December 31, 1997, the 1996 Notes had a fair value of approximately
$330,000,000. At December 31, 1998, the Notes had a fair value of approximately
$937,014,000. The increase in fair value is primarily due to changes in the
interest rate environment. The remainder of the Company's long-term debt had
fair values which approximated their carrying amounts.
Interest expense on the above notes was approximately $10,457,000,
$37,136,000 and $70,860,000 for the years ended December 31, 1996, 1997 and
1998, respectively.
F-25
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
8. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets at December 31, 1997 and 1998 consist
of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1998
-------- ------
<S> <C> <C>
Goodwill.......................................................... $210,282 $513,068
Customer Base..................................................... 3,245 49,822
Deferred Financing Costs.......................................... 11,655 19,902
Distribution Right................................................ -- 47,281
Other Intangibles................................................. 3,331 13,837
-------- --------
228,513 643,910
Less Accumulated Amortization..................................... (13,530) (54,393)
-------- --------
Goodwill and Other Intangible Assets--Net......................... $214,983 $589,517
======== ========
</TABLE>
Amortization expense for the years ended December 31, 1996, 1997 and 1998
was $3,193,000, $9,980,000 and $43,006,000, respectively.
9. SHAREHOLDERS' EQUITY
COMMON STOCK
During 1996, the Company issued 4,117,522 shares of Class B Common Stock
for cash aggregating $50,000,000.
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. During 1998, 4,515,411 shares were converted from Class B Common Stock in
exchange for Class A Common Stock.
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.
F-26
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
On November 30, 1998, the Company commenced a secondary public offering of
7,544,278 shares of its Class A Shares. The aggregate offering price of the
7,544,278 shares of Class A Common Stock sold in the equity offering to the
public was $180,120,000, with net proceeds to the Company of $169,989,000.
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 and an equal amount as goodwill.
In March 1998, the Company registered 1,152,715 shares of Class A Common
Stock to be issued pursuant to the terms of the warrant agreement governing the
Warrants (the "Warrant Registration") and 300,000 shares of Class A Common Stock
to be sold by a corporation wholly owned by a former Vice Chairman of the
Company, and members of his family (the "Selling 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"). During 1998, the Company issued 274,726 shares of Class A Common
Stock upon the exercise of warrants.
In connection with the marketing and distribution services agreement
entered into with Metro Holding in June 1998, as mentioned in Note 2, the
Company issued 1,607,142 shares of Class A Common Stock.
During 1997 and 1998, the Company issued 712,142 and 1,232,339 shares of
Class A Common Stock upon the exercise of options, respectively. In addition,
during 1998, the Company issued 54,750 shares of Class A Common Stock upon the
issuance of restricted stock.
During 1997 and 1998, in connection with the acquisition of certain
minority interests, the Company issued 411,105 and 428,272 shares of Class A
Common Stock, respectively.
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 in 1997 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
F-27
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
dividends were deemed to be canceled and waived upon conversion. The cumulative
amount of such dividends was approximately $16,000.
10. CAPITAL LEASE OBLIGATIONS
Future minimum annual payments applicable to assets held under capital
lease obligations for years subsequent to December 31, 1998 are as follows (in
thousands):
YEAR ENDED
----------
1999........................................................ 26,624
2000........................................................ 24,281
2001........................................................ 22,311
2002........................................................ 18,245
2003........................................................ 12,336
2004 and thereafter......................................... 21,491
-------
Total minimum lease obligations............................. 125,288
Less interest............................................... (22,831)
-------
Present value of future minimum lease obligations........... 102,457
Less current portion........................................ (24,593)
-------
Long-term lease obligations at December 31, 1998............ 77,864
=======
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 $26,632,000 and $76,087,000 at
December 31, 1997 and 1998, respectively. At December 31, 1997 and 1998, the
related accumulated depreciation was $2,557,000 and $4,895,000, respectively.
11. RELATED PARTY TRANSACTIONS
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 $521,000 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, $6,000 and $9,000 for the years
ended December 31, 1996, 1997 and 1998, respectively.
F-28
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
The Company has employment contracts with certain of its executive
officers. These agreements expire beginning January 2000 through December 31,
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 $1,419,000, $1,555,000 and
$2,116,000 for the years ended December 31, 1996, 1997 and 1998, respectively.
The aggregate commitment for annual future salaries pursuant to the employment
agreements at December 31, 1998, excluding bonuses, is approximately $2,624,000,
$2,265,000, $1,375,000 and $925,000 for 1999, 2000, 2001, and 2002,
respectively.
12. EMPLOYEE BENEFIT PLAN
In 1996, the Company instituted a defined 401(k) 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, 1997 and 1998. The Company's
subsidiary Telegate established a defined benefit pension plan covering the
members of Telegate's board of directors effective December 31, 1998. Telegate
did not make any contributions to the plan nor did the plan pay any benefits in
the year ended December 31, 1998.
13. STOCK OPTION PLANS
1995 STOCK OPTION PLAN
In April 1995, the Company established an Incentive Stock Option Plan (as
amended and restated, the "1995 Plan") to reward employees, nonemployee
consultants and directors for service to the Company and to provide incentives
for future service and enhancement of shareholder value. The 1995 Plan is
administered by the Compensation Committee of the Board of Directors of the
Company (the "Committee"). The Committee consists of three members of the Board
of Directors. The Plan provides for awards of up to 2,847,000 shares of Class A
Common Stock of the Company.
The options granted in 1995 vest over a period of three years commencing
on the first anniversary of the date of grant such that the option holder may
not acquire more than 2% of the outstanding capital stock as of the date upon
which the related employment agreement expires. The options granted in 1996 vest
in one-third increments on each of the first, second and third anniversaries of
the grant date, unless a different vesting schedule is designated by the
Committee. Further, the options granted under the 1995 Plan terminate on the
tenth anniversary of the date of grant. A total of 2,716,617 options have been
granted under this plan. The Company will not grant further options under the
1995 Plan.
1997 STOCK INCENTIVE PLAN
During 1997, the Company established the 1997 Stock Incentive Plan (the
"1997 Stock Plan") to attract and motivate key employees of the Company. The
1997 Stock Plan is administered by the
F-29
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
Committee. The 1997 Stock 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 Stock 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 and
terminate on the seventh anniversary of the date of grant, unless a different
vesting schedule is designated by the Committee. As of December 31, 1998, a
total of 1,093,020 options and 164,250 shares of restricted stock 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. The 1997 Performance Plan is effective through and including the
year 2000, unless extended or earlier terminated by the Board of Directors.
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, and may be paid in cash, in shares of Class A Common Stock
or in any combination thereof, provided that at least 50% of such award is
required to be paid in cash. The 1997 Performance Plan provides for the grant of
up to 400,000 shares of Class A Common Stock. No shares have been granted under
the 1997 Performance Plan.
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 $150,000 and $75,000, respectively. The
1997 Directors' Plan provides for the grant of up to 250,000 shares of Class A
Common Stock. The options vest over a five-year period, subject to certain
acceleration provisions. A total of 32,704 options have been granted under this
plan.
The exercise price of stock options granted under the 1997 Stock Plan, the
1997 Performance Plan and the 1997 Directors' Plan (collectively, the "1997
Plans") initially will equal the fair market value of the Class A Common Stock
on the date of the grant. The Company records stock option grants under the 1997
Plans based on the fair market value of the underlying security on the date of
grant. The Company used the expected life of the underlying security to
calculate the fair market value of such security.
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
OPTIONS EXERCISE PRICE EXERCISE PRICE
---------- -------------- --------------
<S> <C> <C> <C>
Outstanding at December 31, 1995............ 1,423,500 $ .000457 $ .000457
Granted .............................. 283,824 $ 1.60-2.06 $ 1.693
Exercised............................. -- $ -- $ --
Rescinded/Canceled.................... -- $ -- $ --
--------- ----------- ----------
</TABLE>
F-30
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Outstanding at December 31, 1996............ 1,707,324 $ .000457-2.06 $ 0.82
Granted............................... 1,459,195 $ .00457-26.15 $ 9.675
Exercised............................. (712,142) $ .000457 $ .000457
Rescinded/Canceled.................... -- $ -- $ --
---------- --------------- ----------
Outstanding at December 31, 1997............ 2,454,377 $ .000457-26.15 $ 5.94
Granted............................... 675,822 $ .043-26.15 $ 21.974
Exercised............................. (1,232,339) $.000457-18.625 $ 1.32
Rescinded/Canceled.................... (20,929) $ 12.142-22.00 $ 13.747
---------- --------------- ----------
Outstanding at December 31, 1998............ 1,876,931 $ .000457-26.15 $ 14.655
========== =============== ==========
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED
SHARES AVERAGE
EXERCISABLE EXERCISE PRICE
----------- --------------
<S> <C> <C>
December 31, 1996........................................ 177,701 $ 0.000457
December 31, 1997........................................ 459,607 0.44
December 31, 1998........................................ 397,115 4.11
</TABLE>
The following table summarizes information concerning the remaining options
granted under the 1995 Plan and the 1997 Plans outstanding as of December 31,
1998.
F-31
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- --------------------------------------------------------------------------------- ----------------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
NUMBER OF AVERAGE REMAINING NUMBER OF AVERAGE
SHARES EXERCISE CONTRACTUAL SHARES EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING PRICE LIFE EXERCISABLE PRICE
- ------------------------- ------------ ---------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
$ .000457 174,293 $ .000457 6.3 174,293 $ .000457
$ .00457 178,478 $ .00457 8.4 32,478 $ .00457
$ .01 94,954 $ .01 8.8 47,477 $ .01
$ 1.60-$2.05 115,778 $ 1.76 7.3 29,200 $ 2.05
$ 12.142-$17.00 164,763 $ 12.27 7.7 85,668 $ 12.21
$ 18.26-$26.15 1,148,665 $ 22.01 6.6 27,999 $ 18.76
--------- --------
1,876,931 397,115
========= ========
</TABLE>
At December 31, 1998, the Company has authorized and reserved for future
grants approximately 1,843,000 shares of Class A Common Stock under the 1997
Stock Plan, 400,000 under the 1997 Performance Plan and 217,000 under the 1997
Directors' Plan.
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 0.6 was used for options granted on or after the date of the
initial public offering and the minimum value method was used for options
granted prior to the date of the initial public offering, as there was no market
for the Company's common stock in which to measure the stock price volatility.
The following weighted average assumptions were used in calculating the fair
value of the options granted in the years ended December 31, 1996, 1997 and
1998, respectively: risk-free interest rates between 4.54% and 5.95%; no
dividends are expected to be declared; expected life of the options are between
39 and 51 months, between 18 and 42 months and between 18 and 42 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:
F-32
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
($ IN THOUSANDS, EXCEPT LOSS PER COMMON SHARE AND
WEIGHTED AVERAGE FAIR VALUE OF OPTIONS GRANTED)
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1996 1997 1998
----------- ------------ ----------
<S> <C> <C> <C>
Net loss
As reported................................. $(38,240) $(100,199) $(219,224)
Pro forma................................... $(38,315) $(118,176) $(224,197)
Net loss per common share:
As reported................................. $ (5.13) $ (5.27) $ (4.52)
Pro forma................................... $ (5.14) $ (6.22) $ (5.11)
Weighted average fair value of options
granted during the period.................... $ 0.26 $ 12.32 $ 7.36
</TABLE>
As of December 31, 1998, the Company has granted options to acquire an
aggregate of 1,093,020 shares of Class A Common Stock under the 1997 Plan and
164,250 shares of restricted stock under the 1997 Stock Plan to employees. The
Company also granted restricted units ("Restricted Units") under the 1997 Stock
Plan. All grants of Class A Common Stock and Restricted Units vest over a
three-year period and were made at the fair market value on the date of grant.
Restricted Units granted under the 1997 Stock Plan to certain employees
generally are convertible into shares of Class A Common Stock or cash, at the
Company's discretion. As of December 31, 1998, the approximate total number of
shares of Class A Common Stock into which all outstanding Restricted Units may
be converted, based on the valuations attributed to the Company's subsidiaries
and the average closing price of the Class A Common Stock on December 31, 1998,
is estimated to be approximately 1,500,000. As of December 31, 1998, vested and
exercisable Restricted Units which may be converted, based on the valuations
attributed to the Company's subsidiaries and the average closing price of the
Class A Common Stock on December 31, 1998, is estimated to be 500,000.
F-33
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
14. COMMITMENTS AND CONTINGENCIES
At December 31, 1998, 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):
YEAR ENDED
----------
1999.......................................... $ 6,532
2000.......................................... 6,025
2001.......................................... 5,536
2002.......................................... 4,259
2003.......................................... 2,923
2004 and thereafter........................... 3,999
-------
$29,274
=======
Rent expense on the above leases for the years ended December 31, 1996,
1997 and 1998 was $2,276,000, $3,842,000, and $4,724,000, respectively.
The Company is committed to pay for transmission capacity under certain
operating leases. The minimum annual lease payments with respect to these
agreements is as follows (in thousands):
YEAR ENDED
----------
1999.................................................. $ 95,000
2000.................................................. 48,000
2001.................................................. 13,000
2002.................................................. 2,500
--------
$158,500
========
The Company recorded expenses in connection with such commitments for the
years ended December 31, 1996, 1997 and 1998 of approximately $0, $9,100,000 and
$81,997,000, respectively.
At December 31, 1998, a subsidiary of the Company had commitments
outstanding for capital expenditures under purchase orders and contracts and for
minimum payments under non-cancelable contracts for marketing and EDP services
of approximately $2.6 million and $5.6 million, respectively.
Commitments and Contingencies. The Company is involved in various claims
that arose in the ordinary course of its acquired businesses, and certain claims
that arose in the ordinary course of its
F-34
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
businesses. 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 was
recorded as Other Income--Net in the statements of operations and comprehensive
loss.
The Company is a party to separate stockholder agreements with certain
minority stockholders of its subsidiaries, pursuant to which the Company has
granted put rights with roll-up right provisions ("put rights"). These
agreements restrict the sale of the minority stockholders' interest to any
person or entity other than the Company and in certain cases require the Company
to purchase these interests in certain of the Company's subsidiaries. Certain of
the minority stockholders have the option to require the Company to purchase
their interests at any time in exchange for cash or Class A Common Stock (in
most instances, at the sole discretion of the Company) and have the right to
require the Company to purchase their interests in whole or in part at various
times through December 31, 2005 or upon cessation of such stockholder's
employment with the Company for any reason. Generally, the minority stockholder
remains employed by the Company and receives a salary and a performance based
bonus. The Company has issued put rights to substantially all of its
subsidiaries' minority stockholders at the time the Company acquired a majority
shareholding in the entity acquired or formed. Such put rights were issued to
create an incentive for the Company's minority shareholders to maximize the long
term value of their respective subsidiaries and to provide liquidity to the
shareholders at the time of exercise.
The Company's issuance of put rights did not at the time of grant provide
the recipient of such rights with any tangible value other than the right to put
their minority shares to the Company, in a value for value exchange (fair value
of the minority shares of the subsidiary for fair value of Class A Common Stock
or cash), in most instances, at the sole discretion of the Company. Solely for
the purpose of illustration, if all such options were in effect on December 31,
1998, the Company's aggregate purchase obligation is estimated to be
approximately $100 million.
Letters of Credit. The Company has outstanding letters of credit
aggregating $6,047,000 and $4,743,000 at December 31, 1997 and 1998,
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, 1996, 1997 and 1998 no customer accounted
for more than 10% of the Company's revenues.
F-35
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
16. SEGMENT REPORTING AND GEOGRAPHIC INFORMATION
General Information
The Company has three reportable segments: North American, European and
Asian operations. The Company's reportable segments are strategic business units
that offer primarily identical products and services. They are managed
separately because each business within the units is naturally aligned to its
geographic neighbors. Similar operating segments that operate in different
countries are managed separately, and, in accordance with the provisions of SFAS
131, the Company has aggregated similar operating segments into its three
reportable segments.
(a) Information about Operating Profit or Loss and Total Assets
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on the profit or loss from operations.
The Company accounts for inter-segment sales and transfers as if the sales
or transfers were inter-company and accordingly, no profit or loss is included
among the segments. The Company does not systematically allocate assets or a
proportionate allocation of indebtedness to the divisions of the subsidiaries
constituting its consolidated group, unless the division constitutes a
significant operation. However, where a division of a subsidiary constitutes a
segment that does meet the quantitative thresholds of FAS 131, related
depreciable assets, along with other identifiable assets, are allocated to such
division.
The data for each business segment is presented in the following table
according to geographical location of the operating facilities. General
corporate expenses are included within selling, general and administrative
expenses in the statements of operations and comprehensive loss.
F-36
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
The following table provides certain geographic data on the Company's operations
for the years ended December 31, 1996, 1997 and 1998 (in thousands).
<TABLE>
<CAPTION>
OPERATING
REVENUE INCOME (LOSS) TOTAL ASSETS
------- ------------- ------------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
North America....................................... $ 85,843 $ (11,702) $ 54,509
Europe.............................................. 27,414 (13,438) 50,147
--------- --------- ---------
$ 113,257 $ (25,140) $ 104,656
========= ========= =========
YEAR ENDED DECEMBER 31, 1997
North America....................................... $ 194,518 $ (26,119) $ 118,363
Europe.............................................. 73,653 (35,905) 106,746
Asia................................................ 32,333 (3,191) 58,030
--------- --------- ---------
$ 300,504 $ (65,215) $ 283,139
========= ========= =========
YEAR ENDED DECEMBER 31, 1998
North America....................................... $ 449,974 $ (21,161) $ 425,519
Europe.............................................. 306,289 (59,391) 450,596
Asia................................................ 128,881 (10,705) 90,073
--------- --------- ---------
$ 885,144 $ (91,257) $ 966,188
========= ========= =========
</TABLE>
F-37
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(b) Reconciliations (in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1996 1997 1998
------ ------ -----
<S> <C> <C> <C>
REVENUES
Total revenues for reportable segments......... $ 113,257 $ 300,504 $ 885,144
Other operational segment revenue.............. -- 292 794
--------- --------- ----------
Total consolidated revenues $ 113,257 $ 300,796 $ 885,938
========= ========= ==========
OPERATING LOSS
Total operating loss for reportable
segments................................... $ (25,140) $ (65,215) $ (91,257)
Other operational segments operating
loss....................................... -- (239) (2,416)
Unallocated amounts:
Operating loss of corporate
headquarters.......................... (5,612) (15,602) (36,532)
--------- --------- ----------
Total consolidated operating loss.............. $ (30,752) $ (81,056) $ (130,250)
========== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
ASSETS 1997 1998
---------- ----------
<S> <C> <C>
Total Assets for reportable segments............................ $ 283,139 $ 966,188
Other operational segments...................................... 875 30,371
Unallocated amounts:
Net assets of corporate headquarters........................ 321,650 718,034
--------- ----------
Total consolidated assets....................................... $ 605,664 $1,714,593
========= ==========
</TABLE>
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, 1997 and 1998 and for the years ended December 31, 1996, 1997 and 1998. 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).
F-38
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
Current Assets................................................ $ 212,568 $ 686,727
Non-current Assets............................................ 324,118 877,696
Current Liabilities........................................... 122,672 411,667
Non-current Liabilities....................................... 557,448 1,479,159
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997 DECEMBER 31, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Revenue.............................. $ 113,257 $ 266,142 $ 754,970
Loss Before Extraordinary Item....... (34,309) (95,824) (169,372)
Extraordinary Item................... -- -- (20,800)
Net Loss............................. (34,309) (95,824) (190,172)
</TABLE>
18. SUPPLEMENTAL FINANCIAL INFORMATION
The following table sets forth selected unaudited quarterly financial
information for the years ended December 31, 1996, 1997 and 1998.
(IN THOUSANDS, EXCEPT LOSS PER SHARE)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
<S> <C> <C> <C> <C>
Year Ended December 31, 1996
Revenues........................................... $ 15,864 $ 23,900 $ 30,458 $ 43,035
======== ======== ======== =========
Net loss........................................... $ (4,789) $ (7,489) $ (8,431) $ (17,531)
======== ======== ======== =========
Net loss per share of Common Stock................. $ (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
======== ======== ======== =========
Year Ended December 31, 1997
Revenues........................................... $ 42,168 $ 67,193 $ 83,243 $ 108,192
======== ======== ======== =========
Net loss........................................... $(19,147) $(21,570) $(27,342) $ (32,140)
======== ======== ======== =========
Net loss per share of Common Stock................. $ (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>
F-39
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT LOSS PER SHARE)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
<S> <C> <C> <C> <C>
Year Ended December 31, 1998
Revenues........................................... $131,635 $166,567 $265,916 $ 321,820
======== ======== ======== =========
Loss before extraordinary item..................... $(35,334) $(41,176) $(58,941) $ (62,973)
Extraordinary item................................. -- (20,800) -- --
-------- -------- -------- ---------
Net loss........................................... $(35,334) $(61,976) $(58,941) $ (62,973)
======== ======== ======== =========
Loss per share of Common Stock before
extraordinary item.............................. $ (0.85) $(0.97) $ (1.34) $ (1.33)
======== ======== ======== =========
Net loss per share of Common Stock................. $ (0.85) $(1.47) $ (1.34) $ (1.33)
======== ======== ======== =========
Weighted average number of shares of
Common Stock outstanding........................ 41,777 42,295 44,124 47,392
======== ======== ======== =========
</TABLE>
F-40
<PAGE>
SCHEDULE I
CONDENSED FINANCIAL INFORMATION
RSL COMMUNICATIONS PLC
CONDENSED BALANCE SHEETS
AS OF DECEMBER 31,
($ IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS 1997 1998
---- ----
<S> <C> <C>
Current Assets............................................................. $ 212,568 $ 686,727
Restricted Marketable Securities........................................... 68,836 20,159
Property and Equipment--Net................................................ 64,649 278,646
Other Assets............................................................... 190,633 578,891
--------- ----------
Total................................................................ $ 536,686 $1,564,423
========= ==========
LIABILITIES AND SHAREHOLDER'S DEFICIENCY
Current Liabilities........................................................ $ 122,672 $ 411,667
Long-Term Debt............................................................. 257,448 471,504
Senior Notes--Net.......................................................... 300,000 1,007,655
Shareholders' Deficiency................................................... (143,434) (326,403)
--------- ----------
Total................................................................ $ 536,686 $1,564,423
========= ==========
</TABLE>
S-1
<PAGE>
RSL COMMUNICATIONS PLC
CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31,
($ IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Revenues.................................................. $113,257 $266,142 $ 754,970
Cost of Services.......................................... 98,461 235,150 598,378
Expenses.................................................. 41,619 100,118 253,735
-------- -------- ---------
Loss from operations.................................... (26,823) (69,126) (97,143)
Interest Expense........................................ (7,384) (39,576) (75,129)
Interest Income......................................... -- 13,565 15,333
Other Income (Expense)--Net............................. 473 (375) 554
Foreign Exchange Transaction Loss....................... -- -- (10,663)
Minority Interest....................................... (180) 88 2,284
Loss in Equity Interest of Unconsolidated Subsidiaries.. -- -- (3,276)
Income Taxes............................................ (395) (400) (1,332)
-------- -------- ---------
Loss Before Extraordinary Item.......................... (34,309) (95,824) (169,372)
Extraordinary Item...................................... -- -- (20,800)
-------- -------- ---------
Net Loss............................................ $(34,309) $(95,824) $(190,172)
========= ======== =========
</TABLE>
S-2
<PAGE>
RSL COMMUNICATIONS PLC
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
($ IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Net Loss................................................................... $(95,824) $(190,172)
Depreciation and amortization.............................................. 20,270 65,748
Working capital change and other........................................... (15,909) 29,569
-------- ---------
Net cash used in operating activities................................. (91,463) (94,855)
-------- ---------
Purchases of Property and Equipment........................................ (29,866) (142,953)
Acquisitions of Subsidiaries............................................... (50,814) (272,940)
Purchase of Marketable Securities.......................................... -- (134,275)
Proceeds from Maturities of Marketable Securities.......................... 26,492 23,684
Proceeds from Sales of Marketable Securities............................... 27,675 35,757
Proceeds of Restricted Marketable Securities............................... 41,038 29,141
Other...................................................................... 144 4,324
-------- ---------
Net cash provided by (used in) investing activities.................... 14,669 (457,262)
-------- ---------
Proceeds from notes payable................................................ -- 791,992
Retirement of 1996 Notes................................................... -- (127,493)
Premium--Paid for the Retirement of 1996 Notes............................. -- (16,662)
Advances from Parent....................................................... 118,999 137,976
Offering Cost and Other.................................................... (15,653) (4,720)
-------- ---------
Net cash provided by financing activities.............................. 103,346 781,093
-------- ---------
Net increase in cash................................................... 26,552 228,976
Effect of foreign currency on cash..................................... (785) 819
Cash and cash equivalents at beginning of period....................... 103,613 129,380
-------- ---------
Cash and cash equivalents at end of period............................. $129,380 $ 359,175
======== =========
</TABLE>
S-3
<PAGE>
SCHEDULE II
RSL COMMUNICATIONS, LTD.
SCHEDULE OF VALUATION ALLOWANCES
($ IN THOUSANDS)
<TABLE>
<CAPTION>
Balance at Charged to Costs Charged to Other Balance at
January 1, 1998 and Expenses Accounts Deductions December 31, 1998
--------------- ---------------- ---------------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
Bad debt provision $12,333 $9,043 -- $(7,381) $13,995
</TABLE>
<TABLE>
<CAPTION>
Balance at Charged to Costs Charged to Other Balance at
January 1, 1997 and Expenses Accounts Deductions December 31, 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 Costs Charged to Other Balance at
January 1, 1996 and Expenses Accounts Deductions December 31, 1996
--------------- ---------------- --------------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
Bad debt provision $1,596 $2,830 -- $(545) $3,881
</TABLE>
S-4
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York on the 31st day of March, 1998.
RSL COMMUNICATIONS, LTD.
By /s/ Itzhak Fisher
---------------------------------
Name: Itzhak Fisher
Title: President and Chief
Executive Officer
Pursuant to the requirements of the Exchange Act, this report has been
signed by the following persons on behalf of the registrant and 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 BOARD OF DIRECTORS March 31, 1999
(Ronald S. Lauder)
/s/ Itzhak Fisher DIRECTOR, PRESIDENT AND
- ------------------------------- CHIEF EXECUTIVE OFFICER
(Itzhak Fisher) (PRINCIPAL EXECUTIVE March 31, 1999
OFFICER)
/s/ Jacob Z. Schuster
- -------------------------------- DIRECTOR AND ASSISTANT
(Jacob Z. Schuster) OFFICER) March 31, 1999
/s/ Donald R. Shassian EXECUTIVE VICE PRESIDENT,
- -------------------------------- CHIEF FINANCIAL OFFICER
(Donald R. Shassian) AND TREASURER
(PRINCIPAL FINANCIAL
OFFICER)
March 31, 1999
</TABLE>
S-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Mark J. Hirschhorn VICE PRESIDENT-FINANCE,
- -------------------------------- GLOBAL CONTROLLER AND
Mark J. Hirschhorn ASSISTANT SECRETARY
(CONTROLLER AND PRINCIPAL
ACCOUNTING OFFICER) March 31, 1999
/s/ Gustavo A. Cisneros
- -------------------------------- DIRECTOR March 31, 1999
(Gustavo A. Cisneros)
/s/ Fred H. Langhammer
- --------------------------------
(Fred H. Langhammer) DIRECTOR March 31, 1999
/s/ Leonard A. Lauder
- --------------------------------
(Leonard A. Lauder) DIRECTOR March 31, 1999
/s/ Eugene Sekulow
- --------------------------------
(Eugene Sekulow) DIRECTOR March 31, 1999
/s/ Nicolas G. Trollope
- --------------------------------
(Nicolas G. Trollope) DIRECTOR March 31, 1999
</TABLE>
S-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- ------------------------------------------------------------
<S> <C>
*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.
*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 -- 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.
*10.3 -- Collateral Pledge and Security Agreement, dated October 3, 1996,
by and among RSL Communications PLC and Trustee.
++++10.4 -- 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.
++++10.5 -- 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.
++++10.6 -- Indenture, dated as of February 27, 1998, by RSL Communications
PLC and RSL Communications, Ltd. to The Chase Manhattan Bank as
Trustee.
++++10.7 -- Indenture, dated as of February 27, 1998, by RSL Communications
PLC and RSL Communications, Ltd. to The Chase Manhattan Bank as
Trustee.
++++10.8 -- Note Deposit Agreement, dated as of March 16, 1998, by and
between RSL Communications PLC and The Chase Manhattan Bank as
Book-Entry Depositary.
++++10.9 -- Indenture, dated as of March 16, 1998, by RSL Communications PLC
and RSL Communications, Ltd. to The Chase Manhattan Bank as
Trustee.
*10.10 -- Warrant Agreement, dated October 3, 1996, between RSL
Communications, Ltd., as Issuer, and The Chase Manhattan Bank, as
warrant agent.
*10.11 -- Warrant Registration Rights Agreement, dated October 3, 1996,
between RSL Communications, Ltd., as issuer, and The Chase
Manhattan Bank, as warrant agent.
*10.12 -- Amendment to the Revolving Credit Facility, dated August 20,
1996, from The Chase Manhattan Bank to RSL Communications, Inc.
*10.13 -- Amendment to the Revolving Credit Facility, dated September
10, 1996, from The Chase Manhattan Bank to RSL Communications,
Ltd.
*10.14 -- Subordinated Promissory Note, dated September 10, 1996, from
RSL Communications, Ltd. to Ronald S. Lauder.
*10.15 -- Warrant for 210,000 shares of Class B Common Stock of RSL
Communications, Ltd. issued to Ronald S. Lauder on September 10,
1996.
*10.16 -- Standby Facility Agreement, dated October 1, 1996, by and between
RSL Communications, Ltd. and Ronald S. Lauder.
*10.17 -- RSL Communications, Ltd.'s 1995 Amended and Restated Stock
Option Plan.
*10.18 -- Memorandum of Agreement, dated July 30, 1996, between
International Telecommunications Corporation and Codetel.
</TABLE>
S-7
<PAGE>
<TABLE>
<S> <C>
*10.19 -- General Purchase Agreement, dated September 14, 1995,
between Ericsson Inc. and International Telecommunications
Corporation.
*10.20 -- Lease Agreement between AB LM Ericsson Finans and International
Telecommunications Corporation.
*10.21 -- Lease Agreement, dated April 10, 1996, between RSL COM Europe
Ltd. and AB LM Ericsson Finans.
*10.22 -- Lease Agreement, dated December 30, 1996, between RSL COM Europe
Ltd. and AB LM Ericsson Finans.
*10.23 -- Asset Purchase Agreement, dated as of May 8, 1996, by and between
RSL COM France S.A. and Sprint Telecommunications France Inc.
*10.24 -- Asset Purchase Agreement, dated as of May 8, 1996, by and among
Siena Vermogensverwaltungs-GmbH, Sprint Telecommunication
Services GmbH and Sprint Fon Inc.
*10.25 -- Asset Purchase Agreement, August 12, 1996, by and between RSL COM
UK Limited and Incom (UK) Ltd.
*10.26 -- Stock Purchase Agreement, dated July 3, 1996, between RSL
Communications Limited, Charles Piluso and International
Telecommunications Group, Ltd.
*10.27 -- Stock Purchase Agreement, dated September 9, 1996, between RSL
Communications PLC, Richard Rebetti, Jr. and International
Telecommunications Group, Ltd.
*10.28 -- Agreement and Plan of Reorganization, dated September 9, 1996,
among RSL Communications PLC, RSL Communications, Ltd. and
Charles Piluso.
*10.29 -- Tax Agreement, dated September 9, 1996, between RSL
Communications PLC, RSL Communications, Ltd. and Charles
Piluso.
*10.30 -- Stock Purchase Agreement, dated September 22, 1995, by and
between RSL Communications, Inc. and Charles Piluso.
*10.31 -- Stock Purchase Agreement, dated September 22, 1995, by and
between Richard Rebetti and RSL Communications, Inc.
*10.32 -- Amendment to the Stock Purchase Agreement, dated September 22,
1995, between and among International Telecommunications Group,
Ltd., International Telecommunications Corporation and RSL
Communications, Inc.
*10.33 -- Stock Purchase Agreement, dated March 10, 1995, between RSL
Communication, Inc., International Telecommunications Group,
Ltd. and International Telecommunications Corporation.
*10.34 -- Indemnity Agreement, dated March 10, 1995, between and among
International Telecommunications Group, Ltd., International
Telecommunications Corporation and RSL Communications, Inc.
*10.35 -- Sublease, dated July 18, 1996, between RSL Communications,
Ltd. and RSL Management Corporation.
*10.36 -- Lease, dated as of January 15, 1997, between Longstreet
Associates L.P. and RSL COM U.S.A., Inc.
*10.37 -- Employment Agreement, dated January 31, 1997, between Roland
T. Mallcott and RSL Communications, Ltd.
*10.38 -- Amendment of Lease, dated as of December 6, 1995, between
Hudson Telegraph Associates and International
Telecommunications Corporation.
**10.39 -- 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.
**,***10.40 -- Delta Three, Inc. Services Agreement.
**10.41 -- Employment Agreement, dated July 31, 1997, between Andrew C.
Shields and RSL Communications, Ltd.
</TABLE>
S-8
<PAGE>
<TABLE>
<S> <C>
+10.42 -- RSL Communications, Ltd. 1997 Performance Incentive Plan.
+10.43 -- RSL Communications, Ltd. 1997 Stock Incentive Plan.
**10.44 -- Lease Agreement, dated June 19, 1997 for property at 430 Park
Avenue, New York, New York.
**10.45 -- Stock Purchase Agreement of Delta Three, Inc.
**10.46 -- Employment Agreement, dated September 2, 1997, between Itzhak
Fisher and RSL Communications, Ltd.
**10.47 -- Employment Agreement, dated September 2, 1997, between Itzhak
Fisher and International Telecommunications Group, Ltd.
+10.48 -- RSL Communications Ltd. 1997 Directors' Compensation Plan.
**10.49 -- Registration Rights Agreement, dated September 2, 1997, among RSL
Communications, Ltd., Ronald S. Lauder, Itzhak Fisher and Coral
Gate Investments Ltd.
**10.50 -- International Telecommunication Services Agreement, dated July 1,
1995, between International Telecommunications Corporation and
TELECOM Denmark.
**10.51 -- International Telecommunication Operating Agreement, dated July
15, 1995 between Telenor Carrier Services A.S. and International
Telecommunications Corporation.
**10.52 -- International Telecommunication Services Agreement, dated May 10,
1994, between Mercury Communications Limited and International
Telecommunications Corporation.
**10.53 -- Agreement Concerning Voice Distribution of International
Telephony Traffic, undated, between Unisource Carrier Services AG
and International Telecommunications Corporation.
**10.54 -- International Telecommunications Service Agreement, dated May 31,
1994, between Compania Dominicana De Telefonos, C. Por A. and
International Telecommunications Corporation.
**10.55 -- Second Supplementary Agreement to the UK-Netherlands 14 Cable
System Construction & Maintenance Agreement, effective February
18, 1997, among the parties on the Annex thereto.
**10.56 -- Fourth Supplementary Agreement to the ODIN Construction and
Maintenance Agreement, dated October 24, 1996, among the parties
on the Annex thereto.
**10.57 -- Second Supplementary Agreement to Antillas I Construction &
Maintenance Agreement, dated February 13, 1997, among the parties
on the Annex thereto.
**10.58 -- Canus I Cable System Indefeasible Right of Use Agreement and
Financing Agreement, dated June 4, 1996, between Optel
Communications, Inc. and International Telecommunications
Corporation.
**10.59 -- 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.
**10.60 -- PTAT-1 Submarine System Indefeasible Right of Use Agreement,
dated May 12, 1994, between Private Transatlantic
Telecommunications System, Inc. and International
Telecommunications Corporation.
**10.61 -- 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.
*10.62 -- 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.
+++10.63-- Asset Purchase Agreement, dated as of April 23, 1998, by and
between CBS Corporation and RSL COM U.S.A., Inc.
</TABLE>
S-9
<PAGE>
*****10.64 -- Restated Umbrella Agreement, dated as of June 26, 1998, among
Motorola Limited, SA Motorola NV, Motorola Electronic GmbH,
Motorola SA and RSL Communications, Ltd.
***10.65 -- Share Subscription, Share Option and Shareholders Agreement,
dated June 10, 1998, among RSL COM Europe Ltd., RSL
Communications, Ltd. and Metro Holding AG.
***10.66 -- Marketing and Distribution Services Agreement, dated as of June
10, 1998, between RSL Com Europe Ltd. and Metro Holding AG.
***10.67 -- Exchange Agreement, dated July 22, 1998, among Ligapart AG, Metro
Holding AG and RSL Communications, Ltd.
***10.68 -- Amended and Restated Share Subscription, Share Option and
Shareholders Agreement, dated July 22, 1998, among RSL COM Europe
Ltd., RSL Communications, Ltd. and Metro Holding AG.
***10.69 -- Share Purchase Agreement, dated June 24, 1988, between British
Columbia Railway Company and RSL Com Holdings Canada, Inc.
****10.70 -- Note Deposit Agreement, dated November 9, 1998, among RSL
Communications PLC, RSL Communications, Ltd. and The Chase
Manhattan Bank as Book-Entry Depositary.
****10.71 -- Indenture, dated November 9, 1998, by RSL Communications PLC and
RSL Communications, Ltd. to The Chase Manhattan Bank as Trustee.
******10.72 -- Note Deposit Agreement, dated December 8, 1998, among RSL
Communications PLC, RSL Communications, Ltd., and The Chase
Manhattan Bank as Book-Entry Depository.
******10.73 -- Indenture, dated December 8, 1998, by RSL Communications PLC and
RSL Communications, Ltd. to The Chase Manhattan Bank as Trustee.
******10.74 -- Employment Agreement between RSL Communications, Ltd. and Richard
Williams.
******10.75 -- Employment Agreement between RSL Communications, Ltd. and Donald
Shassian.
****21.1 -- Subsidiaries of the Company.
27.1 -- Financial Data Schedule.
S-10
<PAGE>
* Incorporated by reference to Registrant's Registration Statement on
Form S-4 (Registration No.333-25749).
** Incorporated by reference to Registrant's Registration Statement on
Form S-1 (Registration No. 333-34281)
*** Confidential Treatment was granted by the Commission with respect to
certain information contained in this exhibit.
**** Incorporated by reference to Registrant's Registration Statement on
Form S-1 (Registration No. 333-62325).
***** Incorporated by reference to the Registrant's report on Form 8-K
dated August 14, 1998.
****** Incorporated by reference to Registrant's Registration Statement on
Form S-4 (Registration No. 333-70023).
+ 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).
S-11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 367,823
<SECURITIES> 131,707
<RECEIVABLES> 181,845
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 726,077
<PP&E> 369,508
<DEPRECIATION> 45,785
<TOTAL-ASSETS> 1,714,593
<CURRENT-LIABILITIES> 470,927
<BONDS> 998,868
0
0
<COMMON> 241
<OTHER-SE> 133,243
<TOTAL-LIABILITY-AND-EQUITY> 1,714,593
<SALES> 0
<TOTAL-REVENUES> 885,938
<CGS> 0
<TOTAL-COSTS> 702,602
<OTHER-EXPENSES> (739)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 75,431
<INCOME-PRETAX> (197,090)
<INCOME-TAX> 1,334
<INCOME-CONTINUING> (198,424)
<DISCONTINUED> 0
<EXTRAORDINARY> 20,800
<CHANGES> 0
<NET-INCOME> (219,224)
<EPS-PRIMARY> (4.99)
<EPS-DILUTED> (4.99)
</TABLE>
