<PAGE>
Filed Pursuant to Rule No. 424(b)(3)
Under the Securities Act of 1933, as amended.
Registration Statement No. 333-70023.
PROSPECTUS
OFFERS TO EXCHANGE FOR
ALL OUTSTANDING 10 1/2% SENIOR NOTES DUE 2008
ALL OUTSTANDING 12% SENIOR NOTES DUE 2008
RSL COMMUNICATIONS PLC
GUARANTEED AS TO PAYMENT OF PRINCIPAL AND INTEREST BY
RSL COMMUNICATIONS, LTD.
[LOGO]
----------------------
In exchange for the Old Notes listed above, RSL Communications PLC is
offering the following New Notes:
New 10 1/2% Notes: We are offering new 10 1/2% Senior Exchange Notes
due 2008 in exchange for our outstanding 10 1/2%
Senior Notes due 2008.
New 12% Notes: We are offering new 12% Senior Exchange Notes due
2008 in exchange for our outstanding 12% Senior Notes
due 2008.
INVESTING IN THE NEW NOTES INVOLVES RISKS. SEE THE "RISK FACTORS" SECTION
BEGINNING ON PAGE 12.
The New Notes:
o The New Notes will be free of transfer restrictions for most investors
and the New Notes will not carry registration rights. Otherwise, the New
10 1/2% Notes will have terms that are substantially identical to the
terms of the Old 10 1/2% Notes and the New 12% Notes will have terms that
are substantially identical to the terms of the Old 12% Notes.
o We will apply to list the New Notes on the Luxembourg Stock Exchange.
The Exchange Offers:
o Each Exchange Offer will expire at 5:00 p.m., New York City time, on
February 25, 1999, unless extended.
o Each Exchange Offer is subject to customary conditions. We may waive
these conditions.
o We will exchange New 10 1/2% Notes for all outstanding Old 10 1/2% Notes
validly tendered to us and not withdrawn.
o We will exchange New 12% Notes for all outstanding Old 12% Notes validly
tendered to us and not withdrawn.
o If you tender Old Notes to us, you may withdraw your tender at any time
prior to the expiration of the Exchange Offers.
o We will not receive any proceeds from the Exchange Offers.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
----------------------
The date of this Prospectus is January 26, 1999.
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2
<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page
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Summary......................................................... 5
Risk Factors.................................................... 12
Use of Proceeds................................................. 24
Capitalization.................................................. 24
Selected Consolidated Financial Data............................ 26
Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 28
Business........................................................ 42
Management...................................................... 91
Certain Relationships and Related Transactions.................. 102
Principal Shareholders.......................................... 103
Description of Certain Indebtedness............................. 105
Registration Rights Agreements for Old Notes.................... 111
The Exchange Offers............................................. 113
Description of the New Notes and the New Notes Guarantees....... 119
Certain United States Federal Income Tax Considerations......... 151
Certain United Kingdom Tax Considerations For U.S. Holders of
Notes......................................................... 152
Plan of Distribution............................................ 152
Legal Matters................................................... 153
General Information............................................. 153
Experts......................................................... 154
Service of Process and Enforcement of Liabilities............... 154
Index to Consolidated Financial Statements...................... F-1
</TABLE>
You should rely only on the information contained in this Prospectus and
the information to which we have referred you. We have not authorized any person
to provide you with information different from the information contained in this
Prospectus. This Prospectus is not an offer to sell and it does not seek an
offer to buy these securities in any jurisdiction where an offer or sale is not
permitted. The information contained in this Prospectus is correct only as of
the date of this Prospectus, regardless of the time of the delivery of this
Prospectus or any sale of these securities.
CERTAIN UK RELATED REGULATORY ISSUES
Persons in the UK will be eligible to receive the New Notes to be issued in
the Exchange Offers only if the ordinary activities of such persons involve them
in acquiring, holding, managing or disposing of investments (as principal or
agent) for the purposes of their businesses or otherwise in circumstances which
do not constitute an offer to the public in the UK for purposes of the Public
Offers of Securities Regulations 1995.
This Prospectus is being distributed on the basis that each person in the
UK to whom this Prospectus is issued is reasonably believed to be a person of a
kind described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 or is a person to whom the document may
otherwise lawfully be issued or passed on and, accordingly, by accepting
delivery of this Prospectus the recipient warrants and acknowledges that it is a
person falling within any such exemption.
------------------------
In this Prospectus, references to "dollars" and "$" are to United States
dollars. For purposes of the balance sheet data included in this Prospectus,
conversions of foreign currencies to U.S. dollars have been calculated on the
basis of exchange rates in effect on the balance sheet dates. Conversions of
foreign currencies to U.S. dollars in the pro forma and historical financial
information included herein have been calculated, for purposes of the statements
of operations, on the basis of average exchange rates over the periods
presented. Exchange rates per United States dollar as of certain dates for
certain currencies are set forth below.
3
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<TABLE>
<CAPTION>
RATE AS OF RATE AS OF RATE AS OF RATE AS OF RATE AS OF RATE AS OF
DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, JANUARY 21,
CURRENCY 1996 1997 1998 1997 1998 1999
- --------------------- ------------ ------------ ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Austrian Schilling... (1) 12.63 11.72 12.43 11.76 11.88
Australian Dollar.... 1.26 1.54 1.61 1.38 1.69 1.56
Belgian Franc........ (1) (1) 34.36 (1) 34.49 34.72
British Pound........ 0.58 0.61 0.60 0.62 0.59 0.60
Danish Krone......... (1) 6.85 6.36 6.72 6.36 6.43
Dutch Guilder........ 1.74 2.03 1.88 1.99 1.89 1.91
Finnish Markka....... 4.60 5.45 5.06 5.29 5.09 5.13
French Franc......... 5.19 6.01 5.59 5.93 6.60 5.66
German Mark.......... 1.54 1.80 1.68 1.77 1.67 1.69
Italian Lira......... (1) 1,770 1,654 (1) 1,652 1,669
Spanish Peseta....... (1) 152.30 142.15 (1) 142.10 143.43
Swedish Krona........ 6.89 7.94 8.10 7.58 7.83 7.72
Swiss Franc.......... (1) 1.46 1.37 (1) 1.38 1.38
Venezuelan Bolivar... (1) 504.30 565.00 (1) 573.40 571.00
</TABLE>
- ------------------
(1) The Company had no business activity in these countries during the periods
indicated.
------------------------
THE EXCHANGE OFFERS ARE NOT BEING MADE, NOR WILL THE ISSUER ACCEPT
SURRENDERS FOR EXCHANGE FROM HOLDERS OF OLD NOTES, IN ANY JURISDICTION IN WHICH
THE EXCHANGE OFFERS OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH
THE SECURITIES OR "BLUE SKY" LAWS OF SUCH JURISDICTION.
As used in this Prospectus, (i) the "Company," "we," "our" and like terms
refer to RSL Communications, Ltd., a Bermuda corporation, its predecessors and
all of its subsidiaries, (2) the "Guarantor" means RSL Communications, Ltd.
exclusive of its subsidiaries and (3) the "Issuer" means RSL Communications PLC,
a United Kingdom corporation.
Throughout this Prospectus we have used industry data obtained from
internal surveys, market research, publicly available information and industry
publications. Industry publications generally state that the information they
contain has been obtained from sources believed to be reliable but that the
accuracy and completeness of such information is not guaranteed. We have not
independently verified these data.
------------------------
Certain of the information contained in this Prospectus, including
information about the Company's plans and strategy for its business and related
financing, are forward-looking statements. For a discussion of important factors
that could cause our actual results to differ materially from the forward-
looking statements, see the "Risk Factors" section.
4
<PAGE>
SUMMARY
The following summary highlights selected information from this Prospectus.
It may not contain all of the information that is important to you, including
Prospectus information regarding the Company, the Exchange Offer and the terms
of the New Notes. We encourage you to read the entire Prospectus, including the
Risk Factors and the financial statements.
THE COMPANY
We provide a broad array of telecommunications services, with an emphasis
on international long distance voice services, to small and medium-sized
businesses in key markets. Our services include international and national fixed
and wireless, calling card, fax, data, Internet, private line and other
value-added telecommunications services. Since starting operations in the United
States in 1995, we have grown rapidly through acquisitions, strategic
investments, joint ventures, alliances, and the start-up of our own operations
in key markets. We generate revenue in 19 countries in which approximately 70%
of all international long distance telecommunications minutes originated in
1997.
We formed the Company to capitalize on the growth, deregulation and
profitability of the international long distance switched telecommunications
market. The Company currently has significantly less than a 1% share of this
market, which as a whole generated an estimated $65.9 billion in revenue and
81.8 billion minutes in 1997. International long distance minutes are projected
to grow between approximately 12% and 18% per annum through the year 2001.
The Company is building a low-cost, facilities-based global network
designed to provide high quality telecommunications services and developing a
wide range of marketing and distribution channels to expand its customer base.
The core of our operations is "RSL-NET," our integrated digital
telecommunications network. Our independent Local Operators in each country
market our services through (1) direct sales forces, (2) strategic marketing
alliances, (3) networks of independent agents and distributors and
(4) telemarketing organizations.
The key elements of our strategy for capitalizing on opportunities in the
long distance market are as follows:
o Focus on international long distance services.
o Identify and enter key markets ahead of full deregulation.
o Target small and medium-sized businesses as potential customers.
o Build a cost competitive global network.
o Expand marketing and distribution channels.
o Pursue strategic acquisitions and alliances.
o Leverage expertise of management team.
o Expand Internet-based telephony and on-line service offerings.
See the "Business" section under the heading "Company Strategy."
RISK FACTORS
See the "Risk Factors" section beginning on page 12 for a discussion of
certain risks that you should consider before exchanging Old Notes for New
Notes, including risks relating to the Company's needs for additional capital,
historical and future net operating losses and negative EBITDA (as defined),
substantial indebtedness, holding company structure, rapidly changing industry,
increasing pricing pressures and government regulatory restrictions.
HEADQUARTERS
The Company's headquarters are located at Clarendon House, Church Street,
Hamilton HM CX Bermuda (telephone number: 441-295-2832). We also maintain
executive offices for some of our operations at 767 Fifth Avenue, Suite 4300,
New York, New York 10153 (telephone number: 212-317-1800).
5
<PAGE>
THE EXCHANGE OFFERS
On November 9, 1998, the Issuer issued the Old 12% Notes, in an aggregate
principal amount at maturity of $100,000,000, and, on December 8, 1998, the
Issuer issued the Old 10 1/2% Notes, in an aggregate principal amount of
$200,000,000. Each offering of Old Notes was exempt from registration under the
Securities Act of 1933, as amended.
We have agreed to use our best efforts to complete the Exchange Offer for
the Old 12% Notes by July 7, 1999 and to use our best efforts to complete the
Exchange Offer for the Old 10 1/2% Notes by August 5, 1999. The terms of the
Exchange Offers, which are specified in greater detail in the main body of this
Prospectus and the accompanying Letters of Transmittal, include the following:
<TABLE>
<S> <C>
Offer of New 10 1/2% Notes................ The Issuer is offering up to $200,000,000 principal amount at
maturity of 10 1/2% Senior Exchange Notes due 2008 in exchange for a
like principal amount of Old 10 1/2% Notes.
Offer of New 12% Notes.................... The Issuer is offering up to $100,000,000 principal amount at
maturity of 12% Senior Exchange Notes due 2008 in exchange for a like
principal amount of Old 12% Notes.
Exchange Procedures....................... The procedures that you must follow to tender Old Notes in the
Exchange Offers are specified in the section of this Prospectus
labeled "The Exchange Offers."
Expiration Date........................... Each Exchange Offer will expire at 5:00 p.m. New York City time, on
February 25, 1999, or such later date and time to which it is
extended.
Withdrawal................................ You may withdraw your tender of Old Notes pursuant to an Exchange
Offer at any time prior to the applicable Expiration Date. If for any
reason we do not accept any Old Note that you tender for exchange we
will return that Old Note to you at our expense as promptly as
practicable after the expiration or termination of the applicable
Exchange Offer.
Conditions of the
Exchange Offers......................... We will be required to consummate each Exchange Offer only if certain
conditions are satisfied. If any of the conditions to an Exchange
Offer are not satisfied, however, we may nevertheless waive them and
consummate that Exchange Offer. See the section of this Prospectus
labeled "The Exchange Offers" under the heading "Certain Conditions
to the Exchange Offers." We may terminate or amend each Exchange
Offer at any time prior to the applicable Expiration Date.
United States Federal Income Tax
Consequences............................ The exchange of Old Notes for corresponding New Notes will not
constitute a taxable exchange for U.S. federal income tax purposes.
See "Certain United States Federal Income Tax Considerations."
Exchange Agent............................ The Chase Manhattan Bank is serving as Exchange Agent for the
Exchange Offers.
Use of Proceeds........................... The Issuer will not receive any proceeds from the Exchange Offers.
See the "Use of Proceeds" section for a description of the use of
proceeds from the issuance of the Old Notes.
</TABLE>
6
<PAGE>
SUMMARY DESCRIPTION OF THE NEW NOTES
The terms of the New Notes and the terms of the Old Notes for which they
are offered in exchange are identical in all material respects, except that
(1) the New Notes will be free of transfer restrictions for most investors, as
described below opposite the caption "Resales" and (2) the New Notes will not
entitle their holders to registration rights. The terms of the New Notes, which
are specified in greater detail in the main body of this Prospectus, include the
following:
<TABLE>
<S> <C>
New 10 1/2% Notes
Principal Amount..................... Up to $200,000,000 principal amount of 10 1/2% Senior Exchange Notes
due 2008.
Maturity............................. November 15, 2008.
Interest............................. Annual rate: 10.5%
Payments: Every six months on November 15 and May 15.
First payment: May 15, 1999.
New 12% Senior Notes
Principal Amount at Maturity......... Up to $100,000,000 principal amount at maturity of 12% Senior
Exchange Notes due 2008. The New 12% Notes will have an initial
accreted value equal to the accreted value of the Old Notes for which
they are exchanged.
Maturity............................. November 1, 2008.
Cash Interest........................ Annual rate: 12.0%
Payments: Every six months on November 1 and May 1.
First payment: May 1, 1999.
Accrual of Interest....................... Interest on each New Note will accrue from the last interest payment
date on which interest is paid on the Old Note surrendered in
exchange therefor or, if no interest has been paid on such Old Note,
from the date of the original issue of such Old Note. If we accept
your Old Notes for exchange you will not receive any payment in
respect of interest on those Old Notes otherwise payable on any
interest payment date the record date for which occurs on or after
consummation of the Exchange Offer for the Old Notes.
Resales................................... We believe that you may offer the New Notes for resale, resell the
New Notes and otherwise transfer the New Notes without complying with
the registration and prospectus delivery provisions of the Securities
Act, so long as:
o you acquire the New Notes in the Exchange Offer in the ordinary
course of your business;
o you are not participating in any distribution of the New Notes that
you obtain in the Exchange Offer and you do not intend to
participate and have no arrangement or understanding with any
person to participate in any such distribution; and
o you are not an affiliate of the Company.
New Notes Guarantees...................... The New Notes are unconditionally guaranteed by the Guarantor as to
payment of principal, interest and any other amounts owed. If the
Issuer cannot make payments on the New Notes when they are due then
the Guarantor will be required to make those payments.
Ranking................................... The New Notes will be senior obligations of the Issuer and the New
Notes Guarantees will be senior obligations of the Guarantor. The New
Notes and the New Notes Guarantees will be unsecured. The New Notes
and the New Notes Guarantees will rank on the same level, or "pari
passu," in right of payment with all existing and future unsecured
obligations of the Issuer and the Guarantor and will rank senior in
right of payment to all existing and future subordinated
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
obligations of the Issuer and the Guarantor. The New 10 1/2% Notes
and the New 12% Notes will rank pari passu in right of payment with
each other.
The Guarantor conducts its principal operations through its
subsidiaries (other than the Issuer). Accordingly, the New Notes and
the New Notes Guarantees will be effectively subordinated to all
indebtedness and other liabilities of the Guarantor's other
subsidiaries. In addition, holders of secured obligations of the
Issuer or the Guarantor will have claims that rank prior to the
claims of the holders of the New Notes and the New Notes Guarantees
with respect to the assets securing such other obligations. See the
section "Description of the New Notes and the New Notes Guarantees"
under the heading "Ranking." Assuming that we had completed all of
our recent securities offerings at September 30, 1998:
o the total amount of outstanding liabilities of the Guarantor and
the Issuer (excluding their subsidiaries), including trade
payables, would have been approximately $1,002.5 million and
o the total amount of outstanding liabilities of the subsidiaries of
the Guarantor (other than the Issuer), including trade payables,
would have been approximately $439.5 million.
Optional Redemption....................... On or after November 15, 2003 we may redeem the New 10 1/2% Notes. On
or after March 1, 2003, we may redeem the New 12% Notes. We may
redeem the New Notes in each of these cases with any source of funds
available to us.
Before November 15, 2001 we may redeem up to 33 1/3% of the principal
amount of the New 10 1/2% Notes, and before March 1, 2001 we may
redeem up to 33 1/3% of the original principal amount at maturity of
the New 12 1/2% Notes. We may redeem the New Notes in each of these
cases only with the proceeds of one or more sales of equity of the
Guarantor.
The prices for each of these optional redemptions are listed in the
section "Description of the New Notes and the New Notes Guarantees"
under the heading "Optional Redemption."
Additional Amounts; Tax Redemption........ We will make payments under the New Notes or the New Notes Guarantees
without withholding or making any deduction for taxes unless required
by law. If withholding is required as a result of (1) a change to
current law or the interpretation or administration thereof or (2) a
Listing Failure (as defined in the section "Description of the New
Notes and the New Notes Guarantees" under the heading "Additional
Amounts"), we will pay, subject to certain exceptions, Additional
Amounts as may be necessary so that net payments will be no less than
the amounts provided for in the New Notes. If (1) we become obligated
to pay any Additional Amounts as a result of such change (or, in
certain cases, such Listing Failure) and (2) we are unable to avoid
such obligation to pay Additional Amounts by taking reasonable
measures available to us, then we may redeem all, but not less than
all, outstanding New Notes of any class of New Notes at any time at
100% of the principal amount (or accreted value, in the case of the
New 12% Notes) thereof, together with accrued interest thereon, if
any, to but excluding the redemption date. See the section
"Description of the New Notes and the New Notes Guarantees" under the
heading "Additional Amounts."
</TABLE>
8
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<TABLE>
<S> <C>
Change of Control......................... If we sell certain assets or if we experience specific kinds of
changes of control, we must offer to repurchase the New Notes at a
purchase price equal to 101% of the principal amount thereof (in the
case of the New 10 1/2% Notes) or 101% of the accreted value thereof
(in the case of the New 12% Notes) plus, in each case, accrued
interest, if any, to the date of purchase.
Basic Covenants........................... The New Notes will be governed by Indentures that we have established
with an indenture trustee. Each Indenture will restrict the ability
of the Guarantor and certain Restricted Subsidiaries of the Guarantor
to:
o incur certain additional indebtedness,
o pay dividends or make distributions on their capital stock,
o make investments or certain other restricted payments,
o create liens,
o sell assets,
o issue or sell capital stock of Restricted Subsidiaries,
o enter into transactions with stockholders or affiliates, or
o effect a consolidation or merger.
</TABLE>
For more details, see the section "Description of the New Notes and the New
Notes Guarantees" under the heading "Covenants."
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-4 under the Securities Act for the New Notes offered hereby.
This Prospectus does not contain all of the information included in the
Registration Statement and the exhibits and schedules to the Registration
Statement. This Prospectus describes certain contracts and other documents which
we have filed as exhibits to the Registration Statement. The descriptions of
those documents in this Prospectus are not necessarily complete and you should
refer to the copy of any contract or other document filed as an exhibit to the
Registration Statement for more detail concerning those documents. For further
information regarding the Issuer, the Guarantor and the New Notes, refer to the
Registration Statement and the exhibits and schedules to the Registration
Statement.
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. You may inspect and
copy reports, proxy statements and other information that we have filed at the
public reference facilities maintained by the Commission at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional
Offices at 7 World Trade Center, New York, New York 10048 and the Northwestern
Atrium Center, 500 West Madison Street, Room 1400, Chicago, Illinois 60661. You
may obtain copies of such material at prescribed rates from the Public Reference
Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. The Commission maintains a Web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding issuers that file electronically with the
Commission.
9
<PAGE>
SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
The following tables set forth certain summary consolidated financial data
for the Company for each of the three years in the period ended December 31,
1997 and for the nine month periods ended September 30, 1997 and 1998, which
have been derived from the Consolidated Financial Statements and notes thereto.
The information as of and for the year ended December 31, 1994 was derived from
the Consolidated Financial Statements of the Company's predecessor entity,
International Telecommunications Group, Ltd. The Company's Consolidated
Financial Statements as of December 31, 1997, 1996 and 1995 and for the years
ended December 31, 1997, 1996 and 1995 have been audited by Deloitte & Touche
LLP as stated in their report appearing herein.
In the opinion of management, the unaudited Condensed Consolidated
Financial Statements as of September 30, 1998 and 1997 and for the nine month
periods ended September 30, 1998 and 1997 have been prepared on the same basis
as the audited Consolidated Financial Statements and include all adjustments,
which consist only of normal recurring adjustments, necessary for a fair
presentation of the financial position and the results of operations for these
periods. Operating results for the nine months ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the full year. In
addition, the Company has experienced rapid growth over the periods set forth
below, which growth may not necessarily continue at such rate. Accordingly, the
financial and operating results set forth below may not be indicative of future
performance.
The summary consolidated financial and operating data presented below
should be read along with the section "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, NINE MONTHS ENDED
------------------------------------------------- SEPTEMBER 30,
PREDECESSOR ----------------------
1994 1995(1) 1996 1997 1997 1998
----------- -------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT LOSS PER SHARE)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues...................................... $ 4,702 $ 18,617 $ 113,257 $ 300,796 $ 192,604 $ 564,118
Operating costs and expenses:
Costs of services (exclusive of depreciation
and amortization shown separately
below).................................... (4,923) (17,510) (98,461) (265,321) (171,203) (462,181)
Selling, general and administrative
expense................................... (2,395) (9,639) (38,893) (94,712) (62,085) (147,494)
Depreciation and amortization............... (240) (849) (6,655) (21,819) (14,367) (43,282)
------- -------- --------- --------- --------- ---------
(7,558) (27,998) (144,009) (381,852) (247,655) (652,957)
------- -------- --------- --------- --------- ---------
Loss from operations.......................... (2,856) (9,381) (30,752) (81,056) (55,051) (88,839)
Interest income............................... -- 173 3,976 13,826 9,947 13,239
Interest expense.............................. (225) (194) (11,359) (39,373) (28,910) (51,646)
Other income (expense)--Net................... -- -- 470 6,595(2) 6,572(2) 445
Foreign exchange loss......................... -- -- -- -- -- (10,621)
Minority interest............................. -- -- (180) 210 (212) 4,322
Income taxes.................................. -- -- (395) (401) (405) (726)
Loss in equity interest of unconsolidated
subsidiaries................................ -- -- -- -- -- (1,625)
------- -------- --------- --------- --------- ---------
Loss before extraordinary item................ (3,081) (9,402) (38,240) (100,199) (68,059) (135,451)
Extraordinary item(3)......................... -- -- -- -- -- (20,800)
------- -------- --------- --------- --------- ---------
Net loss...................................... $(3,081) $ (9,402) $ (38,240) $(100,199) $ (68,059) $(156,251)
------- -------- --------- --------- --------- ---------
------- -------- --------- --------- --------- ---------
Loss per share before extraordinary
item(3)(4).................................. $(15.41) $ (1.67) $ (5.13) $ (5.27) $ (2.16) $ (3.17)
Net loss per share(3)(4)...................... $(15.41) $ (1.67) $ (5.13) $ (5.27) $ (2.16) $ (3.66)
Weighted average number of shares of Common
Stock outstanding(4)........................ 200 5,641 7,448 19,008 31,541 42,740
OTHER FINANCIAL DATA:
EBITDA(5) (as defined)........................ $(2,616) $ (8,532) $ (23,807) $ (52,432) $ (34,324) $ (40,790)
Ratio of earnings to fixed charges(6)......... -- -- -- -- -- --
Capital expenditures(7)....................... 1,126 6,074 23,880 49,417 26,835 104,868
Cash (used in) provided by operating
activities.................................. (1,987) 3,554 (10,475) (91,812) (60,443) (116,367)
Cash (used in) provided by investing
activities.................................. (478) (16,537) (225,000) (18,821) 25,305 (312,772)
Cash (used in) provided by financing
activities.................................. 2,888 18,143 335,031 152,035 (14,976) 367,011
</TABLE>
10
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<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
----------------------------
ACTUAL AS ADJUSTED(8)
---------- --------------
($ IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................................ $ 82,196 $ 537,773
Restricted marketable securities(9).................................................. 30,579 30,579
Total assets......................................................................... 1,167,049 1,628,968
Short-term debt, current portion of long-term debt, and current portion of capital
lease obligations(10).............................................................. 17,700 17,700
Long-term debt and capital lease obligations(10)..................................... 718,767 1,011,714
Shareholders' equity................................................................. 18,019 186,991
</TABLE>
- ------------------
(1) Effective with the acquisition of a majority equity interest in RSL COM
North America, Inc. (formerly known as International Telecommunications
Group, Ltd.) ("RSL North America"), in September 1995, the Company began to
consolidate RSL North America's operations. From March 1995 (the date of
the Company's initial investment) to September 1995, the Company accounted
for its investment in RSL North America using the equity method of
accounting.
(2) Other income includes the reversal of certain liabilities accrued in
connection with the Company's obligations under an agreement that required
the Company to meet a carrier vendor's minimum usage requirements, which
agreement was entered into by a subsidiary of the Company prior to the
Company's acquisition of such subsidiary. During May 1997, the Company
renegotiated the contract with this carrier vendor resulting in the
elimination of approximately $7.0 million of previously accrued charges.
(3) Extraordinary item represents primarily the premium paid to retire
approximately $127.5 million of the original $300.0 million of notes issued
by the Company in 1996.
(4) Loss per share is calculated by dividing the loss attributable to the
Common Stock by the weighted average number of shares of Common Stock
outstanding, and has been retroactively restated to reflect the
2.19-for-one stock split. Shares issuable pursuant to outstanding stock
options, unexercised Warrants (as defined), the Lauder Warrants (as
defined), Roll-Up Rights (as defined) or Incentive Units (as defined) or in
the Telegate Exchange (as defined) are not included in the loss per share
calculation as their effect is anti-dilutive.
(5) EBITDA (as defined) consists of loss before interest, loss in equity
interest of unconsolidated subsidiaries, income taxes, extraordinary item,
depreciation and amortization and foreign exchange loss. EBITDA (as
defined) is provided because it is a measure commonly used in the
telecommunications industry. It is presented to enhance an understanding of
the Company's operating results and is not intended to represent cash flow
or results of operations in accordance with U.S. GAAP for the periods
indicated. The Company's use of EBITDA (as defined) may not be comparable
to similarly titled measures used by other companies due to the use by
other companies of different financial statement components in calculating
EBITDA.
(6) The ratio of earnings to fixed charges is computed by dividing the loss
from operations before fixed charges by fixed charges. Fixed charges
consist of interest charges and amortization of debt issuance costs,
whether expensed or capitalized and that portion of rental expense deemed
to be representative of interest. For the years ended December 31, 1994,
1995, 1996 and 1997 and the nine months ended September 30, 1997 and 1998,
earnings were insufficient to cover fixed charges by approximately $3.1
million, $9.4 million, $37.7 million, $100.0 million, $67.4 million and
$137.4 million, respectively.
(7) Capital expenditures include assets acquired through capital lease
financing and other debt.
(8) Adjusted to give effect to the issuance of the Old 10 1/2% Notes (the net
proceeds of which were approximately $196.1 million), the issuance of
7,544,278 shares of common stock in 1998 (the net proceeds of which were
approximately $169.0 million) and the issuance of the Old 12% Notes (the
net proceeds of which were approximately $90.5 million) and the application
of the estimated net proceeds therefrom received by the Company. See "Use
of Proceeds" and "Capitalization."
(9) The restricted marketable securities consist of U.S. government securities
pledged to secure the payment of interest on the principal amount of the
notes issued by the Company in 1996. See "Description of Certain
Indebtedness--1996 Notes."
(10) As of September 30, 1998, the Company had approximately $3.4 million of
available (undrawn) borrowing capacity under its current bank and vendor
facilities.
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RISK FACTORS
An investment in the New Notes involves risks. You should carefully
consider the following factors as well as the other matters described in this
Prospectus. This Prospectus contains "forward-looking statements" regarding the
intent, belief or current expectations of the Company or its officers. These
forward looking statements relate to our financing plans, the regulatory
environments in which we operate, trends affecting our financial condition or
results of operations, the impact of competition, the start-up of certain of our
operations and acquisition opportunities. We caution you that forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties. Actual results may differ materially from those in the
forward-looking statements. Cautionary statmements in this Prospectus, including
information contained in this "Risk Factors" section and information under the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" sections identify important factors that could cause
such differences. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the cautionary statements contained in this
Prospectus.
THE COMPANY HAS A SHORT OPERATING HISTORY
The Company acquired all of its operations since 1995 and, therefore, has
limited experience in conducting those operations. Our principal operations
commenced on various dates from 1990 through 1997 and, therefore, have limited
operating histories. In addition, we invest in start-up operations in markets
where we have no existing operations. Furthermore, in many markets, we plan to
offer services that have been provided only by existing government-owned post,
telegraph and telephone monopolies ("PTTs"). We may face difficulties in
establishing or expanding such businesses. Since its inception, the Company has
generated net losses of $9.4 million, $38.2 million and $100.2 million in 1995,
1996 and 1997, respectively. See the heading "Our Anticipated Growth and
Acquisitions Engender Risks."
WE HAVE RECENTLY ENTERED INTO NEWLY OPENING MARKETS
You should consider the Company's prospects in light of the risks,
expenses, problems and delays inherent in establishing a new business. As a new
entrant in our markets, we may need to discount services to customers. In
addition, our Local Operators may incur significant costs developing their
network infrastructures, including the purchase of minimum investment units
("MIUs") and indefeasible rights of use ("IRUs") in fiber optic cable systems,
switches and leased capacity. The fixed costs and expenses that we incur under
these circumstances could result in low or negative operating margins. See the
section "Management's Discussion and Analysis of Financial Condition and Results
of Operations" under the heading "Overview."
THE COMPANY HAS NET OPERATING LOSSES AND NEGATIVE EBITDA (AS DEFINED)
The Company must continue to expand its operations and meet increasing
demands for service quality, availability of value added services and
competitive pricing to establish and maintain a competitive position in its
markets. The Company has generated net losses of $304.2 million from its
inception through September 30, 1998. The Company has also incurred negative
EBITDA (as defined) since its inception. Due to our need to expand our
operations, develop RSL-NET and build our customer base and marketing
operations, we expect to incur significant net losses through 2001, significant
negative cash flow from operating activities through 2000 and negative EBITDA
(as defined) through 1998. These are forward-looking statements, however, and we
caution you that our significant net losses, negative cash flow from operating
activities and negative EBITDA (as defined) might continue beyond the years
indicated.
WE MAY NEED ADDITIONAL CAPITAL
When market conditions are favorable, we may raise substantial additional
capital to fund our capital expenditures, acquisitions, strategic alliances,
start-up operations and anticipated substantial net losses. In 1997, we made
capital expenditures of approximately $49.4 million. We expect that we will
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have made capital expenditures of at least $115.0 million in 1998. We intend to
increase our capital expenditures in 1999. We have also experienced a
consistently increasing working capital deficit. If market conditions for future
capital-raising transactions are not favorable, we believe that the remaining
net proceeds from the sale of our securities and other sources of liquidity
available to us will be sufficient to fund a reduced capital expenditure and
expansion plan for our existing operations, as well as continuing net losses,
for approximately 18 to 24 months. We may be required to seek additional capital
regardless of market conditions if:
o our plans or assumptions change or prove to be inaccurate;
o we identify additional required or desirable infrastructure
investments or acquisitions;
o we experience unanticipated costs or competitive pressures; or
o the remaining net proceeds from the sale of our securities and other
sources of available liquidity otherwise prove to be insufficient.
The Company may also be required to raise capital to refinance its outstanding
debt securities when they mature. We cannot assure you that we will be able to
raise additional capital. The failure to obtain additional capital on acceptable
terms could materially adversely affect our business, results of operations and
financial condition and our ability to pay principal of and interest on the New
Notes.
OUR SUBSTANTIAL INDEBTEDNESS COULD ENDANGER OUR FINANCIAL CONDITION AND INHIBIT
OUR ABILITY TO SATISFY OUR OBLIGATIONS UNDER THE NEW NOTES
We have a significant amount of indebtedness. Assuming that we had
completed all of our recent securities offerings at September 30, 1998 and
applied the proceeds as intended, the Company would have had total consolidated
indebtedness of approximately $1,004.9 million and stockholders' equity of
approximately $174.6 million.
For the years ended December 31, 1994, 1995, 1996 and 1997, and the nine
months ended September 30, 1997 and 1998, our earnings were insufficient to
cover our fixed charges. The deficiency was approximately $3.1 million for the
year ended December 31, 1994, $9.4 million for the year ended December 31, 1995,
$37.7 million for the year ended December 31, 1996, $100.0 million for the year
ended December 31, 1997, $67.4 million for the nine months ended September 30,
1997 and $137.4 million for the nine months ended September 30, 1998.
We may incur substantial amounts of additional indebtedness resulting in
substantial and increasing interest expense that will likely exceed our EBITDA
(as defined). If we are unable to generate sufficient EBITDA (as defined) or we
are otherwise unable to obtain funds necessary to make required payments, or if
we fail to comply with the material terms of our indebtedness, we would be in
default and the holders of our indebtedness would be entitled to accelerate the
maturity of such indebtedness. Any such default could result in a default on the
New Notes and could delay or preclude payment of principal of and interest on
the New Notes.
The trust indentures governing our outstanding debt securities contain
certain restrictive covenants which impose limitations on the ability of the
Company and certain of its subsidiaries to:
o incur additional indebtedness;
o pay dividends or make certain other distributions;
o issue capital stock of certain subsidiaries;
o guarantee debt;
o enter into transactions with shareholders and affiliates;
o create liens;
o enter into sale-leaseback transactions; and
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o sell assets.
See the section "Description of Certain Indebtedness" under the headings "1996
Notes," "U.S. Dollar Notes," "DM Notes," "Old 12% Notes" and "Old 10 1/2%
Notes."
Our level of indebtedness could have important consequences to you as a
holder of the New Notes because:
o it could limit our ability to obtain any necessary financing in the
future for working capital, capital expenditures, debt service
requirements or other purposes;
o a substantial portion of our future cash flow from operations, if
any, will be dedicated to the payment of principal and interest on
our indebtedness and will not be available for our business;
o it could limit our flexibility in planning for, or reacting to
changes in, our business;
o we are more highly leveraged than some of our competitors, which may
place us at a competitive disadvantage; and
o it could make us more vulnerable in the event of a downturn in our
business.
See the sections "Selected Consolidated Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
OUR HOLDING COMPANY STRUCTURE MAY JEOPARDIZE OUR ABILITY TO REPAY THE NEW NOTES
The Issuer and the Guarantor are holding companies and their only material
assets consist of the stock of their subsidiaries and fluctuating cash balances.
The Issuer has contributed or loaned a substantial majority of the net proceeds
from the sale of the Old Notes to its subsidiaries and other affiliates. See the
"Use of Proceeds" section. The cash flow and the related ability of each of the
Issuer and the Guarantor to service its debt obligations, including the New
Notes and the New Notes Guarantees, depend upon the ability of the Issuer or the
Guarantor to receive cash from their subsidiaries. These subsidiaries, however,
are legally distinct from the Issuer and the Guarantor and may have no
obligation, contingent or otherwise, to pay amounts due pursuant to the New
Notes or to make funds available for such payment. These subsidiaries have no
obligation to guarantee the New Notes. Accordingly, the New Notes and the New
Notes Guarantees will be effectively subordinated to all indebtedness and other
liabilities and commitments (including trade payables) of these subsidiaries.
The ability of these subsidiaries to make such distributions to the Issuer and
the Guarantor will be subject to, among other things, the availability of funds
and the terms of such subsidiaries' indebtedness. In addition, the repayment of
loans and advances by such subsidiaries may be subject to statutory or other
legal restrictions and to taxation, are contingent upon the earnings of those
subsidiaries and are subject to various business considerations. Dividends and
other payments to the Issuer and the Guarantor from their subsidiaries, in
certain jurisdictions, may have adverse tax consequences to them and to the
shareholders of the Company, and the subsidiaries' ability to declare and pay
dividends and their ability to make any payment or transfer of property or
assets to the Issuer and the Guarantor are, in certain circumstances, subject to
local statutory or other legal restrictions, and restrictions contained in their
respective Articles of Association, other organizational documents or loan
agreements.
As shareholders of each of their subsidiaries, any right of the Issuer or
the Guarantor to receive assets of any of their subsidiaries upon any
liquidation or reorganization of those subsidiaries (and the consequent right of
the holders of the New Notes and the New Notes Guarantees to those assets) is
effectively subordinated to the claims of the subsidiaries' creditors, except to
the extent the Issuer or the Guarantor is independently recognized as a creditor
of those subsidiaries. Any recognized claims of the Issuer or the Guarantor as a
creditor of a subsidiary would be subordinate to any prior security interest
held by any other creditor of the subsidiary and obligations of the subsidiary
that are senior to those owing to the Issuer or the Guarantor. In the event of
such a subsidiary's liquidation, there may not be assets sufficient for the
Issuer and/or the Guarantor to recoup their investments in that subsidiary.
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The Company's Bermuda counsel has opined that the New Notes Guarantees will
be valid and binding obligations of the Company, subject to standard
qualifications regarding bankruptcy, insolvency and similar circumstances.
Assuming that we had completed all of our recent securities offerings at
September 30, 1998:
o the total amount of outstanding liabilities of the Guarantor and the
Issuer (excluding their subsidiaries), including trade payables,
would have been approximately $1,002.5 million; and
o the total amount of outstanding liabilities of the subsidiaries of
the Guarantor (other than the Issuer), including trade payables,
would have been $439.5 million. See the section "Description of the
New Notes and the New Notes Guarantees" under the heading "Ranking."
WE MAY NOT BE ABLE TO REPAY OR REFINANCE THE NEW NOTES
We may not be able to repay the New Notes with cash from operations.
Accordingly, we may need to seek capital from outside sources in order to repay
principal on the New Notes. Our ability to obtain capital from outside sources
will depend on our financial condition at the time, market conditions and other
factors, including factors beyond our control. If we are unable to refinance the
New Notes or obtain additional funds for their repayment, the value of the New
Notes would be adversely affected.
OUR ANTICIPATED GROWTH AND ACQUISITIONS ENGENDER RISKS
We have experienced rapid growth and we intend to pursue further expansion
of our existing operations, through acquisitions, joint ventures and strategic
alliances and the establishment of new operations. Our ability to manage our
growth will depend on our ability to:
o evaluate new markets and investment vehicles;
o monitor operations and control costs;
o maintain effective quality controls;
o obtain satisfactory and cost-effective lease rights from, and
interconnection agreements with, competitors that own transmission
lines; and
o significantly expand our internal management, technical and
accounting systems.
Our growth will also depend on our ability to purchase MIUs, IRUs and other
capacity, which may be adversely affected by competition and regulatory
restrictions on ownership. Our rapid growth strains our financial, management
and operational resources, including our ability to:
o identify acquisition targets and joint venture partners;
o negotiate acquisition and joint venture agreements; and
o maintain satisfactory relations with our joint venture partners and
minority investors in acquired entities.
In addition, acquisitions and the establishment of new operations will entail
considerable expenses in advance of anticipated revenues and may cause
substantial fluctuations in our operating results.
We may, as a result of legal restrictions or other reasons, be limited to
acquiring only a minority interest in strategic targets, in which case we would
lack control over the target company's operations and strategies. Any such lack
of control may interfere with our growth and the integration of our operations.
We may also acquire interests in operations, for strategic reasons, even if
those operations have operational or managerial problems or are incurring
losses. In such cases, those operational or managerial problems or losses may
cause the Company significant operational difficulties or consume substantial
monetary, management and other resources of the Company.
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WE MAY EXPERIENCE PROBLEMS INTEGRATING OUR NEW OPERATIONS
When we acquire or launch new businesses we must integrate them with our
existing operations. For businesses that we acquire, we must integrate various
systems, including switching, transmission, technical, sales, customer service,
marketing, billing, accounting, quality control, management, personnel, payroll
and regulatory compliance, and we must integrate other systems and operating
hardware and software. Some or all of these systems and hardware and software
elements may be incompatible. Additionally, acquired businesses may offer
product lines that the Company has limited experience in providing, such as, in
the case of the recent Motorola Tel.co acquisition, wireless resale.
Furthermore, acquired businesses generally suffer from higher levels of employee
and customer attrition and turnover, beginning when employees and customers
learn of a proposed transaction and ending some time after the transaction has
been completed. We have has experienced high levels of customer attrition and
turnover in certain acquired businesses in the United States, Australia, France
and Germany. In connection with the recent Motorola Tel.co acquisition, we
expect to experience higher levels of customer attrition than previously
experienced by our European operations.
In countries where we expand by establishing a new business, we must
recruit, hire and train personnel, establish offices, obtain regulatory
authorization, lease transmission lines from and obtain interconnection
agreements with competitors that own intra-national transmission lines, and
install hardware and software. See the heading "Our Markets Are Highly
Competitive." In addition, since we already operate businesses in many countries
and we intend to expand into additional countries and regions, including
countries and regions within Europe, Asia/Pacific Rim and Latin America, we must
manage the problems associated with integrating a culturally and linguistically
diverse workforce.
THE RAPIDLY CHANGING INDUSTRY IN WHICH WE OPERATE PRESENTS RISKS AND
UNCERTAINTIES
The international telecommunications industry is changing rapidly, due to
deregulation, privatization of PTTs, technological improvements, expansion of
telecommunications infrastructure, the globalization of the world's economies,
free trade and other factors. The Company may be unable to compete effectively
or adjust its contemplated plan of development to meet these changing market
conditions.
Much of our planned growth is predicated upon the deregulation of
telecommunications markets. Such deregulation may not occur when or as
anticipated, if at all, and the Company may not be able to grow in the manner or
at the rates currently contemplated.
The telecommunications industry is in a period of rapid technological
evolution, marked by the introduction of new product and service offerings and
increased satellite and fiber optic cable transmission capacity for services
similar to those provided by the Company, including utilization of the Internet
for international voice and data communications. We cannot predict which of the
many possible future product and service offerings will be necessary to
establish and maintain a competitive position or what expenditures will be
required to develop and provide such products and services. Our profitability
will depend, in part, on our ability to anticipate and adapt to rapid
technological changes occurring in the telecommunications industry and on our
ability to offer, on a timely basis, services meeting evolving industry
standards and customer preferences. We may be unable to adapt to such
technological changes or offer such services on a timely basis.
WE FACE INCREASING PRICING PRESSURES
Existing excess international transmission capacity minimizes the marginal
cost of carrying an additional international call for carriers. Industry
observers have predicted that these low marginal costs may result in significant
pricing pressures and that, within a few years after the end of this century,
there may be no charges based on the distance a call is carried. Certain of our
competitors have introduced calling plans that provide for flat rates on calls
within the U.S. and Canada, regardless of time of day or distance of the call.
This system of pricing, if it were to become prevalent in our markets, would
likely have a material adverse effect on our prospects, financial condition and
results of operations and our ability to pay our debts. See the heading "We
Depend on Other Carriers."
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WE ARE UNABLE TO PREDICT TRAFFIC VOLUMES
We may enter into long-term agreements for leased capacity based on traffic
volumes that we expect will occur in the future. Traffic volumes, however, may
not reach expected levels and, thus, we may be obligated to pay for transmission
capacity without adequate corresponding revenues. Conversely, we may
underestimate our need for leased capacity and, thus, we may be required to
obtain transmission capacity through more expensive means. In the past, we have
at times overestimated our need for leased capacity and as a result we have
transported traffic at a higher cost. We have at times also understimated our
needs and leased capacity which was underutilized and, in some instances, led to
underutilization charges. See the section "Management's Discussion and Analysis
of Financial Condition and Results of Operations." A failure to accurately
project needs for leased capacity in the future may have a material adverse
effect on our business and our ability to satisfy our obligations under the New
Notes.
WE DEPEND ON OTHER CARRIERS
The Company does not own any local exchange transmission facilities and we
own only limited intra-national transmission facilities. All of the telephone
calls made by our customers are connected at least in part through transmission
facilities that we lease. In many of the foreign jurisdictions in which we
conduct business, the primary provider of significant intra-national
transmission facilities is the PTT. Accordingly, prior to full deregulation, we
may be required to lease transmission capacity at artificially high rates from a
provider that occupies a monopoly or near monopoly position. Such rates may
prevent us from generating gross profit on the related calls. In addition, PTTs
may not be required by law to allow us to lease necessary transmission lines or,
if applicable law requires PTTs to lease transmission lines to the Company, we
may encounter delays in commencing operations and negotiating leases and
interconnection agreements. Additionally, disputes may result with respect to
pricing terms and billing. See the heading "Government Regulations Restrict Our
Operations."
In the U.S., the providers of local exchange transmission facilities are
generally the incumbent local exchange carriers ("LECs"), including the regional
Bell operating companies ("RBOCs"). The permitted pricing of local exchange
facilities that we lease in the U.S. is subject to uncertainties. The U.S. Court
of Appeals for the Eighth Circuit has held that the United States Federal
Communications Commission (the "FCC") does not have jurisdiction to create
national rules for the pricing of such facilities, but rather that such
jurisdiction rests with each of the individual states. As of the date of this
Prospectus, this case is before the U.S. Supreme Court and, if the lower court
decision is upheld, the need to address different pricing regimes in different
states could make it more burdensome or expensive for the Company to enter a
local exchange market.
Many of the international telephone calls made by our customers are
transported through transmission facilities that the Company leases from its
competitors, including American Telephone & Telegraph, Inc., Teleglobe Canada,
Inc., British Telecommunications PLC, France Telecom S.A., Deutsche Telekom AG,
Cable and Wireless Communications PLC, MCI WorldCom, Inc. and Sprint
Corporation. To the extent that we provide local exchange services in the U.S.,
we will be required to lease facilities from LECs that will be competitors of
the Company, such as the RBOCs. We generally lease lines on a short-term basis.
These include leases on a per-minute basis (some with minimum volume
commitments) and, where we anticipate higher volumes of traffic, leases of
transmission capacity for point-to-point circuits on a monthly or longer-term
fixed cost basis. When we negotiate lease agreements we must estimate future
supply and demand for transmission capacity as well as the calling patterns and
traffic levels of our existing and future customers. When excess transmission
capacity is present, as was the case for many years in the U.S., lease rates
have declined and short-term leases have been advantageous. Recently, capacity
has been somewhat constrained in the U.S. and the decline in lease rates has
slowed. As a result, longer term leases may become more attractive. If we fail
to meet our minimum volume commitments pursuant to long-term leases, we must pay
"under-utilization" charges. See the heading "We Are Unable to Predict Traffic
Volumes." For these reasons, we would suffer competitive disadvantages if we
entered into leases with inappropriate durations or leases based on per-minute
charges for high volume routes (or leases with fixed monthly rates for low
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volume routes), or if we failed to meet our minimum volume requirements. The
Company is also vulnerable to service interruptions and poor transmission
quality from leased lines. If our relationships with one or more of our carrier
vendors were to deteriorate, we could suffer a material adverse effect upon our
business, financial condition and results of operations.
WE DEPEND ON EFFECTIVE INFORMATION SYSTEMS
Sophisticated information systems are vital to the Company's growth and its
ability to:
o monitor costs;
o bill and receive payments from customers;
o reduce credit exposure;
o effect least cost routing; and
o achieve operating efficiencies.
We currently operate separate network management information systems for
our U.S., European and Australian operations. We intend to integrate and operate
the information services for all of our Local Operators from the regional
headquarters of each Local Operator. A failure of any of our current systems,
the failure of the Company to efficiently implement or integrate new systems,
the failure of any new systems or the failure to upgrade systems as necessary
could have a material adverse effect on the Company, its financial condition and
its results of operations.
THE YEAR 2000 PROBLEM PLACES OUR TECHNOLOGY SYSTEMS AT RISK
We are reviewing our computer systems and operations to identify and
determine the extent to which any of our systems will be vulnerable to potential
errors and failures as a result of the "Year 2000" problem. The Year 2000
problem is the result of the use by computer programs of two digits, rather than
four digits, to define the applicable year. Any of the Company's programs that
have time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a major system failure or
miscalculations, 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.
We are assessing and upgrading our computer system in an effort to prevent
major system failures that could result upon the transition from 1999 to the
year 2000. We may, however, be unable to successfully implement these upgrades,
and additional steps may be necessary. A failure of the Company's computer
systems or the failure of the Company's vendors or customers to effectively
upgrade their software and systems for transition to the year 2000 could have a
material adverse effect on the Company's business and financial condition or
results of operations.
If we complete our assessment without identifying any additional material
non-compliant systems operated by, or in the control of, the Company or of third
parties, the most reasonably likely worst case scenario would be a systems
failure beyond the control of the Company to remedy. Such a failure could
materially prevent us from operating our business. We believe 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. See the section "Management's Discussion
and Analysis of Financial Condition and Results of Operations" under the heading
"Year 2000 Technology Risks" and the section "Business" under the headings
"North American Operations--U.S. Operations" and "European Operations--General."
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OUR MARKETS ARE HIGHLY COMPETITIVE
The telecommunications services markets are extremely competitive. Prices
for long distance calls are decreasing substantially in most of the Company's
markets. In addition, all of our markets have deregulated or are in the process
of deregulating telephone services. Customers in most of these deregulating
markets are not familiar with obtaining services from competitors to the PTTs
and incumbent LECs and may be reluctant to use new providers. The Company's
target customers, small and medium-sized businesses, may be reluctant to entrust
their telecommunications needs to new and unproven operators or may switch to
other service providers as a result of price competition.
We must compete with a variety of other telecommunications providers in
each of our 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;
o companies such as GTE and MCI WorldCom offering local exchange
service in conjunction with domestic long distance and international
long distance services;
o LECs such as the RBOCs; and
o other companies with business plans similar to our business plan.
We anticipate increased competition as worldwide deregulation accelerates.
Many of our competitors have significantly greater financial, management and
operational resources and more experience. If any of our competitors devote
additional resources to providing international long distance voice
telecommunication services to our key markets, including our target customer
base of small and medium-sized businesses, there could be a material adverse
effect on our business.
Competition for customers is primarily on the basis of price and, to a
lesser extent, on the type and quality of services offered and customer service.
We attempt to discount our services from the prices charged by the PTT or major
carriers in each of our markets. We have no control over the prices set by our
competitors, and some of our larger competitors may be able to use their
substantial financial resources to cause severe price competition in the
countries in which we operate. In certain deregulated markets severe price
competition has occurred, and as deregulation progresses in other markets we may
encounter severe price competition in those markets. Any price competition could
have a material adverse effect on our business, financial condition and results
of operations. In addition, certain of our competitors will provide potential
customers with a broader range of services than we currently offer or can offer
due to regulatory restrictions. See the section "Business" under the heading
"Industry Overview" and the section "Business" under the heading "European
Operations" and the sub-heading "General."
Recent and pending deregulation in each of our markets may encourage new
entrants. For example, as a result of the enactment of the Telecommunications
Act of 1996 and regulatory initiatives taken by the FCC, the RBOCs may provide
international telecommunications services, are allowed as "non-dominant"
carriers to offer domestic long distance service through affiliates outside
their service areas and are also allowed to provide long distance service within
their service areas, so long as certain competition related conditions are met.
AT&T, MCI WorldCom and other long distance carriers are allowed to enter the
local telephone services market, and any entity, including cable television
companies and utilities, may enter the United States domestic long distance
telecommunications market. The U.S. District Court for the Northern District of
Texas recently ruled that restrictions placed by the Telecommunications Act of
1996 on the ability of RBOCs to provide long distance service within their
respective service areas were unconstitutional. Although the U.S. Court of
Appeals for the 5th
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Circuit reversed the District Court's ruling, certain RBOCs have petitioned the
U.S. Supreme Court for certiorari. Certain RBOCs have also filed applications
with the FCC seeking authority to provide long distance service within their
respective service areas. A decision by the U.S. Supreme Court affirming the
decision by the District Court, or the grant by the FCC of the pending RBOC
applications, would enable the RBOCs to compete more effectively against the
Company.
In November 1997, the FCC revised its rules to implement commitments made
by the U.S. under the Basic Telecommunications Agreement of the World Trade
Organization (the "WTO") executed in February 1997. The FCC established an open
entry standard for applicants from World Trade Organization member countries
seeking authority to provide international telecommunications service in the
United States and adopted a rebuttable presumption that the U.S. affiliates of a
foreign carrier with less than 50% market share in their home market should be
treated as non-dominant. In addition, the FCC reclassified AT&T as a
"non-dominant" carrier for domestic purposes in October 1995 and for
international purposes in May 1996. These FCC actions substantially reduced the
regulatory constraints (including pricing constraints) on AT&T and affiliates of
foreign carriers. As a result, we expect to encounter additional regional
competitors and increased competition. Moreover, we believe that competition in
foreign markets will increase and become increasingly similar to the competitive
environment in the U.S.
The PTTs and incumbent LECs generally have certain competitive advantages
over the Company due to their control over and connection to intra-national and
local exchange transmission facilities, their ability to delay access to lines
and the reluctance of some regulators to adopt policies and grant approvals that
would increase competition. Our Local Operator in any such jurisdiction would be
adversely affected to the extent that the PTT or incumbent LEC in any
jurisdiction uses its competitive advantages to their fullest extent.
GOVERNMENT REGULATIONS RESTRICT OUR OPERATIONS
National and local laws and regulations differ significantly among the
countries in which we operate. The interpretation and enforcement of such laws
and regulations vary and could limit our ability to provide certain
telecommunications services, including IP telephony services. Changes in current
or future laws or regulations or future judicial intervention in the U.S. or in
any other country may have a material adverse effect on the Company, and FCC or
other regulatory intervention may have a material adverse effect on the Company.
Our European strategy is based in large part upon the ongoing liberalization of
the European Union ("EU") and deregulation of other foreign markets based on
European Commission ("EC") directives and the GBT Agreement. Several EU member
states have already experienced delays in deregulation. Moreover, even if a
national legislature of an EU member state implements the relevant directives
within the time frame established by the EC, there may be significant resistance
to the implementation of such measures from PTTs, regulators, trade unions and
other sources. The telecommunications services that we provide in various EU
member states are subject to and affected by regulations and license conditions
enforced by the National Regulatory Authority ("NRA"). The NRA in the U.K. has
imposed mandatory rate reductions on the dominant operator in the U.K., British
Telecom, and is expected to continue to do so for the foreseeable future. This
may have the effect of reducing the prices that we can charge our U.K.
customers.
Governments in other foreign markets may fail to implement deregulation or
even if they do implement deregulation it may not proceed on schedule. In
addition, even if other foreign markets act to deregulate their
telecommunications markets on the current schedule, the national governments of
such foreign markets must pass legislation or other national measures to
deregulate the markets within the countries. The national governments may not
pass such legislation or other national measures or may not pass them in the
form required, or may pass such legislation or measures only after a significant
delay. These and other potential obstacles to deregulation would have a material
adverse effect on our operations by preventing us from expanding our operations
as currently anticipated.
The Internet protocol ("IP") telephony services that we provide through
Delta Three may be subject to and affected by regulations introduced by the
authorities in each country where Delta Three operates.
20
<PAGE>
In the United States, the FCC has advised Congress that it may, in the future,
regulate IP telephony services as basic telecommunications services. The
regulation of Delta Three's activities may have a material adverse effect on the
financial condition and results of operations of Delta Three and the Company.
OUR RESULTS DEPEND UPON KEY PERSONNEL
Our success depends, in part, upon our key management. In particular, we
depend highly upon Ronald S. Lauder, Chairman of the Board of Directors of the
Company and its largest and controlling shareholder, and Itzhak Fisher, the
President and Chief Executive Officer of the Company. If we were to lose the
services of Mr. Lauder, Mr. Fisher or any of the other members of our senior
management team, we could suffer material adverse effects.
We believe that our future success will depend in large part upon our
ability to attract, retain and motivate highly skilled employees. Such employees
are in great demand and are often subject to offers for competitive employment.
We may be unable to retain key managerial employees or to attract, integrate or
retain such employees in the future.
WE HAVE A CONTROLLING SHAREHOLDER
Ronald S. Lauder, Chairman of the Board of Directors of the Company,
beneficially owns approximately 56.6% of the voting power of the Company. In
addition, Mr. Lauder beneficially owns approximately 31.2% of the outstanding
capital stock of the Company. As a result, Mr. Lauder has majority voting
control of the Company, the ability to approve certain fundamental corporate
transactions and to elect all members of the Company's Board of Directors. Mr.
Lauder, together with certain other executive officers and directors of the
Company, companies and partnerships they control and members of their immediate
families, controls approximately 92.1% of the voting power and approximately
56.8% of the outstanding capital stock of the Company.
The exercise of voting power by Mr. Lauder and the other persons described
above may present conflicts of interest between them, as shareholders, and the
holders of the New Notes. For example, if the Company encounters financial
difficulties, or is unable to pay its debts as they mature, our equity investors
may have an interest in pursuing acquisitions, divestitures, financings, or
other transactions that in their judgment could enhance their equity
investments, even though such transactions might involve risk to the holders of
the New Notes. See the "Principal Shareholders" section.
EFFECTS OF INCORPORATION UNDER BERMUDA CORPORATE LAW
The Guarantor is a Bermuda corporation and, accordingly, is governed by The
Companies Act 1981 of Bermuda. The Companies Act 1981 of Bermuda differs in
certain respects from laws generally applicable to United States corporations
and shareholders. These differences include less restrictive limitations on
transactions entered into by the Guarantor in which any of its directors have an
interest and greater restrictions on the rights of its shareholders to dissent
from and obtain remedies in connection with mergers, takeovers and other
combination transactions and to pursue legal challenges to corporate actions.
EFFECTS OF INCORPORATION UNDER UNITED KINGDOM CORPORATE LAW
The Issuer is a United Kingdom corporation and, accordingly, is governed by
the Companies Act 1985 of the United Kingdom. This act differs materially from
laws generally applicable to United States corporations and their shareholders,
including regulations relating to interested directors, mergers and
indemnification of directors.
21
<PAGE>
MANDATORY REDEMPTION UPON A CHANGE OF CONTROL
If the Company experiences a change of control, we may be required to
purchase all of the outstanding New Notes, along with any of our other notes
that are then outstanding, at a price equal to 101% of the principal amount (or
accreted value) thereof at the date of purchase plus accrued and unpaid
interest. However, we may not have sufficient funds to purchase the New Notes
and/or our other outstanding notes. See the section "Description of the New
Notes and the New Notes Guarantee" under the heading "Change of Control."
ENFORCEMENT OF JUDGMENTS AND SERVICE OF PROCESS
The Issuer is incorporated in the United Kingdom and the Guarantor is
incorporated in Bermuda. Certain of their respective officers and directors
reside outside the United States. All or a substantial portion of the assets of
such persons are or may be located outside the United States. Consequently, it
may not be possible to serve process within the United States upon such persons
or to enforce against them judgments obtained in United States courts, including
judgments predicated upon the civil liability provisions of the federal
securities laws of the United States. See the section "Service of Process and
Enforcement of Liabilities."
OUR RESULTS MAY BE AFFECTED BY DEVALUATION AND CURRENCY RISKS
Most of our revenues, costs, assets and liabilities are denominated in
local currencies. In the future, we may acquire interests in entities that
operate in countries where the expatriation or conversion of currency is
restricted. Currently, we do not hedge against foreign currency exchange risks
but in the future we may commence such hedging against specific foreign currency
transaction risks. We may be unable to hedge all our exchange rate exposure
economically, and exchange rate fluctuations may have a material adverse effect
on the ability of the Issuer or the Guarantor to meet their respective
obligations under the New Notes. Because of the number of currencies involved,
our constantly changing currency exposure and the fact that all foreign
currencies do not fluctuate in the same manner against the United States dollar,
we cannot quantify the effect of exchange rate fluctuations on our future
financial condition or results of operations.
Under the treaty on the European Economic and Monetary Union, on
January 1, 1999 the "Euro" has replaced the currencies of 11 of the 15 member
states of the EU, including some countries in which we operate. We have modified
our computer systems and programs for the replacement of these European
currencies with the Euro. We are treating costs associated with the
modifications necessary to prepare for the Euro as expenses during the period in
which we incur them. Such costs may involve significant expenditures and, if not
implemented in a timely manner, could have a material adverse effect on the
Company.
NO PUBLIC MARKET EXISTS FOR THE NEW NOTES
The New Notes are a new issue of securities for which there is currently no
active trading market. If the New Notes are traded after their initial issuance,
they may trade at a discount from their initial offering price, depending upon
prevailing interest rates, the market for similar securities and other factors,
including general economic conditions and the financial condition, performance
and prospects of the Company. Even though the New Notes are being registered
under the Securities Act, an active trading market may not develop.
THE NEW 12% NOTES HAVE ORIGINAL ISSUE DISCOUNT FOR U.S. FEDERAL INCOME TAX
PURPOSES
The New 12% Notes have original issue discount ("OID") for U.S. federal
income tax purposes. Consequently, if you are a U.S. holder of New 12% Notes,
for U.S. federal income tax purposes you must include OID in your gross income
before you receive cash payments on the New 12% Notes.
22
<PAGE>
CONSEQUENCES OF FAILURE TO EXCHANGE AND REQUIREMENTS FOR TRANSFER OF NEW NOTES
If you hold Old Notes and you do not exchange them for New Notes in the
Exchange Offers you must continue to comply with (1) the provisions in the
Indentures governing the Old Notes regarding transfer and exchange of the Old
Notes and (2) the restrictions on transfer of the Old Notes written on the
legend appearing on the face of the certificates representing the Old Notes.
These transfer restrictions are imposed on the Old Notes because we issued the
Old Notes under exemptions from the Securities Act and applicable state
securities laws or in transactions not subject to the registration requirements
of the Securities Act and applicable state securities laws.
In general, you may offer or sell the Old Notes only if (1) you register
them under the Securities Act, (2) you sell them under an exemption from the
Securities Act and applicable state securities laws or (3) you sell them in a
transaction not subject to the Securities Act and applicable state securities
laws. We do not currently anticipate that we will register the Old Notes under
the Securities Act. See the section "Registration Rights Agreements for Old
Notes."
Based on interpretations by the staff of the Commission, as set forth in
no-action letters issued to third parties, we believe that you may offer for
resale, resell or otherwise transfer New Notes issued under the Exchange Offers
(unless you are an "affiliate" of the Issuer or the Guarantor within the meaning
of Rule 405 under the Securities Act) without complying with the registration
and prospectus delivery provisions of the Securities Act, so long as you acquire
the New Notes in the ordinary course of your business and you have no
arrangement with any person to participate in the distribution of the New Notes.
However, we do not intend to ask the Commission to consider, and the Commission
has not considered, the Exchange Offers in the context of a no-action letter and
we cannot assure you that the staff of the Commission would make a similar
determination with respect to the Exchange Offers as in such other
circumstances. Unless you are a broker-dealer, you must acknowledge that
(1) you will acquire the New Notes in your ordinary course of business, (2) at
the time of the completion of the Exchange Offers you will not have engaged in,
and do not intend to engage in, a distribution of New Notes and (3) you are not
an affiliate of the Issuer or the Guarantor within the meaning of Rule 405 of
the Securities Act or if you are such an affiliate, that you will comply with
the registration and prospectus delivery requirements of the Securities Act, to
the extent applicable. If you are a broker-dealer you must acknowledge that you
acquired your Old Notes as a result of market-making activities or other trading
activities and that you will deliver a prospectus in connection with any resale
of your New Notes. See the section "Plan of Distribution." In addition, to
comply with state securities laws, the New Notes may not be offered or sold in
any state unless they have been registered or qualified for sale in such state
or an exemption from registration or qualification is available and is complied
with. We currently do not intend to register or qualify the sale of the New
Notes in any state where an exemption from registration or qualification is
required and not available. See the section "The Exchange Offers" under the
heading "Consequences of Exchanging Old Notes" and the section "Registration
Rights Agreement for Old Notes."
23
<PAGE>
USE OF PROCEEDS
The Issuer will not receive any proceeds from the Exchange Offers. The net
proceeds to the Issuer from the sale of the Old Notes were approximately
$286.6 million, after deducting the underwriting discounts and estimated
expenses of the offerings of the Old Notes. Of the net proceeds, the Company
intends to use (1) approximately $146.1 million for the expansion and
development of the Company's infrastructure, such as the replacement of leased
transmission facilities with owned transmission facilities and the purchase of
IRUs and interests in inter-city fiber routes in European countries, as well as
the installation of additional national and international gateway switches and
(2) approximately $140.5 million for the funding of the Company's operating
losses. In addition, in the ordinary course of its business, the Company
continually reviews acquisition opportunities in the telecommunications industry
as they arise. Although it is not currently party to any agreement or binding
understanding with respect to a transaction, it may use proceeds from the sale
of the Old Notes partially to fund suitable acquisition opportunities that
arise. Historically, the Company has acquired telecommunications carriers with
established customer bases, compatible operations and experience with additional
or emerging telecommunications products and services. See "Risk Factors--Our
Anticipated Growth and Acquisitions Engender Risks."
CAPITALIZATION
The following table sets forth the unaudited consolidated cash and cash
equivalents, restricted marketable securities and capitalization of the Company
as of September 30, 1998 and as adjusted to give effect to (i) the issuance of
the Old 12% Notes and the application of the net proceeds therefrom received by
the Company, (ii) the issuance by the Company on December 1, 1998 of 7,000,000
shares of its Class A common shares, par value $0.00457 ("Class A Common Stock")
pursuant to an underwritten public offering (the "1998 Equity Offering") and the
issuance by the Company on December 15, 1998 of 544,278 shares of Class A Common
Stock pursuant to underwriters' over-allotment options granted as part of the
1998 Equity Offering (the "Green Shoe"), and the application of the net proceeds
therefrom received by the Company, and (iii) the issuance of the Old 10 1/2%
Notes and the application of the estimated net proceeds therefrom received by
the Company. The table should be read in conjunction with the Consolidated
Financial Statements and notes thereto and the other information included
elsewhere in this Memorandum. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998
----------------------------------------
AS ADJUSTED
FOR THE
12% NOTES
OFFERING, THE 1998
EQUITY OFFERING, THE
10 1/2% NOTESOFFERING
ACTUAL AND THE GREEN SHOE
----------- ------------------------
(IN THOUSANDS, EXCEPT SHARE DATA)
----------------------------------------
<S> <C> <C>
Cash and cash equivalents......................... $ 82,196 $ 537,773 (1)(2)(3)
--------- ------------
--------- ------------
Restricted marketable securities(4)............... $ 30,579 $ 30,579
--------- ------------
--------- ------------
Short-term debt and current portion of long-term
debt and current portion of capital lease
obligations...................................... $ 17,700 $ 17,700
Long-term debt and capital lease obligations:
Capital leases................................... 21,211 21,211
12 1/4% Senior Notes due 2006 (net of unamortized
discount of $1.8 million)...................... 170,667 170,667
9 1/8% Senior Notes due 2008..................... 200,000 200,000
10 1/8% Senior Discount Notes due 2008........... 212,131 212,131
10% Senior Discount Notes due 2008............... 114,758 114,758
12% Senior Notes due 2008 (net of unamortized
discount of $5.5 million)...................... -- 94,489
10 1/2% Senior Notes due 2008 (net of unamortized
discount of $1.5 million)...................... -- 198,458
--------- ------------
Total long-term debt, short-term debt and
capital lease obligations(5)................. 736,467 1,029,414
--------- ------------
Shareholders' equity:
Common Stock, $.00457 par value; 438,000,000
authorized; 17,782,140 shares of Class A
Common Stock outstanding and 24,782,140 shares
outstanding as adjusted(6)..................... 81 115
26,874,795 shares of Class B Common Stock
outstanding(7)............................... 123 123
Preferred Stock, $.00457 par value; 65,700,000
shares authorized; no shares outstanding....... -- --
Warrants--Common Stock........................... 5,544 5,544
Additional paid-in capital....................... 328,443 497,381
Accumulated deficit.............................. (304,190) (304,190)
Foreign currency translation adjustment.......... (11,982) (11,982)
--------- ------------
Total shareholders' equity..................... 18,019 186,991
--------- ------------
Total capitalization........................... $ 754,486 1,216,405
--------- ------------
--------- ------------
</TABLE>
(Footnotes on next page)
24
<PAGE>
(Footnotes from previous page)
- ------------------
(1) Reflects the receipt of net proceeds of approximately $90.5 million from the
issuance of the Old 12% Notes.
(2) Reflects the receipt of net proceeds of approximately $169.0 million from
the 1998 Equity Offering and the Green Shoe.
(3) Reflects the receipt of net proceeds of approximately $196.1 from the
issuance of the Old 10 1/2% Notes.
(4) The restricted marketable securities consist of U.S. government securities
pledged to secure the payment of interest on the principal amount of the
1996 Notes. See "Description of Certain Indebtedness--1996 Notes."
(5) As of September 30, 1998, the Company had approximately $3.4 million of
available (undrawn) borrowing capacity under its current bank and vendor
facilities.
(6) The foregoing does not include (i) 1,481,055 shares of Class A Common Stock
issuable upon the exercise of outstanding stock options, (ii) 26,328,590
shares of Class A Common Stock issuable upon the conversion of the shares of
Class B Common Stock, (iii) 459,900 shares of Class A Common Stock issuable
upon the conversion of shares of Class B Common Stock issuable pursuant to
the Lauder Warrants, (iv) 917,729 shares of Class A Common Stock issuable
upon the exercise of unexercised Warrants, (v) 109,500 shares of restricted
stock, granted pursuant to the Company's 1997 Stock Incentive Plan or
(vi) shares of Class A Common Stock issuable upon exercise of Roll-Up Rights
or Incentive Units or in the Telegate Exchange.
(7) Does not include 459,900 shares of Class B Common Stock issuable upon
exercise of the Lauder Warrants.
25
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
Set forth below are selected consolidated financial data for each of the
years in the four year period ended December 31, 1997 and for the nine months
ended September 30, 1997 and 1998. The selected consolidated financial data
presented below with respect to the years ended December 31, 1997, 1996 and 1995
have been derived from the Consolidated Financial Statements appearing elsewhere
in this Prospectus. The Consolidated Financial Statements for the three year
period ended December 31, 1997 have been audited by Deloitte & Touche LLP,
independent auditors. The information as of and for the year ended December 31,
1994 has been derived from the financial statements of the Company's predecessor
entity, RSL North America.
In the opinion of management, the unaudited Condensed Consolidated
Financial Statements as of September 30, 1998 and 1997 and for the nine month
periods ended September 30, 1998 and 1997 have been prepared on the same basis
as the audited Consolidated Financial Statements and include all adjustments,
which consist only of normal recurring adjustments, necessary for a fair
presentation of the financial position and the results of operations for these
periods. Operating results for the nine months ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the full year. In
addition, the Company has experienced rapid growth over the periods set forth
below, which growth may not necessarily continue at such rate. Accordingly, the
financial and operating results set forth below may not be indicative of future
performance.
The information set forth below is qualified by reference to and should be
read in conjunction with the Consolidated Financial Statements and notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
------------------------------------------ SEPTEMBER 30,
PREDECESSOR ----------------------
1994 1995(1) 1996 1997 1997 1998
----------- -------- -------- --------- --------- -----------
(IN THOUSANDS, EXCEPT LOSS PER SHARE)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues................................... $ 4,702 $ 18,617 $113,257 $ 300,796 $ 192,604 $ 564,118
Operating costs and expenses:
Cost of services (exclusive of
depreciation and amortization shown
separately below)...................... (4,923) (17,510) (98,461) (265,321) (171,203) (462,181)
Selling, general and administrative
expenses............................... (2,395) (9,639) (38,893) (94,712) (62,085) (147,494)
Depreciation and amortization............ (240) (849) (6,655) (21,819) (14,367) (43,282)
------- -------- -------- --------- --------- ---------
(7,558) (27,998) (144,009) (381,852) (247,655) (652,957)
------- -------- -------- --------- --------- ---------
Loss from operations....................... (2,856) (9,381) (30,752) (81,056) (55,051) (88,839)
Interest income............................ -- 173 3,976 13,826 9,947 13,239
Interest expense........................... (225) (194) (11,359) (39,373) (28,910) (51,646)
Other income (expense)--Net................ -- -- 470 6,595(2) 6,572(2) 445
Foreign exchange loss...................... -- -- -- -- -- (10,621)
Minority interest.......................... -- -- (180) 210 (212) 4,322
Income taxes............................... -- -- (395) (401) (405) (726)
Loss in equity interest of unconsolidated
subsidiaries............................. -- -- -- -- -- (1,625)
------- -------- -------- --------- --------- ---------
Loss before extraordinary item............. (3,081) (9,402) (38,240) (100,199) (68,059) (135,451)
Extraordinary item(3)...................... -- -- -- -- -- (20,800)
------- -------- -------- --------- --------- ---------
Net loss................................... $(3,081) $ (9,402) $(38,240) $(100,199) $ (68,059) $(156,251)
------- -------- -------- --------- --------- ---------
------- -------- -------- --------- --------- ---------
Loss per share before extraordinary
item(3)(4)............................... $(15.41) $ (1.67) $ (5.13) $ (5.27) $ (2.16) $ (3.17)
Net loss per share(3)(4)................... $(15.41) $ (1.67) $ (5.13) $ (5.27) $ (2.16) $ (3.66)
Weighted average number of shares of Common
Stock outstanding(4)..................... 200 5,641 7,448 19,008 31,541 42,740
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
------------------------------------------------ SEPTEMBER 30,
PREDECESSOR -----------------------
1994 1995 1996 1997 1997 1998
----------- -------- --------- -------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
EBITDA(5) (as defined)..................... $(2,616) $ (8,532) $ (23,807) $(52,432) $(34,324) $ (40,790)
Ratio of earnings to fixed charges(6)...... -- -- -- -- -- --
Capital expenditures(7).................... 1,126 6,074 23,880 49,417 26,835 104,868
Cash (used in) provided by operating
activities............................... (1,987) 3,554 (10,475) (91,812) (60,443) (116,367)
Cash (used in) provided by investing
activities............................... (478) (16,537) (225,000) (18,821) 25,305 (312,772)
Cash (used in) provided by financing
activities............................... 2,888 18,143 335,031 152,035 (14,976) 376,011
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------- AS OF SEPTEMBER 30,
PREDECESSOR -----------------------
1994 1995 1996 1997 1997 1998
----------- ------- -------- -------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 452 $ 5,163 $104,068 $144,894 $ 52,706 $ 82,196
Securities available for sale.............. -- -- 67,828 13,858 24,093 --
Restricted marketable securities(8)........ -- -- 104,370 68,836 86,034 30,579
Total assets............................... 3,682 53,072 427,969 605,664 435,961 1,167,049
Short-term debt, current portion of
long-term debt and current portion of
capital lease obligations(9)............. 2,645 5,506 6,974 8,033 5,438 17,700
Long-term debt and capital lease
obligations(9)........................... 1,404 6,648 314,425 316,608 316,677 718,767
Shareholders' (deficiency) equity.......... (3,651) 5,705 20,843 126,699 (14,275) 18,019
</TABLE>
- ------------------
(1) Effective with the acquisition of a majority equity interest in RSL North
America in September 1995, the Company began to consolidate RSL North
America's operations. From March 1995 (the date of the Company's initial
investment) to September 1995, the Company accounted for its investment in
RSL North America using the equity method of accounting.
(2) Other income includes the reversal of certain liabilities accrued in
connection with the Company's obligations under an agreement that required
the Company to meet a carrier vendor's minimum usage requirements, which
agreement was entered into by a subsidiary of the Company prior to the
Company's acquisition of such subsidiary. During May 1997, the Company
renegotiated the contract with this carrier vendor resulting in the
elimination of approximately $7.0 million of previously accrued charges.
(3) Extraordinary item represents primarily the premium paid to retire
approximately $127.5 million of the original $300.0 million of the Company's
1996 Notes.
(4) Loss per share is calculated by dividing the loss attributable to Common
Stock by the weighted average number of shares of Common Stock outstanding,
and has been retroactively restated to reflect the 2.19-for-one stock split.
Shares issuable pursuant to outstanding stock options, unexercised Warrants,
the Lauder Warrants, Roll-up Rights or Incentive Units or in the Telegate
Exchange are not included in the loss per common share calculation as their
effect is anti-dilutive.
(5) EBITDA (as defined) consists of loss before interest, loss in equity
interest of unconsolidated subsidiaries, income taxes, extraordinary item,
depreciation and amortization and foreign exchange loss. EBITDA (as defined)
is provided because it is a measure commonly used in the telecommunications
industry. It is presented to enhance an understanding of the Company's
operating results and is not intended to represent cash flow or results of
operations in accordance with U.S. GAAP for the periods indicated. The
Company's use of EBITDA (as defined) may not be comparable to similarly
titled measures used by other companies due to the use by other companies of
different financial statement components in calculating EBITDA.
(6) The ratio of earnings to fixed charges is computed by dividing the loss from
operations before fixed charges by fixed charges. Fixed charges consist of
interest charges and amortization of debt issuance costs, whether expensed
or capitalized and that portion of rental expense deemed to be
representative of interest. For the years ended December 31, 1994, 1995,
1996 and 1997 and the nine months ended September 30, 1997 and 1998,
earnings were insufficient to cover fixed charges by approximately $3.1
million, $9.4 million, $37.7 million, $100.0 million, $67.4 million and
$137.4 million, respectively.
(7) Capital expenditures include assets acquired through capital lease financing
and other debt.
(8) The restricted marketable securities consist of U.S. government securities
pledged to secure the payment of interest on the principal amount of the
1996 Notes. See "Description of Certain Indebtedness--1996 Notes."
(9) As of September 30, 1998, the Company had approximately $3.4 million of
available (undrawn) borrowing capacity under its current bank and vendor
facilities.
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements, including the notes thereto, appearing
elsewhere in this Prospectus.
OVERVIEW
GENERAL
The Company is a rapidly growing multinational telecommunications company
which provides a broad array of services, with a focus on international long
distance voice services to small and medium-sized businesses in key markets. The
Company's services include international and national fixed and wireless,
calling card, fax, data, Internet, private line and other value-added
telecommunications services. The Company currently has revenue generating
operations in Australia, Austria, Belgium, Canada, Denmark, Finland, France,
Germany, Italy, Japan, Luxembourg, The Netherlands, Portugal, Spain, Sweden,
Switzerland, the United Kingdom, the United States and Venezuela. In 1997,
approximately 70% of all international long distance telecommunications minutes
originated in these markets. The Company is also in the process of commencing
start-up operations through its investments in an entity in Mexico. See
"Business--Latin American Operations--General." The Company plans to expand its
operations and network into additional key markets which account for a
significant portion of the world's remaining international traffic.
NORTH AMERICA. The Company commenced operations in the U.S. in 1995 and
has since implemented solutions designed to improve the operations of RSL COM
U.S.A., Inc. ("RSL USA"). The Company added key members to its management and
purchased and developed additional management software systems which provide
current traffic provisioning and an enhanced ability to predict future traffic
volume. The Company also successfully negotiated and continues to negotiate rate
reductions and more appropriate transmission capacity arrangements based on the
Company's current and anticipated capacity requirements. In addition, the
Company anticipates that expanded utilization of its own facilities (as such
component of RSL-NET continues to grow) will result in more cost-efficient
methods of transport for its U.S. business.
As of September 30, 1998, the Company had recorded approximately
$277.1 million of goodwill in connection with its North American acquisitions.
Goodwill represents the excess of cost over the fair value of the net
assets of acquired entities. The Company's component cost and purchase price
allocation for its North American acquisitions for each of the three years ended
December 31, 1995, 1996 and 1997 and for the nine month period ended
September 30, 1998 are as follows:
<TABLE>
<CAPTION>
COMPONENT COST AND PURCHASE PRICE
ALLOCATION
-------------------------------------
SEPTEMBER 30,
1995 1996 1997 1998
---- ---- ---- -------------
($ IN MILLIONS)
<S> <C> <C> <C> <C>
ASSETS ACQUIRED:
Cash and cash equivalents.......................... 7.4 -- 5.1 1.0
Accounts receivable................................ 9.0 -- 5.2 29.5
Telecommunications equipment....................... 4.5 -- 0.8 35.1
Deposits and others................................ 1.9 -- 0.5 4.6
Intangible assets--goodwill........................ 29.3 26.3 80.6 140.9
LIABILITIES ASSUMED:
Accounts payable and other long-term liabilities... 32.6 7.0 12.4 73.4
Long-term debt..................................... 5.1 -- -- --
EQUITY:
Increase to shareholders' equity................... -- -- 38.2 8.7
TOTAL CASH INVESTED.................................. 14.4 19.3 41.6 129.0
TOTAL NET LIABILITIES ASSUMED........................ 14.9 7.0 0.8 3.2
TOTAL STOCK ISSUED................................... -- -- 38.2 8.7
---- ---- ---- -----
TOTAL GOODWILL RECORDED/TOTAL PURCHASE PRICE......... 29.3 26.3 80.6 140.9
---- ---- ---- -----
---- ---- ---- -----
</TABLE>
28
<PAGE>
EUROPE. Member States are in various stages of deregulation. Deregulation
in these countries may occur either because the Member States of the EU decide
to open up their own markets (e.g., the United Kingdom, Sweden and Finland) or
because they are directed to do so by the European Commission ("EC") through one
or more directives issued thereby. In the latter case, such an EC directive
would be addressed to the national legislative body of each 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 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 public switched telephone network ("PSTN") to the Company's switches.
See "Business--International Long Distance Mechanics."
As of September 30, 1998, the Company had recorded an aggregate of
approximately $155.2 million of goodwill in connection with its European
acquisitions. Goodwill represents the excess of cost over the fair value of the
net assets of acquired entities. The Company's component cost and purchase price
allocation for its European acquisitions for each of the three years ended
December 31, 1995, 1996 and 1997 and for the nine-month period ended
September 30, 1998 are as follows:
<TABLE>
<CAPTION>
COMPONENT COST AND PURCHASE PRICE
ALLOCATION
-------------------------------------
SEPTEMBER 30,
1995 1996 1997 1998
---- ---- ---- -------------
($ IN MILLIONS)
<S> <C> <C> <C> <C>
ASSETS ACQUIRED:
Cash............................................... -- 2.3 1.7 0.9
Accounts receivable................................ 0.2 0.6 2.3 28.1
Telecommunications equipment....................... -- 2.2 0.8 3.7
Deposits and others................................ -- 0.3 0.4 16.5
Intangible assets--goodwill........................ 0.9 24.7 33.7 95.9
LIABILITIES ASSUMED:
Accounts payable and other long-term liabilities... 0.2 5.9 5.0 52.8
Lease commitments.................................. -- 2.4 -- --
EQUITY:
Increase to shareholders' equity................... -- -- 3.4 --
TOTAL CASH INVESTED.................................. 0.9 21.8 30.5 92.3
TOTAL LIABILITIES (ASSETS) ASSUMED................... -- 2.9 (0.2) 3.6
TOTAL STOCK ISSUED................................... -- -- 3.4 --
---- ---- ---- -----
TOTAL GOODWILL RECORDED/TOTAL PURCHASE PRICE......... 0.9 24.7 33.7 95.9
---- ---- ---- -----
---- ---- ---- -----
</TABLE>
REVENUES
The Company provides both domestic and international long distance services
and derives its revenues principally from the provision of international long
distance voice telecommunication services. Revenues are derived from the number
of minutes of use (or fractions thereof) billed by the Company ("revenue
minutes") and are recorded upon completion of calls. The Company also derives
revenues from prepaid calling cards. These revenues are recognized at the time
of usage or upon expiration of the card. The Company maintains local market
pricing structures for its services and generally prices its services at a
discount to the prices charged by the local PTTs and major carriers. The Company
has
29
<PAGE>
experienced, and expects to continue to experience, declining revenue per minute
in all of its markets as a result of increasing competition in
telecommunications, which the Company expects will be offset by increased minute
volumes and decreased operating costs per minute. See "Risk Factors--The Rapidly
Changing Industry in Which We Operate Presents Risks and Uncertainties" and
"--Our Markets Are Highly Competitive."
NORTH AMERICAN OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------------------------
NINE MONTHS ENDED
PREDECESSOR SEPTEMBER 30,
----------- ----------------------
1994 1995 1996 1997 1997 1998
------- ------- -------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PERCENTAGE OF CONSOLIDATED REVENUES)
<S> <C> <C> <C> <C> <C> <C>
Revenues....................................... $ 4,702 $18,461 $ 85,843 $ 194,518 $ 127,491 $ 305,673
Percentage of consolidated revenues............ 100.0% 99.2% 75.8% 64.7% 66.2% 54.2%
Operating costs and expenses:
Cost of services (exclusive of depreciation
and amortization shown separately
below).................................... (4,923) (17,367) (76,892) (176,780) (117,666) (253,200)
Selling, general and administrative
expenses.................................. (2,395) (7,444) (17,606) (38,207) (20,478) (53,348)
Depreciation and amortization................ (240) (619) (3,047) (5,650) (4,009) (8,014)
------- ------- -------- --------- --------- ---------
(7,558) (25,430) (97,545) (220,637) (142,153) (314,562)
------- ------- -------- --------- --------- ---------
Loss from operations........................... $(2,856) $(6,969) $(11,702) $ (26,119) $ (14,662) $ (8,889)
------- ------- -------- --------- --------- ---------
------- ------- -------- --------- --------- ---------
</TABLE>
Prior to 1997, the Company's revenues had been primarily derived from its
operations within the United States. The Company's U.S. revenues result
primarily from the sale of long distance voice services on a wholesale basis to
other carriers, on a retail basis to commercial customers and on a bulk discount
basis to distributors of prepaid calling cards. The Company experiences
significant month to month changes in revenues generated by its carrier
customers (i.e., customers who acquire the Company's services for the purpose of
reselling such services on a wholesale basis to other carriers or on a retail
basis to end users). The Company believes such carrier customers will react to
temporary price fluctuations and spot market availability that will impact the
Company's carrier revenues. Over the past two years, the Company has shifted its
marketing focus in the United States to small and medium-sized businesses and
has restructured its pricing of wholesale services to other carriers. The
Company believes that as a result of these changes to its business and as a
result of utilizing a greater proportion of owned versus leased facilities, the
Company has begun to experience decreasing quarterly losses commencing in
January 1998. The Company has derived increased revenues from its commercial
customers, and it continues to reduce its reliance on wholesale carrier
revenues. The Company will also begin deriving revenues as a result of its
recent acquisition of operations in Canada. See "--Overview" in this Section.
30
<PAGE>
EUROPEAN OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------------------- -----------------------
1995 1996 1997 1997 1998
------- -------- ----------- --------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGE OF CONSOLIDATED REVENUES)
<S> <C> <C> <C> <C> <C>
Revenues....................................... $ 156 $ 27,414 $ 73,653 $ 51,220 $ 168,672
Percentage of consolidated revenues............ 0.8% 24.2% 24.5% 26.6% 29.9%
Operating costs and expenses:
Cost of services (exclusive of depreciation
and amortization shown separately
below).................................... (143) (21,569) (59,516) (40,746) (136,779)
Selling, general and administrative
expense................................... (539) (17,377) (43,004) (32,879) (64,118)
Depreciation and amortization................ (12) (1,906) (7,038) (4,298) (14,298)
------- -------- --------- --------- ----------
(694) (40,852) (109,558) (77,923) (215,195)
------- -------- --------- --------- ----------
Loss from operations........................... $ (538) $(13,438) $ (35,905) $ (26,703) $ (46,523)
------- -------- --------- --------- ----------
------- -------- --------- --------- ----------
</TABLE>
The Company commenced European operations in certain countries in the
second quarter of 1996 and has since established operations in many additional
European countries.
Substantially all revenues from the Company's European operations are
derived from commercial sales to end-users. Sales are targeted at small to
medium-sized corporate customers, as well as to niche consumer markets
(including selected ethnic communities). To reduce its credit risk to such niche
consumer markets, the Company primarily offers prepaid products to its targeted
consumer. Each of the countries in which the Company operates has experienced
different levels of deregulation, resulting in various levels of competition and
differing ranges of services which the Company is permitted to offer its
customers. The Company also believes that as it pursues its strategic growth
strategy it will continue to encounter various degrees of start-up time.
EFFECT OF DEREGULATION ON EUROPEAN REVENUES. The Company operates, or will
soon operate, in various countries in Europe, each of which is in a different
state of deregulation. In certain of these countries, current regulatory
restrictions limit the Company's ability to offer a broader array of products
and services and limit the availability of those services to customers.
Accordingly, the Company anticipates that deregulation will have a favorable
impact on revenues because (i) customers will be able to access the Company's
services more easily and (ii) the Company will have the ability to provide a
broader array of products and services. The Company believes that, with
established or start-up operations in 14 European countries, it will be well
positioned to benefit from the anticipated deregulation of European markets.
However, there can be no assurance regarding the timing or extent of
deregulation in any particular country. See "Risk Factors--The Rapidly Changing
Industry in Which We Operate Presents Risks and Uncerainties," "--Government
Regulations Restrict Our Operations" and "Business--European
Operations--General--Regulatory Environment."
31
<PAGE>
ASIA/PACIFIC RIM OPERATIONS
<TABLE>
<CAPTION>
INCEPTION
INCEPTION (APRIL 1997 NINE MONTHS
(APRIL 1997 THROUGH ENDED
THROUGH DECEMBER SEPTEMBER 30, SEPTEMBER 30,
31, 1997) 1997) 1998
----------------- ------------------ ------------------
(IN THOUSANDS EXCEPT PERCENTAGE OF CONSOLIDATED REVENUES)
<S> <C> <C> <C>
Revenues......................................... $32,333 $ 13,836 $ 89,219
Percentage of consolidated revenues.............. 10.7% 7.2% 15.8%
Operating costs and expenses:
Cost of services (exclusive of depreciation and
amortization shown separately below)........... (28,873) (12,756) (71,738)
Selling, general and administrative expenses... (5,827) (2,674) (20,555)
Depreciation and amortization.................. (824) (268) (3,604)
------- -------- --------
(35,524) (15,698) (95,897)
------- -------- --------
Loss from operations............................. $(3,191) $ (1,862) $ (6,678)
------- -------- --------
------- -------- --------
</TABLE>
The Company commenced Asian/Pacific Rim revenue producing operations
through its Australian entity with the acquisition of a customer base in
Australia in the second quarter of 1997. The Company initiated operating in
Japan through RSL COM Japan K.K. ("RSL Japan") in July 1998.
LATIN AMERICAN OPERATIONS
The Company commenced Latin American revenue producing operations in
Venezuela in the third quarter of 1997. The Company's operations in Venezuela
have generated approximately $846,000 in revenues from August 1997 through
September 30, 1998.
COST OF SERVICES (EXCLUSIVE OF DEPRECIATION AND AMORTIZATION)
The Company's cost of services is comprised of costs associated with
gaining local access and the transport and termination of calls over RSL-NET.
The majority of the Company's cost of services are variable, including local
access charges and transmission capacity leased on a per-minute of use basis.
The Company plans to make significant investments in IRUs, MIUs and domestic
circuits and, as a result, expects an increasing amount of its total operating
costs to become fixed, as the volume of the Company's calls carried over its own
facilities increases. As the Company migrates increasing 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 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.
32
<PAGE>
EFFECT OF DEREGULATION ON EUROPEAN COST OF SERVICES (EXCLUSIVE OF DEPRECIATION
AND AMORTIZATION)
The Company's current cost structure varies from country to country, in
part, as a result of the different level of regulatory policies in place in each
country. In general, the Company's cost structure is lower in countries that
have been substantially deregulated than in those which are partially
deregulated and certain of the Company's European operations have become cash
flow positive. In countries that are not substantially deregulated, the
Company's access to the local exchange network is through more expensive means
(i.e., leased lines or dial-in access). This results in higher costs to the
Company for carrying international traffic originating within one country and
terminating in another country. In addition, local regulations in many countries
restrict the Company from purchasing capacity on international cable and fiber
systems. The Company must instead either enter into long-term lease agreements
for international capacity at a high fixed cost or purchase per-minute of use
termination rates from the dominant carrier. Deregulation in countries in which
the Company operates is expected to permit the Company to (i) interconnect its
switches with the local exchange network and (ii) purchase its own international
facilities. The Company believes that deregulation will result in improved
European operating results. Deregulation in a particular country is also
expected to permit the Company to terminate international inbound traffic in
such country which will result in an improved cost structure for the Company as
a whole. However, the foregoing is a forward-looking statement and there can be
no assurance that deregulation will proceed as expected or lower the Company's
cost of services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The Company's selling, general and administrative expenses consist of costs
incurred to support the continued expansion of RSL-NET, the introduction of new
services and the provision of ongoing customer service. These costs are
principally comprised of costs associated with employee compensation, occupancy,
insurance, professional fees, sales and marketing (including sales commissions)
and bad debt expenses. In addition, as the Company commences operations in
different countries, it incurs significant start-up costs, particularly for
hiring, training and retention of personnel, leasing of office space and
advertising. The Company's selling, general and administrative expense also
includes the settlement of various claims and disputes relating, primarily, to
pre-acquisition periods.
The Company has grown and intends to continue to grow by establishing
operations in countries that are in the process of being deregulated and that
originate and terminate large volumes of international traffic or offer other
strategic benefits. Each of the Company's operations is in a different stage of
development. The early stages of development of a new operation involve
substantial start-up costs in advance of revenues. Upon the commencement of such
operations, the Company generally incurs additional fixed costs to facilitate
growth. The Company expects that during periods of significant expansion,
selling, general and administrative expenses will increase materially.
Accordingly, the Company's consolidated results of operations will vary
depending on the timing and speed of the Company's expansion strategy and,
during a period of rapid expansion, will not necessarily reflect the performance
of the Company's more established Local Operators.
FOREIGN EXCHANGE
The Company is exposed to fluctuations in foreign currencies relative to
the U.S. dollar, as its revenues, costs, assets and liabilities are, for the
most part, denominated in local currencies. The results of operations of the
Company's subsidiaries, as reported in U.S. dollars, may be significantly
affected by fluctuations in the value of the local currencies in which the
Company transacts business.
The Company recorded a foreign currency translation adjustment of
$4.7 million and $6.7 million for the year ended December 31, 1997 and for the
nine months ended September 30, 1998, respectively. Such amount is recorded upon
the translation of the foreign subsidiaries' financial statements into U.S.
dollars, and is dependent upon the various foreign exchange rates and the
magnitude of the foreign subsidiaries' financial statements.
33
<PAGE>
The Company incurs settlement costs when it exchanges traffic via operating
agreements with foreign correspondents. These costs currently represent a small
portion of the total costs of services; however, as the Company's international
operations increase, it expects that these costs will become a more significant
portion of its cost of services. Such costs are settled by utilizing a net
settlement process with the Company's foreign correspondents comprised of
special drawing rights ("SDRs"). SDRs are the established method of settlement
among international telecommunications carriers. The SDRs are valued based upon
a basket of foreign currencies and the Company believes that this mitigates, to
some extent, its foreign currency exposure.
The Company has monitored and will continue to monitor its currency
exposure. See "Risk Factors--Our Results May Be Affected By Devaluation and
Currency Risks."
ACQUISITION ACCOUNTING
Since its formation in 1994, the Company has expanded its revenues,
customer base and network through internal growth and acquisitions. All of its
acquisitions were negotiated on an arm's length basis with unaffiliated third
parties. The Company accounted for all of its acquisitions of controlling
interests using the purchase method of accounting and, accordingly, the
respective purchase prices have been allocated to the assets acquired and
liabilities assumed based on their estimated fair values at their dates of
acquisition. The excess of the purchase price over the estimated fair values of
the net assets acquired has been recorded as goodwill, which is being amortized
over a 15-year period. For periods prior to April 1, 1996, the Company had
included 100% of the losses of its loss generating subsidiaries in its results
of operations because the book value of the minority interests in these
subsidiaries has been reduced to below zero. The Company's non-U.S. subsidiaries
denominate revenues, costs, assets and liabilities for the most part in local
currencies. All of the subsidiaries, however, report their financial results in
U.S. dollars pursuant to U.S. GAAP. See "--Foreign Exchange."
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
REVENUES. Revenues increased to $564.1 million for the nine months ended
September 30, 1998 compared to $192.6 million for the nine months ended
September 30, 1997, an increase of 193%. This increase is due primarily to an
increase in the Company's North American revenues from $127.5 million for the
nine months ended September 30, 1997 to $305.7 million for the same period this
year and the Company's European revenues, which increased from $51.2 million for
the nine months ended September 30, 1997 to $168.7 million for the same period
this year. The Company had revenue generating operations in the United States,
Canada, 14 European countries, Venezuela, Australia and Japan during the first
nine month period of 1998. The increase in the Company's North American revenues
was primarily due to acquisitions, which contributed $98.1 million and $0.0 for
the nine months ended September 30, 1998 and 1997, respectively, a significant
increase in the Company's U.S. commercial customer base and increased traffic
volume from existing customers. Revenues from the Company's European operations
increased as a result of increased sales of prepaid calling cards, which
contributed $20.6 million and $0.0 for the nine months ended September 30, 1998
and 1997, respectively, through acquisitions, primarily the Motorola Tel.co
acquisition, completed after September 30, 1997, which contributed
$62.6 million to the Company's September 30, 1998 European revenues, and an
increase in the European customer base. Revenues from the Company's Asia/Pacific
Rim operations increased to $89.2 million for the nine months ended
September 30, 1998, compared with $13.8 million for the same period of 1997,
primarily as a result of various acquisitions which had taken place throughout
the period.
COST OF SERVICES (EXCLUSIVE OF DEPRECIATION AND AMORTIZATION DISCUSSED
SEPARATELY BELOW). Cost of services increased to $462.2 million for the nine
months ended September 30, 1998 from $171.2 million for the nine months ended
September 30, 1997, an increase of 170%. This increase is primarily due to
increased traffic and, to a certain extent, increased rates paid to the
Company's carrier vendors. As a percentage of revenues, cost of services
decreased to 81.9% for the nine months ended
34
<PAGE>
September 30, 1998 from 88.9% for the nine months ended September 30, 1997. The
decrease in cost of services as a percentage of revenues is primarily
attributable to the increased diversification in the Company's customer base,
increase in commercial accounts and mobile subscribers which positively impacted
the Company's profitability, and the improvement in the Company's North American
operations' costs of services which represented 54.8% of the Company's total
cost of services in the period. This was offset by the Company's European
operations which experienced problems in purchasing capacity in Germany and
France due to certain delays in implementing deregulation in these countries.
Accordingly, traffic arising from increased prepaid card sales in these
countries had to be carried over uneconomical overflow capacity which produced
low and in certain cases negative gross margins for the Company's prepaid
operations in Germany and France. The Company believes that these capacity
problems were temporary and have since been corrected. In order to reduce costs,
the Company intends to purchase additional capacity, if and when regulations
permit, in each of the Company's respective countries of operation, on routes on
which it has experienced, or anticipates experiencing, overflow traffic.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense for the nine months ended September 30, 1998 increased by
$85.4 million, or 138%, to $147.5 million from $62.1 million for the nine months
ended September 30, 1997. This increase is primarily attributable to costs of
start-ups in and expansion of the Company's European operations, the hiring of
new personnel in Europe and as a result of acquisitions in North America and
Australia. The Company's European operations contributed $64.1 million or 43.5%
of the Company's consolidated SG&A for the nine months ended September 30, 1998,
although such operations accounted for only 29.9% of the Company's total
revenues in such period. European selling, general and administrative expense
increased as a result of the Motorola Tel.co acquisition and the significant
increase in employees in many of the Company's European operations. Selling,
general and administrative expense will continue to increase as a result of
start-up costs and infrastructure expansion and start-up costs attributable to
new local operations.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense increased 201% to $43.3 million for the nine months ended September 30,
1998 from $14.4 million for the nine months ended September 30, 1997. This
increase is primarily attributable to the increased amortization of goodwill
recorded as a result of the Company's acquisitions. Depreciation and
amortization expense is expected to increase in the future as the Company
acquires additional businesses and assets.
INTEREST INCOME. Interest income increased to $13.2 million for the nine
months ended September 30, 1998 from $9.9 million for the nine months ended
September 30, 1997, primarily as a result of interest earned on the proceeds of
the 1998 Notes (as defined herein).
INTEREST EXPENSE. Interest expense increased to $51.6 million for the nine
months ended September 30, 1998 from $28.9 million for the nine months ended
September 30, 1997, primarily as a result of interest related to the 1998 Notes.
FOREIGN EXCHANGE LOSS. Foreign exchange loss increased to $10.6 million
for the nine months ended September 30, 1998 from $0.0 for the nine months ended
September 30, 1997, primarily as a result of the increase in the Deutsche mark
against the U.S. dollar in connection with the Company's 1998 Deutsche mark
denominated Senior Discount Notes.
LOSS IN EQUITY INTEREST OF UNCONSOLIDATED SUBSIDIARIES. Loss in equity
interest of unconsolidated subsidiaries increased to $1.6 million for the nine
months ended September 30, 1998 from $0.0 for the nine months ended
September 30, 1997 to account for the Company's pro-rata allocable loss in its
investment in Maxitel (as defined) and Telegate (as defined).
LOSS BEFORE EXTRAORDINARY ITEM. Loss before extraordinary item increased
to $135.5 million for the nine months ended September 30, 1998, as compared to
net loss of $68.1 million for the nine months ended September 30, 1997 due to
the factors described above. An extraordinary item of $20.8 million for the nine
months ended September 30, 1998 represents primarily the premium paid to retire
approximately $127 million of the original $300 million of the Company's 1996
Notes. The Company had no such expense in the nine-month period ended September
30, 1997.
35
<PAGE>
YEARS ENDED DECEMBER 31, 1997 AND 1996
REVENUES. Revenues increased to $300.8 million for the year ended December
31, 1997 compared to $113.3 million for the year ended December 31, 1996, an
increase of 165.6%. This increase was due primarily to an increase in the
Company's U.S. revenues from $85.8 million for the year ended December 31, 1996
to $194.5 million for the year ended December 31, 1997 and the Company's
European revenues, which increased from $27.4 million for the year ended
December 31, 1996 to $73.7 million for the year ended December 31, 1997. The
Company generated revenues in the United States, in 10 European countries, and
in Australia and Venezuela during the fourth quarter of 1997. The Company had
revenue producing operations in only the United States and five European
countries in 1996. The increase in U.S. revenues was primarily due to increased
traffic volume from existing customers, increases in the Company's U.S.
commercial customer base and the LDM acquisition on October 1, 1997 which
contributed $13.1 million (for the period October 1, 1997 to December 3, 1997)
to the Company's December 31, 1997 revenue. The increase in the Company's
European revenues was primarily due to increased traffic volume from existing
customers, increases in the Company's commercial customer base in the United
Kingdom, Sweden, Finland, Germany and The Netherlands. The Company's 1996
European acquisitions in France, Germany and The Netherlands contributed $32.7
million in revenue for the full 1997 year end compared to revenues of $16.5
million recorded from the dates of their respective acquisitions to
December 31, 1996.
COST OF SERVICES (EXCLUSIVE OF DEPRECIATION AND AMORTIZATION DISCUSSED
SEPARATELY BELOW). Cost of services increased to $265.3 million for the year
ended December 31, 1997 from $98.5 million for the year ended December 31, 1996,
an increase of 169.5%. This increase was primarily due to increased traffic and
increased rates paid to the Company's carrier vendors. As a percentage of
revenues, cost of services increased to 88.2% for the year ended December 31,
1997 from 86.9% for the year ended December 31, 1996. The increase in cost of
services as a percentage of revenues was primarily attributable to the Company's
U.S. operations' cost of services, which represented 66.6% of the Company's
total cost of services. Although the Company anticipated a decrease in U.S. and
European cost of services during 1997, rapid revenue growth in excess of the
Company's expectations continued to cause traffic overflow resulting in higher
cost of services, and increased operating losses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense for the year ended December 31, 1997 increased by $55.8
million, or 143.5%, to $94.7 million from $38.9 million for the year ended
December 31, 1996. This increase is primarily attributable to the costs
associated with the Company's expansion into nine new markets and the concurrent
hiring of more than 1,000 new personnel. The Company also recognized all of the
costs associated with opening new offices, commencing advertising campaigns and
product development. As a percent of U.S. revenues, the Company's U.S. selling,
general and administrative expense decreased to 19.6% for the year ended
December 31, 1997 from 20.5% for the prior year. The Company's U.S. bad debt
expense for the year ended December 31, 1997 increased by $8.1 million or 289%
to $10.9 million from $2.8 million for the year ended December 31, 1996. This
increase was primarily attributable to a 127% increase in the Company's U.S.
revenues for the same period and increased credit exposure primarily due to the
increased diversity in the Company's customer base. Additionally, the Company's
1997 bad debt expense included approximately $3.0 million of bad debt recorded
in connection with the bankruptcy filing of one of the Company's major
customers, Cherry Communications. As a percent of European revenues, the
Company's European selling, general and administrative expense decreased to
58.4% for the year ended December 31, 1997 from 63.4% for the prior year. The
Company's consolidated selling, general and administrative expense in Europe was
45.4% of its total consolidated selling, general and administrative expense,
despite such operations accounting for only 24.5% of the Company's total
revenues because of a greater proportion of start-up and expansion costs.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense increased 227.9% to $21.8 million for the year ended December 31, 1997
from $6.7 million for the year ended December 31, 1996, an increase of $15.1
million. This increase was primarily attributable to the increased amortization
of goodwill recorded as a result of the Company's acquisitions.
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<PAGE>
INTEREST INCOME. Interest income increased to $13.8 million for the year
ended December 31, 1997 from $4.0 million for the year ended December 31, 1996,
primarily as a result of interest earned on the remaining net proceeds of the
1996 Units Offering (as defined) and the net proceeds from the initial public
offering of Class A Common Stock in October 1997 (the "IPO").
INTEREST EXPENSE. Interest expense increased to $39.4 million for the year
ended December 31, 1997 from $11.4 million for the year ended December 31, 1996,
an increase of approximately $28.0 million, as a result of interest related to
the 1996 Notes.
NET LOSS. Net loss increased to $100.2 million for the year ended December
31, 1997, as compared to a net loss of $38.2 million for the year ended December
31, 1996 due to the factors described above.
YEARS ENDED DECEMBER 31, 1996 AND 1995
REVENUES. Revenues increased to $113.3 million for the year ended December
31, 1996 from $18.6 million for the year ended December 31, 1995, an increase of
509%. This increase was due primarily to the full year of U.S. operations
consolidated in the 1996 results of operations compared to only three months of
the Company's U.S. operations consolidated in the historical statement of
operations for 1995. The Company experienced an increase in commercial customers
at each of the Company's operations. The Company's Swedish, Finnish and U.K.
operations began generating revenues in May 1996 and contributed approximately
$7.8 million to 1996 revenues. The Company purchased Sprint's international
voice operations in France and Germany in May 1996. These operations contributed
approximately $13.1 million to 1996 revenues. The Company's European operations
generated minimal revenues in 1995. For the year ended December 31, 1996,
approximately 24% of the Company's revenues were generated from the Company's
European operations.
In connection with the Company's shift in marketing focus to small and
medium-sized businesses, the Company determined in December 1995 that certain
carrier customers provided the Company with margins below its targeted levels
for margin contribution. Accordingly, the Company established new pricing
structures and terminated service to the low or zero margin customers which did
not agree to the new pricing structures. In addition, the Company terminated
service in February 1996 to its largest wholesale customer because of such
customer's inability to pay for past services. This customer represented
approximately 11% of RSL North America's revenues in 1995. The Company commenced
legal proceedings to recover amounts owed to the Company by such customer. The
Company also instituted stricter credit criteria to reduce its bad debt
exposure.
To compensate for the loss of such revenues, the Company accelerated its
U.S. sales efforts to small and medium-sized businesses during 1996, resulting
in increased sales to this segment.
COST OF SERVICES (EXCLUSIVE OF DEPRECIATION AND AMORTIZATION DISCUSSED
SEPARATELY BELOW). Cost of services increased to $98.5 million for the year
ended December 31, 1996 from $17.5 million for the year ended December 31, 1995,
an increase of 463%. This increase was due primarily to the full year of U.S.
operations that is consolidated in the 1996 results of operations compared to
only three months of the Company's U.S. operations consolidated in the
historical statement of operations for 1995. As a percentage of revenues, cost
of services decreased to 86.9% for the year ended December 31, 1996 from 94.1%
for the year ended December 31, 1995. The decrease in cost of services as a
percentage of revenues was primarily attributable to the Company's increased
European revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense for the year ended December 31, 1996 increased to $38.9
million from $9.6 million for the year ended December 31, 1995. This increase
was primarily attributable to the Company's investment in sales personnel and
marketing expense in order to generate increased revenue. Costs for start-up and
expansion of the Company's U.K., Dutch, Finnish and Swedish Local Operators
represented 30.1% and 5.6% of the Company's total selling, general and
administrative expense for the years ended
37
<PAGE>
December 31, 1996 and 1995, respectively, although they only accounted for 9.9%
and less than 1.0% of the Company's total revenues for the same periods.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense increased 689% to $6.7 million for the year ended December 31, 1996 from
$849,000 for the year ended December 31, 1995. This increase was primarily
attributable to the increased amortization of goodwill recorded as a result of
acquisitions. For the years ended December 31, 1996 and 1995, amortization of
goodwill amounted to approximately $2.9 million and $548,000, respectively. The
Company depreciates its switches over a five- to seven-year life, office
equipment is depreciated over their estimated useful lives which range from
three to seven years and its investments in MIUs and IRUs are depreciated over a
15-year life. Goodwill is amortized over 15 years.
INTEREST INCOME. Interest income increased to $4.0 million for the year
ended December 31, 1996 from $173,000 for the year ended December 31, 1995,
primarily as a result of interest earned on the net proceeds from an offering
completed in October 1996 (the "1996 Units Offering") of units consisting in the
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 Issuer's 12 1/4% Senior
Notes due 2006.
INTEREST EXPENSE. Interest expense increased to $11.4 million for the year
ended December 31, 1996 from $194,000 for the year ended December 31, 1995, an
increase of approximately $11.2 million, as a result of interest related to the
1996 Notes ($9.2 million) and borrowings under the Revolving Credit Facility
($748,000) and the remaining amounts due to interest related to capital leases.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred significant operating and net losses and negative
cash flow, due in large part to the start-up and development of the Company's
operations and RSL-NET. The Company expects that its net losses and negative
cash flow will increase as the Company implements its growth strategy.
Historically, the Company has funded its losses and capital expenditures through
capital contributions, borrowings and a portion of the net proceeds of prior
securities offerings. Cash used in operating activities for the nine months
ended September 30, 1998 totaled $116.4 million compared with $60.4 million for
the same period in 1997. Capital expenditures for the nine months ended
September 30, 1998 were $104.9 million compared with $26.8 million for the
comparable period in 1997. These capital expenditures are principally for
switches, fiber, and related telecommunications equipment. The Company intends
to increase significantly its capital expenditures to expand and develop the
Company's infrastructure, in part by replacing leased transmission facilities
with owned transmission lines, purchasing IRUs and interests in inter-city fiber
routes in European countries and installing additional national and
international telephone gateway switches. Funds expended for acquisitions were
$271.2 million during the nine months ended September 30, 1998 compared with
$26.8 million for the nine months ended September 30, 1997. At September 30,
1998, the Company had $28.6 million of working capital deficit as compared to
$83.1 million of working capital on December 31, 1997.
Cash provided by operating activities for the year ended December 31, 1995
and cash used in operating activities for the years ended December 31, 1996 and
1997 equaled $3.6 million, $10.5 million and $91.8 million, respectively.
Capital expenditures for the years ended December 31, 1995, 1996 and 1997 were
$6.1 million, $23.9 million and $49.4 million, respectively. These capital
expenditures were principally for switches and related telecommunications
equipment. Funds expended for acquisitions during the years ended December 31,
1995, 1996 and 1997 were $15.4 million, $38.6 million and $77.8 million,
respectively. During 1996, the Company funded its operating losses, capital
expenditures and acquisitions with borrowings of $44.5 million and a portion of
the net proceeds of the 1996 Units Offering. During 1997, the Company funded its
operating losses, capital expenditures and acquisitions with a portion of the
net proceeds of the 1996 Units Offering and a portion of the net proceeds of the
IPO. At December 31, 1997, the Company had $83.1 million of working capital as
compared to $124.9 million of working capital at December 31, 1996.
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<PAGE>
The Company's indebtedness was approximately $712.0 million at
September 30, 1998, of which $699.4 million represented long-term debt and
$12.6 million represented short-term debt. The Company's indebtedness was
approximately $304.6 million at December 31, 1997, of which $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 the Issuer and guaranteed by the Guarantor.
In October 1996, the Issuer consummated the offering of $300.0 million of
12 1/4% Senior Notes due 2006, $127.5 million of which were redeemed by the
Issuer in April 1998. In February 1998, the Issuer consummated the offering of
$200.0 million of 9 1/8% Senior Notes due 2008 and $328.1 million
($200.0 million initial accreted value) of 10 1/8% Senior Discount Notes due
2008. In March 1998, the Issuer consummated the offering of DM296.0 million
(approximately $99.1 million initial accreted value) of 10% Senior Discount
Notes. On November 9, 1998, the Company issued the Old 12% Notes, in the
principal amount at maturity of $100 million ($94.5 million initial accreted
value). In addition, on December 8, 1998, the company issued the Old 10 1/2%
Notes, in the principal amount of $200 million. The foregoing debt securities
(the "Existing Notes") were issued under indentures (the "Existing Indentures")
containing certain restrictive covenants which impose limitations on the
Company's ability to, among other things: (i) incur additional indebtedness,
(ii) pay dividends or make certain other distributions, (iii) issue capital
stock of certain subsidiaries, (iv) guarantee debt, (v) enter into transactions
with shareholders and affiliates, (vi) create liens, (vii) enter into
sale-leaseback transactions, and (viii) sell assets. See "Description of Certain
Indebtedness--1996 Notes," "--U.S. Dollar Notes," "--DM Notes," "--Old 12%
Notes" and "--Old 10 1/2% Notes."
In connection with the issuance of the 1996 Notes, the Issuer was required
to purchase and maintain restricted marketable securities, which are held by the
indenture trustee for the 1996 Notes, in order to secure the payment of the
first six scheduled interest payments on the 1996 Notes. The market value of
such restricted marketable securities was approximately $68.9 million at
December 31, 1997. The market value of such securities at September 30, 1998, as
adjusted to reflect the redemption of $127.5 million of the 1996 Notes, was
$31.0 million. See "Description of Certain Indebtedness--1996 Notes."
The commitment under the Company's revolving credit facility with The Chase
Manhattan Bank was $7.5 million at June 30, 1998, which amount was permanently
reduced to $5 million at July 1, 1998. Approximately $3.5 million of the
commitment under the facility was utilized at September 30, 1998 and at the date
of this Prospectus. The facility is payable on June 30, 1999 and accrues
interest, at the Company's option, at (i) the lender's prime rate per annum or
(ii) LIBOR plus 1% per annum. The Company, through LDM, has a $10.0 million
revolving credit facility. There was $8.1 million outstanding under this
facility at September 30, 1998. This facility is payable in full on
September 30, 2000 and accrues interest at prime rate plus 2.5% per annum. One
of the Company's primary equipment vendors has also provided to the Company
$75.0 million in vendor financing to fund the purchase of additional switching
and related telecommunications capital equipment. At September 30, 1998, there
was approximately $7.3 million available under this facility. Borrowings under
this vendor facility accrue interest at a rate of LIBOR plus either 5.25% or
4.5% per annum depending on the equipment purchased. See "Description of Certain
Indebtedness--Credit Facilities."
On December 1, 1998, the Company issued 7,000,000 shares of Class A Common
Stock in the 1998 Equity Offering. An additional 544,278 shares of Class A
Common Stock were issued by the Company on December 15, 1998 pursuant to the
Green Shoe. The net total proceeds to the Company were approximately
$169.0 million after deducting the underwriting discount and estimated expenses.
When market conditions are favorable, the Company plans to raise
substantial additional capital to fund its capital expenditures, acquisitions,
strategic alliances, start-up operations and anticipated substantial net losses.
If market conditions are not favorable, the Company believes that the net
proceeds from the issuance of the Old Notes and the 1998 Equity Offering,
together with the remaining net proceeds of prior securities offerings and
availability under its revolving credit facilities, vendor financing facility
and short-term lines of credit and overdraft facilities from local banks, will
be sufficient
39
<PAGE>
to fund a reduced capital expenditure and expansion plan for its existing
operations, as well as continuing net losses, for approximately 18 to 24 months.
However, the Company may be required to raise additional capital regardless of
market conditions if the Company's plans or assumptions change or prove to be
inaccurate, if the Company identifies additional required or desirable
infrastructure investments or acquisitions, if the Company experiences
unanticipated costs or competitive pressures or if the net proceeds from the
issuance of the Old Notes, together with the remaining proceeds of prior
securities offerings and other sources of liquidity otherwise prove to be
insufficient. See "Risk Factors--The Company Has Net Operating Losses and
Negative EBITDA (as defined)," "--We May Need Additional Capital" and "--Our
Substantial Indebtedness Could Endanger Our Financial Condition and Inhibit Our
Ability to Satisfy Our Obligations Under the New Notes."
EFFECTS OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS
No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosure About
Segments of an Enterprise and Related Information." The Company adopted SFAS
No. 130 during the nine month period ended September 30, 1998. The Company has
determined to present the data on a geographical basis for SFAS No. 131.
SFAS No. 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, it has no impact on the
Company's net income. Comprehensive income includes both net income and other
comprehensive income. Other comprehensive loss for the nine months ended
September 30, 1998 and September 30, 1997 of $6.7 million and $1.2 million,
respectively, represented foreign currency translation adjustment. Accumulated
other comprehensive loss included in the accompanying condensed consolidated
balance sheet as of September 30, 1998 and September 30, 1997 was $12.0 million
and $1.8 million, respectively, consisting of the accumulated foreign currency
translation adjustment.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards for derivative instruments and hedging activities. Generally, it
requires that an entity recognize all derivatives as either an asset or
liability and measure those instruments at fair value, as well as identify the
conditions for which a derivative may be specifically designed as a hedge. The
Company has not yet determined the impact on its consolidated financial
statements of the adoption of SFAS 133.
INFLATION
The Company does not believe that inflation has had a significant impact on
the Company's consolidated operations.
SEASONALITY
The Company's European operations experience seasonality during July and
August, December and January, and, to a lesser extent, March, as these months
are traditional holiday months in most European countries and many European
businesses, which are the Company's principal European customers, are closed
during portions of these months.
YEAR 2000 TECHNOLOGY RISKS
The "Year 2000" problem is the result of computer programs being written
using two digits, rather than four digits, to define the applicable year. Any of
the programs used in the Company's operations that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a major system failure or miscalculations, 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.
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<PAGE>
The Company is conducting a comprehensive review of its computer systems to
ensure that all such systems are, or prior to the end of 1999 will be, Year 2000
compliant. The Company's plan for its Year 2000 project includes the following
phases: (i) conducting a comprehensive inventory of the Company's internal
systems, including information technology systems and non-information technology
systems (which include switching, billing and other platforms and electrical
systems) and the systems acquired or to be acquired by the Company, (ii)
assessing and prioritizing any required remediation, (iii) remediating any
problems by repairing or, if appropriate, replacing the non-compliant systems
and (iv) testing all remediated systems for Year 2000 compliance. The Company
has also retained a Year 2000 solution provider as a consultant to assist the
Company in its assessment and remediation projects and to manage and coordinate
Year 2000 compliance for each of the Local Operators on a global basis.
In addition to assessing its own systems, the Company is conducting an
external review of its vendors and suppliers, including equipment and systems
providers and other telecommunications service providers, to determine their
vulnerability to Year 2000 problems and any potential impact on the Company.
Based on preliminary discussions with L.M. Ericsson A.B. ("Ericsson"), the
Company's primary equipment vendor, the Company believes that the equipment
provided to the Company by Ericsson will be Year 2000 compliant. The Company may
experience problems to the extent that other telecommunications carriers whose
services are resold by the Company or to which the Company sends traffic for
termination are not Year 2000 compliant. There can be no assurance that such
problems will not have a material adverse effect on the Company.
The Company expects to complete all of the phases of the process described
above by June 30, 1999 and further expects that all of its computer systems will
be fully Year 2000 compliant before the end of 1999. There can be no assurance,
however, that the Company will achieve full Year 2000 compliance before the end
of 1999 or that effective contingency plans will be developed or implemented. A
failure of the Company's computer systems or the failure of the Company's
vendors or customers to effectively upgrade their software and systems for
transition to the year 2000 could have a material adverse effect on the
Company's business, financial position and results of operations.
The Company has completed numerous acquisitions during recent periods and
is in the process of integrating the systems of the acquired businesses into the
Company's operations. Those systems are included in the Company's Year 2000
review and remediation project. The Company expects to complete additional
acquisitions prior to the end of 1999. During the process of evaluating
businesses for potential acquisition, and after any such acquisitions, the
Company will evaluate the extent of the Year 2000 problems associated with such
acquisitions and the cost and timing of remediation. No assurance can be given,
however, that the systems of any acquired business will be Year 2000 compliant
when acquired or will be capable of timely remediation.
The Company estimates that it will incur costs of between $7 million and
$10 million to become Year 2000 compliant, although the Company's evaluation of
the Year 2000 problem is not yet complete and actual costs may be significantly
higher. Costs associated with software modification are expensed by the Company
when incurred. None were incurred as of September 30, 1998.
Following the completion of the Company's Year 2000 assessment, the Company
plans to determine the nature and extent of any contingency plans that may be
required. Even if the Company's assessment is completed without identifying any
additional material non-compliant systems operated by, or in the control of, the
Company, or of third parties, the most reasonably likely worst case scenario
would be a systems failure beyond the control of the Company to remedy. Such a
failure could materially prevent the Company from operating its business. The
Company believes that such a failure would likely lead to lost revenues,
increased operating costs, loss of customers or other business interruptions of
a material nature, in addition to potential claims against the Company. See
"Risk Factors--We Depend on Effective Information Systems" and "-- the Year 2000
Problem Places Our Technology Systems at Risk," and "Business--North American
Operations--U.S. Operations" and "--European Operations--General."
41
<PAGE>
BUSINESS
OVERVIEW
The Company is a rapidly growing multinational telecommunications company
which provides a broad array of services, with a focus on international long
distance voice services, to small and medium-sized businesses in key markets.
The Company's services include international and national fixed and wireless,
calling card, fax, data, Internet, private line and other value-added
telecommunications services. The Company began operations in the United States
in 1995 and has since grown rapidly through acquisitions, strategic investments,
joint ventures and alliances and the start-up of its own operations in key
markets. The Company generates revenue in 19 countries in which approximately
70% of all international long distance telecommunications minutes were
originated in 1997.
COMPANY OPERATIONS
The Company conducts its operations in four principal regions: North
America, Europe, Asia/Pacific Rim and Latin America. The Company has developed a
different strategy for each region, driven in part by the pace of local
deregulation.
The following table shows the Company's principal operations by country,
the principal subsidiary conducting such operations, the percentage of each such
subsidiary owned, directly or indirectly, by the Company, the date of
acquisition or start-up of such operations and the date each such operation
began (or is anticipated to begin) generating revenues (which may, in certain
circumstances, have been prior to the Company's acquisition of such operation):
<TABLE>
<CAPTION>
DATE OF
COMPANY'S ACQUISITION OR COMMENCEMENT
PERCENTAGE START-UP OF
COUNTRY OPERATING ENTITY OWNERSHIP DATE(1) OPERATIONS(2)
- ---------------- ------------------------------------------- ----------- -------------- -------------
<S> <C> <C> <C> <C>
United States RSL COM U.S.A., Inc. ...................... 97%(3) March 1995 May 1990
United Kingdom RSL COM Europe Ltd. ....................... 100% August 1995 May 1996
Sweden RSL COM Sweden AB. ........................ 100% November 1995 May 1996
Finland RSL COM Finland Oy......................... 100% November 1995 May 1996
France RSL COM France S.A. ....................... 100% May 1996 January 1994
Germany RSL COM Deutschland GmbH................... 100% May 1996 November 1993
The Netherlands RSL COM Nederland B.V. .................... 100% October 1996 October 1995
Australia RSL COM Australia Holdings Pty. Limited.... 91.5%(3)(4) October 1996 April 1997
Denmark RSL COM Danmark A/S........................ 100% November 1996 May 1997
Japan RSL COM Japan K.K. ........................ 100% March 1997 July 1998
Portugal Maxitel Servicos e Gestao de 39% April 1997 November 1997
Telecomunicacoes, SA.....................
Italy RSL COM Italia S.r.l. ..................... 99.3%(3)(5) August 1997 December 1997
Venezuela RSL COM Venezuela C.A. .................... 51%(6) August 1997 May 1992
Austria RSL COM Austria AG......................... 90%(3)(7) August 1997 March 1998
Spain RSL Communications Spain, S.A. ............ 90%(3) December 1997 June 1998
Switzerland RSL COM Schweiz AG......................... 78.5%(3) December 1997 August 1996
Belgium European Telecom S.A./N.V. ................ 90%(3) December 1997 April 1995
Luxembourg European Telecom SARL...................... 90%(8) December 1997 June 1998
Canada RSL COM Canada Holdings, Inc. ............. 100% July 1998 March 1993
Mexico RSL COM Mexico, S.A. ...................... 41%(3)(6) August 1998 March 1999
</TABLE>
- ------------------
(1) Acquisition date refers to the Company's initial purchase of an interest in
the operating entity.
(2) Such date refers to the date upon which the operating entity began or is
currently projected to begin generating revenues from the sale of its
facilities-based international telecommunications services, although certain
of the operating entities may have been generating revenues from other
activities prior to the date of the Company's investment herein. Projected
dates are forward-looking statements and there can be no assurance that such
operations will commence generating revenues on such dates, if at all, in
the event that, among other things, the Company does not receive regulatory
approval on a timely basis, switches cannot be installed or become
operational on a timely basis or the Company is unable to hire necessary
personnel.
(Footnotes continued on next page)
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(Footnotes continued from previous page)
(3) The Company has granted to a number of minority shareholders of its
subsidiaries options, exercisable on the occurrence of certain events, to
exchange their shares in the respective subsidiaries for, in certain
circumstances, shares of Class A Common Stock or, in certain circumstances,
cash (the "Roll-Up Rights"). The Company has also granted to certain
employees of its subsidiaries options to acquire shares of such subsidiaries
or similar rights (the "Incentive Units"), some of which are currently
exercisable, and the right to exchange such Incentive Units for shares of
Class A Common Stock or, in certain circumstances, at the Company's option,
cash.
(4) RSL COM Asia Limited ("RSL Asia"), a 91.5% owned subsidiary of the Company,
owns 100% of RSL COM Australia Holdings Pty Limited ("RSL Australia").
(5) In July 1998, as a consequence of a capital increase in RSL Com Italia
S.r.l. ("RSL Italy") that was funded by the Company but not by the minority
shareholders of RSL Italy, the Company's interest in RSL Italy was increased
to 99.3%. Beginning on July 14, 2000, however, RSL Italy's minority
shareholders will have a call option which would reduce the Company's
ownership interest in RSL Italy to 85% of (i) the entire capital, if at that
time RSL Italy will have no additional shareholders, or (ii) the capital
then held in the aggregate by the Company and the present minority
shareholders, if at that time RSL Italy will have additional shareholders.
(6) RSL COM Latin America, Ltd. ("RSL Latin America"), a 51% owned subsidiary of
the Company, owns (i) 100% of RSL COM Venezuela C.A. and (ii) 80% of RSL COM
Mexico, S.A.
(7) The Minority Interestholder (as defined herein) of RSL COM Austria AG ("RSL
Austria") was granted the right to increase his ownership interest in RSL
Austria to up to 24.9%, subject to certain conditions, which have been
satisfied. The Company is in the process of evaluating the number of shares
of RSL Austria required to be issued to such Minority Interestholder.
(8) European Telecom S.A./N.V. ("RSL Belgium"), a 90% owned subsidiary of the
Company, owns 100% of European Telecom SARL ("RSL Luxembourg").
NORTH AMERICA. The Company began operations in the U.S. in 1995 through RSL
USA. The U.S. is the largest and one of the most deregulated telecommunications
markets in the world. Through acquisitions and the development of existing
infrastructure, the Company has diversified its customer base and increased the
scale of operations in the U.S. to compete more effectively with larger
telecommunications services providers. In connection with this expansion, the
Company has hired additional experienced management, implemented new managerial
and financial controls and introduced a new marketing plan with an emphasis on
cross-selling services.
Through recent acquisitions, the Company has enhanced its U.S. network and
expanded the range of services offered to its customers. In July 1998, the
Company acquired the business of Westinghouse Communications ("WestComm") from
CBS Corporation for $90 million. WestComm provides voice telephony, data
services (including frame relay and TCP/IP networks) and Internet access to a
customer base consisting primarily of small to medium-sized businesses through a
network of six national switches. The Company is integrating WestComm's network,
complementary customer base and sales and distribution channels with the
Company's existing operations, and plans to offer to certain existing customers
the expanded range of WestComm services, including data and Internet services.
In addition, the Company has recently expanded its North American
operations and, as a result, will soon be able to terminate traffic on RSL-NET
in certain regions of Canada and Mexico, the two largest country destinations
for U.S. originated traffic. In July 1998, the Company acquired Westel
Telecommunications Ltd. ("Westel") from British Columbia Railway Company for
approximately $38 million. Westel is a telecommunications company that provides
a broad range of enhanced telecommunications services, including long distance,
data, private line and Internet access throughout British Columbia. Also, the
Company, through certain subsidiaries of RSL Latin America, acquired switches
and fiber optic cable covering 14 cities in Mexico, which were fully installed
in 1998.
EUROPE. The Company began European operations in 1996, when many member
states of the EU were in the initial stages of deregulation, and currently has
operations in 14 countries in Europe. In anticipation of deregulation, the
Company has established a significant presence in most major EU markets through
a series of acquisitions. Pursuing its "first to market" entry strategy, the
Company has made significant investments in advance of customer acquisition to
establish operations, retain qualified personnel and build a recognized brand
name. In the fully deregulated European markets in which it operates, the
Company (i) has been permitted to interconnect its switches directly with the
local exchange network, instead of through more expensive means, such as leased
lines or dial-in access, and (ii) has linked, or is in the process of linking,
with RSL-NET through owned international
43
<PAGE>
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.
The Company has recently completed a number of alliances and acquisitions
in Europe that will significantly expand its distribution channels and broaden
its customer base and product offerings. In June 1998, the Company entered into
a marketing and distribution services agreement with Metro Holding AG ("Metro
Holding"), the management holding company for Metro AG, one of the largest
retailers in Europe. Under this agreement, Metro Holding will assist the Company
in promoting, marketing, selling and distributing the Company's services through
Metro AG's wholesale and retail operations in Europe. This arrangement is
designed to provide the Company access to Metro AG's extensive distribution
network and customer base (which includes a large number of small and medium-
sized businesses) and is expected to significantly accelerate the Company's
penetration into key European markets. In connection with its alliance with the
Company, Metro Holding initially acquired in April 1998 a 12.5% equity interest
in RSL Europe. In June 1998, Metro Holding converted all of its interest in RSL
Europe into 1,607,142 shares of Class A Common Stock (based on value for value)
and purchased an equal number of Class A Common Stock from certain shareholders
of the Company. In the aggregate, Metro Holding acquired approximately 7.2% of
the outstanding stock of the Company, which it is required to hold until at
least April 1, 2001.
The Company recently 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 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 (the "Telegate Exchange").
In January 1998, the Company purchased 90% of the equity of Telecenter Oy
("Telecenter"), an independent sales agent in Finland, for approximately $30.5
million.
In August 1998, the Company acquired the business of Motorola Tel.co in the
United Kingdom, Germany and Belgium from Motorola Inc. for approximately
$68.1 million. Motorola Tel.co resells wireless services and related products in
these countries to a base of over 360,000 subscribers. This transaction
significantly increases the number of direct customer relationships in Europe
and will allow the Company to cross-sell long distance and wireless services.
ASIA/PACIFIC RIM. Most markets in the Asia/Pacific Rim region are in the
earliest stages of deregulation, with the notable exception of Australia, which
is at a significantly more advanced stage of deregulation. The Company began
operations in Australia in April 1997 and has established a significant presence
in that market. The Company also initiated start-up operations in Japan in July
1998.
In March 1998, the Company acquired the customer base of First Direct
Communications Pty, Limited ("First Direct") and Link Telecommunications Pty.
Ltd. ("Link"), two switchless mobile telecommunications resellers, for
approximately $18.0 million.
The Company is evaluating acquisition opportunities in other Asia/Pacific
Rim markets consistent with its global strategy.
LATIN AMERICA. Most markets in Latin America are in the earliest stages of
deregulation. The Company's strategy is to develop, through local operating
companies formed in conjunction with local partners, a pan-Latin American
network and operations spanning Central and South America and the Caribbean. In
mid-1997, the Company formed a joint venture to pursue this strategy with
entities controlled by the Cisneros Group of Companies (the "Cisneros Group"), a
privately held conglomerate
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with significant interests in, among other things, the Latin American media and
communications industry. Revenues for 1997 from the Company's Latin American
operations accounted for less than 1% of the Company's consolidated revenues for
1997.
INDUSTRY OVERVIEW
International telecommunications involve the transmission of voice and data
from the domestic telephone network of one country to that of another. According
to industry sources, international long distance switched telecommunications
traffic worldwide increased from 28 billion minutes in 1989 to 81.8 billion
minutes in 1997 and is projected to reach between approximately 128.7 and
158.6 billion minutes by the year 2001. The market for these services is highly
concentrated in more developed countries, with Europe and the United States
accounting for approximately 41% and 28%, respectively, of the international
long distance telecommunications minutes originated worldwide in 1997.
The International telecommunications industry has experienced a compounded
growth in total minutes of 14.3% per annum from 1989 to 1997. The industry has
been undergoing rapid change due to the continued deregulation of the
telecommunications market, the construction of additional infrastructure and the
introduction of new technologies, which has resulted in increased competition
and demand for telecommunications services worldwide. Forecasts by the
International Telecommunication Union (the "ITU"), a worldwide
telecommunications organization under the auspices of the United Nations,
projects this trend to continue with an annual growth rate between approximately
12% and 18% through the year 2001.
The size of each market of international long distance call origination in
which the Company currently operates or is in the process of commencing
operations, based on minutes of traffic originated in 1997, is set forth below.
The Company believes that it has a market share of significantly less than 1% in
each of these markets.
<TABLE>
<CAPTION>
MILLIONS OF PERCENTAGE OF 1997
COUNTRY OF MINUTES OF USE GLOBAL INTERNATIONAL
OPERATION ORIGINATED(1) TRAFFIC ORIGINATED
- ------------------- -------------- --------------------
<S> <C> <C>
USA................ 22,700 27.8
UK................. 5,800 7.1
Germany............ 5,333 6.5
Canada............. 4,286 5.2
France............. 3,545 4.3
Italy.............. 2,352 2.9
Switzerland........ 2,164 2.6
Japan.............. 1,792 2.2
The Netherlands.... 1,535 1.9
Australia.......... 1,510 1.8
Belgium............ 1,340 1.6
Mexico............. 1,200 1.5
Spain(2)........... 1,189 1.5
Sweden............. 1,140 1.4
Austria............ 996 1.2
Denmark............ 628 0.8
Portugal........... 393 0.5
Finland............ 372 0.5
Luxembourg......... 249 0.3
Venezuela.......... 159 0.2
------ ------
58,683 71.8%
</TABLE>
(Footnotes on next page)
45
<PAGE>
(Footnotes from previous page)
- ------------------
(1) All data, with the exception of U.S. outbound traffic, were taken from
Telegeography 1999, which is published by Telegeography, Inc. and the
International Telecommunication Union (the "ITU"). U.S. data were derived
from FCC Rule Section 43.61 filings which are publicly available.
(2) Minutes for Spain reflect 1996 traffic.
The increasing pace of deregulation in telecommunications is evidenced by
the recent GBT Agreement. The GBT Agreement, signed by 69 countries, calls for
relaxed restrictions on foreign ownership and a commitment to deregulate
telecommunications and allow competition. Of the 69 signatories to the GBT
Agreement, 65 have agreed to adopt certain regulatory principles which call for
deregulation of telecommunications markets and the initiation of competition
based on the following actions: (i) pro-competitive regulation, (ii) creation of
favorable interconnect terms, (iii) standard licensing criteria, (iv)
establishment of an independent regulator, and (v) non-discriminatory allocation
of scarce resources (e.g., rights of way, frequencies, telephone numbers). Each
of the signatory nations which adopted these principles has set a different
timetable for the enactment of such principles, although there can be no
assurance of when or if such principles will be enacted. In November 1997 the
FCC revised its rules to implement commitments made by the U.S. under the GBT
Agreement.
Deregulation has coincided with technological innovation in the telephone
industry. New technologies include fiber optic cable and improvements in
computer software, digital compression and processing technology. Fiber optic
cable, which has widely replaced traditional wire lines, has dramatically
increased the capacity, speed and flexibility of telephone lines. In addition,
recent developments in software and hardware enable the transmission of voice
over the Internet and IP networks through the use of special access servers,
although the quality of the call is not yet comparable to the quality of calls
made over traditional cable lines. In part as a result of these technological
innovations, lack of capacity is a less significant barrier to entry for new
international telephone companies and the transmission costs per minute of an
international call have decreased substantially.
Deregulation and privatization of telecommunications services and the onset
of competition have also resulted in (i) the broadening of service offerings,
including advanced and enhanced services (such as global voicemail, faxmail and
electronic mail, itemized and multicurrency billing and the ability to allow
customers to pay for long distance calls made from any telephone using a single
account (e.g., calling cards)) and (ii) lower end-user prices. These factors
have contributed to an increase in the volume of both inbound and outbound call
traffic. Despite falling prices, the overall market for international long
distance traffic has been growing and the decline in prices generally has been
more than offset by an increase in telecommunications usage.
U.S. INTERNATIONAL LONG DISTANCE MARKET
The U.S. international long distance switched telecommunications market
accounted for approximately 28% of global international long distance call
originations in 1997 based on minutes of use. The industry is large and growing,
with revenues for U.S.-originated international long distance telephone services
rising from approximately $6.9 billion (6.8 billion minutes) in 1990 to
approximately $13.9 billion (18.9 billion minutes) in 1996. The growth of the
U.S.-originated international long distance market was initially attributable to
deregulation and the decrease in prices which accompanied the onset of
competition. Deregulation and the resulting competition also led to improvement
in service offerings and customer service. More recently, in addition to further
U.S. deregulation, the growth of the U.S.-originated international long distance
market has been attributable to (i) the continued deregulation of other
telecommunications markets throughout the world, (ii) the privatization of PTTs,
(iii) increased capacity, improved quality and lower operating costs
attributable to technological improvements, (iv) the expansion of
telecommunications infrastructure and (v) the globalization of the world's
economies and free trade.
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<PAGE>
The profitability of the traditional U.S.-originated international long
distance market is principally driven by the difference between settlement rates
(the rates paid to other carriers to terminate an international call) and billed
revenues. Increased competition arising from deregulation and privatization and
pressure arising from increased global trade have brought about reductions in
settlement rates and end-user prices, reducing termination costs for United
States based carriers. The Company believes that as settlement rates and costs
for leased capacity continue to decline, international long distance will
continue to provide high revenue and gross profit per minute, although there can
be no assurance in this regard.
EUROPEAN INTERNATIONAL LONG DISTANCE MARKET
The European international long distance market is the largest in the
world, accounting for approximately 33 billion minutes or approximately 41% of
minutes of use originated in 1997.
The European PTTs have historically had monopolies on providing telephone
services, making the cost of international telephone calls from Europe much
higher than similar calls from the United States. In addition, the Company
believes that many PTTs have used profits from international traffic to
subsidize domestic calling. Customers in some European markets are not able to
obtain a number of value-added features taken for granted in the United States,
such as itemized billing, touch tone dialing, voice mail and other enhanced
services. Deregulation, together with significant advances in technology that
have decreased the cost of providing services and allowed the provision of more
sophisticated value-added features, have made it possible for other telephone
companies to compete with the PTTs in providing international voice
telecommunications services.
A 1990 EC directive (the "1990 Directive") required each member state to
liberalize by 1992 all telephony services offered over its PSTN, with the
exception of basic "voice telephony" and specified other services. The effect of
the 1990 Directive was that value-added services and the delivery of voice
telephony to closed user groups (i.e., to a specified group of people) were
liberalized to the extent that they do not come within the 1990 Directive's
definition of basic "voice telephony." Different interpretations as to whether a
service should be regarded as a value-added service or as a basic "voice
telephony" service, and as to what constitutes a closed user group, have led to
variations among the member states as to what services may be delivered and the
manner in which they can be provided. In addition, certain member states are
late in enacting the relevant legislation implementing the 1990 Directive, which
has created further regulatory uncertainty. Under a 1996 EC directive (the "Full
Competition Directive"), member states were required to liberalize "Open Voice
Telephony Services," effective January 1, 1998, except for certain member states
who were granted extentions for a specified period of time. However, some of the
EU countries in which the Company operates did not meet the January 1, 1998
requirement of the Full Competition Directive and there can be no assurance
regarding the timing or extent of liberalization in any particular country or
the EU in general. See "--European Operations--General" for a more detailed
discussion of the Full Competition Directive and related regulatory matters.
In response to these European regulatory changes, a number of different
competitors, including the Company, are emerging to compete with the European
PTTs. At one end of the scale, the large U.S. telecommunications service
providers and European PTTs have begun to form "mega-carrier" alliances to
compete in offering value-added services and the resale of calling services
across Europe. At the other end of the scale, a number of competitors have
emerged that primarily provide long distance "call back" telephone service.
Other companies are developing networks in Europe to service specific markets.
The Company believes, along with many industry observers, that the
deregulation currently underway in many countries in continental Europe will
lead to market developments similar to those that occurred in the United States
and the United Kingdom upon deregulation of long distance telecommunications
services. Such deregulation in the United States and the United Kingdom has
resulted in an increase in call traffic and the emergence of multiple new
telecommunications services providers of varying sizes. In addition, significant
reductions in prices, particularly for domestic long
47
<PAGE>
distance calls, as well as improvement in both the services offered and the
level of overall responsiveness to customers, have occurred. Although pricing
has become competitive in both countries, pricing levels continue to permit
services to be profitably provided. There can be no assurance, however, that
this will continue to be the case.
ASIA/PACIFIC RIM INTERNATIONAL LONG DISTANCE MARKET
Deregulation is spreading throughout many of the major markets in Asia and
the Pacific Rim. A significant number of countries in these regions are
signatories of the GBT Agreement and have committed to open their markets to
competition. Australia, the Philippines and New Zealand have already opened
their markets to full competition and Hong Kong, Indonesia, Japan, South Korea
and Malaysia have legalized the provision of value-added services. Singapore
licensed two new operators in 1998.
LATIN AMERICAN INTERNATIONAL LONG DISTANCE MARKET
Various countries in Latin America have taken initial steps towards
deregulation in the telecommunications market during the last few years. Certain
countries have competitive local and/or long distance sectors, most notably
Chile, which has competitive operators in all sectors. Colombia has granted two
long distance operating licenses to local companies, ending the monopoly of
Colombia's PTT. In addition, various Latin American countries have completely or
partially privatized their national carriers, including Argentina, Brazil,
Chile, Mexico, Peru and Venezuela. Venezuela has also legalized value-added
services and has targeted January 1, 2000 as the date for deregulation. Brazil
privatized its PTT, Telebras, in July 1998, and has also established an
independent regulator, ANATEL, to oversee its telecommunications industry.
In Mexico, the former PTT has been privatized and its exclusive long
distance concession was modified in 1990 to allow other participants to render
long distance services as of August 1996. Additionally, the PTT has been
required to interconnect with the networks of competitors since January 1997.
Competition in Mexico has been initiated and an independent regulator has been
established.
Peru opened its market to competition in August 1998, ending the monopoly
of its PTT, Telefonica del Peru, one year earlier than scheduled.
OTHER MARKETS
Despite the growth and deregulatory trends in the global telecommunications
market, the pace of change and emergence of competition in many countries,
particularly in parts of Africa, remains slow, with domestic and international
traffic still dominated by the government-controlled PTTs. The Company believes
that international carriers, such as itself, which have already established, or
are in negotiations to establish, operating agreements with the PTTs in many
such countries will be well-positioned to capture the benefits of increasing
traffic flows as the telecommunications infrastructure in these countries is
expanded.
The Company believes that the trend towards deregulation creates numerous
opportunities for international carriers such as itself to increase their access
to developing telecommunications markets and to increase their market share for
calls both into and out of these emerging markets. The Company believes that
many of the emerging carriers in developing countries, as well as certain
recently privatized PTTs, are likely to seek alliances, partnerships or joint
ventures with other international carriers to expand their global networks, and
that the size of many of the markets may lead them to seek alliances with
carriers like the Company as opposed to the mega-carriers, such as Uniworld,
Concert and Global One. Although there is a general trend towards deregulation
worldwide, there can be no assurance regarding the timing or the nature of
deregulation, whether any deregulation will occur at all or whether any trend
towards deregulation will not be reversed in any particular country.
48
<PAGE>
INTERNATIONAL LONG DISTANCE MECHANICS
A long distance telephone call generally consists of three segments:
origination, transport and termination.
<TABLE>
<S> <C>
------------- ----------------------------------------- ---------------------
| Origination | | Transport | | Termination |
------------- ----------------------------------------- ---------------------
Satellite Connection
[Graphic of Satellite]
Originating Country /\ Terminating Country
/ \
Private Line / \ Private Line
_____________________________ / \ _____________________________
| | / \ | |
| | / \ | |
----------- --------------- /Half Circuit\ --------------- ------------
| Calling | | International | / Half Circuit \ | International | | Called |
| Customer | | Switch |------------------| Switch | | Customer |
----------- --------------- --------------- ------------
| --------- | Cable Connection | --------- |
|_______| |___________| |___________| |_______|
| P S T N | * Resale / Lease | P S T N |
--------- * MIU / IRU ---------
</TABLE>
A typical international long distance call originates on a local exchange
network or private line and is carried to the international gateway switch of a
long distance carrier. The call is then transported along a fiber optic cable or
a satellite connection to an international gateway switch in the terminating
country and finally to another local exchange network or private line where the
call is terminated. A domestic long distance call is similar to an international
long distance call, but typically involves only one long distance carrier, which
transports the call on fiber, microwave radio or via a satellite connection
within the country of origination and termination. Generally, only a small
number of carriers are licensed by a foreign country for international long
distance and, in many countries, only the PTT is licensed to provide
international long distance service. Although the Company is licensed or
otherwise permitted (or not prohibited) to operate as an international long
distance carrier in most of its current markets, the range of services that may
be offered pending further deregulation is, in certain countries, limited to
value-added services and closed-user group services. See "--European
Operations--General." Any carrier that desires to transport switched calls to or
from a particular country must, in addition to obtaining a license or other
permission (if required), enter into operating agreements or other arrangements
with the PTT or another international carrier in that country or lease capacity
from a carrier that already has such arrangements.
ORIGINATION
The Company can originate calls in all countries where it currently has
revenue-generating operations and route them to its local switch through a
dedicated telephone line between the customer and the Company's switch (commonly
known as "direct access"). In addition, depending on local regulations, the
Company can originate calls by using the PSTN. In the United States, all
licensed long distance carriers are provided with "equal access," which allows
such carriers to directly interconnect with the PSTN on the same basis. As a
result of equal access, all long distance calls from a customer are routed
directly to the Company's local switch without requiring the customer to dial
any special access numbers. This is accomplished by the local telephone company
in the customer's territory
49
<PAGE>
programming its network to direct all of the Company's customers' long distance
calls to the selected switch. Outside the United States, certain restrictions
require the Company to utilize one of the following methods to originate a call
via the PSTN.
PREFIX DIALING. Prefix dialing allows a customer to access the Company's
switch via the PSTN by dialing a multiple digit access code (the "prefix")
assigned to the Company prior to dialing the destination telephone number.
Prefix dialing requires direct interconnection with the operator of the PSTN,
typically the PTT or another major carrier, in order to allow the PSTN to
recognize the prefix and direct the call to the Company's switch. In order to
make the use of prefix dialing service transparent to the customer, the Company
can either program the customer's telephone system or install an auto-dialer
device to automatically dial the prefix on behalf of the customer when
appropriate. The auto-dialer device is purchased, installed and maintained by
the Company.
In Europe, prefix dialing is currently provided by all of the Company's
operations except in Portugal, The Netherlands, Italy, France and Spain, where
it is either not currently permitted or otherwise not implemented by the Company
in such countries. Prefix dialing was scheduled to be provided in the remainder
of the EU after January 1, 1998, when deregulation was required under the Full
Competition Directive, but such schedule has not been met and is unlikely to be
met, for the most part, until the end of the first calendar quarter of 1999, at
the earliest. See "Risk Factors--Government Regulations Restrict Our
Operations." In France, RSL France has been granted a four-digit prefix by the
French national telecommunications regulatory authority and has received
authorization, pursuant to article L33.1 and L34.1 of the Postal and
Telecommunications Code, to operate a public network. Prefix dialing requires
the Company to incur a substantial up-front fixed fee that is payable to the PTT
or other operator of the PSTN for interconnection. The Company is then charged a
variable local access charge to route each call to the Company's switch. Despite
such fees, for customers generating relatively low volumes of calls or in remote
locations, prefix dialing is a more cost-effective form of call origination than
through a direct access line.
DIRECT ACCESS. Direct access allows a customer to connect its phone system
directly to the Company's switch utilizing a dedicated phone line. Dedicated
phone lines are leased on a monthly or longer-term fixed cost basis from the PTT
or other local exchange carrier. This method of origination is only
cost-effective for those customers which generate substantial volumes of
international traffic, given the fixed cost of leasing a dedicated line.
DIAL-IN. In countries where interconnection with the PTT or other operator
of the PSTN is currently not available, the Company can provide dial-in services
to closed user groups by allowing the customer to directly call the Company's
switch via the PSTN by dialing a pre-assigned telephone number (local or
toll-free), followed by a pin-code (which allows the switch to recognize the
customer) and the destination telephone number. The mechanics of this service
are substantially similar to calling card services currently provided by the
Company and other carriers in the United States. What constitutes a closed user
group has been the subject of a fair degree of interpretation among Member
States, but is generally interpreted as meaning that the customer can only call
a limited predetermined group of destinations. As with prefix dialing, the
Company can make this service more transparent to the customer by programming
the customer's telephone system or installing an auto-dialer, subject to local
regulation. Given the greater number of digits required to be dialed by the
customer, however, a slight delay in placing a call cannot be avoided by this
service. Dial-in service involves a variable local access charge to route the
call to the Company's switch.
TRANSPORT
The transport of telephone calls is accomplished via land-based cables or
undersea cables, which are usually fiber optic, or by microwave radios or
satellites. A carrier can obtain half circuits on cable systems through MIUs,
IRUs or leases. A carrier from each country owns a half circuit of a cable,
essentially dividing the ownership of the cable extending between two countries
into two equal components. In instances where a carrier has not purchased
interests in a cable prior to the time when
50
<PAGE>
the cable was placed in service, the carrier is only permitted to acquire
capacity on the cable through the purchase, by way of a lump sum payment, of an
IRU. The fundamental difference between an IRU holder and an owner of MIUs is
that the IRU holder is not entitled to participate in management decisions
relating to the cable system. In the event that the Company commences utilizing
its remaining operating agreements, it will have to either invest in additional
IRUs or MIUs, or acquire satellite capacity, to enable it to connect to a
carrier in such countries. Additionally, any carrier may generally lease
circuits on a cable from another carrier with an MIU or IRU. Satellite circuits
are also obtained on a leased basis.
Traditionally, international long distance traffic is exchanged under
bilateral operating agreements between international carriers which own MIUs or
IRUs on the same fiber optic cable system in two countries or through leased
satellite capacity. Operating agreements provide for the termination of traffic
in, and return of traffic to, the carriers' respective countries at negotiated
accounting rates. Operating agreements typically provide that carriers will
return to their correspondents a percentage of the minutes received from such
correspondents ("return traffic"). In the United States, this percentage is set
by the FCC to be the relative ratio of U.S. inbound traffic to U.S. outbound
traffic to each country. In addition, operating agreements provide for network
coordination and accounting and settlement procedures between the carriers.
Accounting rates are reciprocal between each party to an operating
agreement. For example, if a foreign carrier charges a U.S. carrier $0.30 per
minute to terminate a call in the foreign country, the U.S. carrier would charge
the foreign carrier the same $0.30 per minute to terminate a call in the United
States. All U.S. carriers face a single accounting rate for each country unless
otherwise permitted by the FCC.
The term "settlement" rates arises because carriers pay each other for
traffic exchanged utilizing the accounting rate structure on a net basis
determined by the difference between inbound and outbound traffic between them.
Settlement rates differ between countries. For example, a U.S. carrier may have
a settlement rate of $.30 to terminate a call in one country and $.35 in another
country while a UK carrier may have settlement rates of $.45 and $.40 to
terminate calls in the same countries. By linking its Local Operators over owned
and leased facilities, the Company bypasses this traditional settlement process
and lowers its cost of transporting its international traffic.
The FCC has established a policy that effectively prohibits foreign
carriers from discriminating among U.S. carriers (the "International Settlements
Policy"). The International Settlements Policy requires: (1) the equal division
of accounting rates; (2) non-discriminatory treatment of U.S. carriers; and
(3) proportionate return of inbound traffic. In December 1996, the FCC modified
its rules to allow alternative payment arrangements that deviate from the
International Settlements Policy between any U.S. carrier and any foreign
correspondent in a country that satisfies the FCC's effective competitive
opportunities test. The FCC also stated that it would allow alternative
settlement arrangements between a U.S. carrier and a foreign correspondent in a
country that does not satisfy the effective competitive opportunities test, if
the U.S. carrier can demonstrate that deviation from the International
Settlements Policy will promote market-oriented pricing and competition while
precluding abuse of market power by the foreign correspondent. For further
information regarding settlement rates, see "--North American Operations--U.S.
Operations--Regulatory Environment."
The GBT Agreement requires signatories to open their telecommunications
markets to competition. Consistent with the commitments made by the U.S. under
the GBT Agreement, the FCC has revised its rules to establish an open entry
standard for applicants from World Trade Organization member countries seeking
authority to provide international telecommunications service in the U.S., and
has adopted a rebuttable presumption that the U.S. affiliates of a foreign
carrier with less than 50% market share in its home market should be treated as
non-dominant. These open entry policies will apply to applicants of all World
Trade Organization member countries, including those who are not signatories to
the GBT Agreement.
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<PAGE>
A carrier which does not have an operating agreement with a carrier in a
particular country is able to provide international service to that country by
leasing capacity from a carrier which does. Until recently, in many foreign
countries there was only one operating agreement in place between that country's
PTT and a foreign based international carrier as a result of monopolies held by
such PTTs. For example, in the United States, before the deregulation of
telecommunications services, AT&T was the only carrier that had operating
agreements with foreign carriers. However, after deregulation, MCI
Communications Corporation and Sprint, over a period of years, each negotiated
its own operating agreements with foreign carriers. Since then, a limited number
of other U.S.-based companies, including the Company, have been able to secure
operating agreements with foreign carriers. Operating agreements are expected to
become increasingly available as international markets deregulate and new
carriers that are seeking business partners emerge in countries previously
subject to a PTT monopoly or other limited competition market. See "Risk
Factors--The Rapidly Changing Industry in Which We Operate Presents Risks and
Uncertainties."
For an international long distance company without operating agreements or
its own international network, the profitability of originating international
traffic is a function of, among other things, the difference between its billing
rates and the rates it must pay another carrier to transport and terminate such
traffic.
For a company with operating agreements that provide for return traffic,
the profitability of originating international traffic will be a function of,
among other things, the volume of its originating traffic and its billing rates,
as well as the relative volume of its originating and return traffic minutes.
Under the settlement process, a carrier which originates more traffic than it
receives, will, on a net basis, make payments to the corresponding carrier,
while a carrier which receives more traffic than it originates will receive
payments from the corresponding carrier. If the incoming and outgoing flows of
traffic are equal in the number of minutes transmitted, there is no net
settlement payment to either carrier. Therefore, in addition to all of the other
factors that can influence the profitability of a long distance carrier, the
profitability of an international carrier is dependent on its relative flows of
incoming and outgoing traffic.
Return traffic can be more profitable than outgoing traffic when there is a
significant disparity in the cost of terminating traffic between the two
countries that are party to an operating agreement. This is particularly true
for a U.S. carrier because the actual cost for a U.S. carrier to terminate a
call in the United States generally is less expensive than the settlement cost
under an operating agreement with any foreign carrier and return traffic does
not involve any origination costs. The receipt of more profitable return traffic
reduces the aggregate cost to a carrier to transport traffic pursuant to an
operating agreement, and carriers with significant levels of return traffic can
price their international transport and termination services at a discount to
the settlement cost and recover the discount on the return traffic.
TERMINATION
The termination of an international call occurs after the call has been
transported to an international carrier in the destination country. The
international carrier then transports the call to a local exchange network where
it is then terminated. In many countries, only the PTT is licensed to provide
international long distance service and local exchange services.
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COMPANY STRATEGY
The Company's strategy is to capitalize on the growth, deregulation and
profitability of the international long distance market. The key elements of
this strategy are as follows:
FOCUS ON PROVIDING INTERNATIONAL LONG DISTANCE SERVICES
The international long distance public switched telecommunications market
generated an estimated $65.9 billion in revenue and 81.8 billion minutes in
1997. Minutes of use are projected to grow at a rate of between approximately
12% and approximately 18% per annum through the year 2001, while prices are
expected to decline, resulting in substantially slower growth in revenues. The
Company currently has significantly less than a 1% share of this market. The
Company provides a broad array of international and domestic services but
focuses on providing services to end-users which generate significant calling
traffic between countries to capitalize on (i) the continued growth of
international traffic and (ii) the margin opportunity created by the high
end-user rates currently maintained by PTTs and other dominant carriers. If any
of the factors contributing to the growth of traffic or the pricing scheme by
the PTTs and other major carriers should cease to apply, growth and
profitability in the international market and the Company's prospects would be
negatively impacted. The United States market, one of the most deregulated and
competitive markets in the world, illustrates the greater profitability of
international traffic versus domestic traffic in the current market and
regulatory environment. Based on FCC statistics and other available information,
the Company estimates that industry-wide gross profit (before access charges) in
1996 for U.S.-originated traffic averaged $.31 per minute of international use,
compared to a 1995 gross profit of $.08 per minute of domestic use, although the
actual gross profit per minute of use may vary significantly depending on the
destination, route and time of day of a particular call. From 1989 to 1996, per
minute settlement payments by United States based carriers to foreign PTTs fell
approximately 39% from $.70 to $.43. In September 1997, the FCC adopted new
lower benchmark rates for these settlement payments. Despite declining costs,
dominant carriers and PTTs have maintained high end-user rates for international
long distance services, allowing them to provide domestic services at lower
rates. The Company believes that as settlement rates and costs for purchased
capacity continue to decline, international long distance should continue to
provide high revenue and gross profit per minute, although increased competition
may, to a certain extent, moderate such revenues and gross profits. The
foregoing is a forward-looking statement and there can be no assurances in this
regard. See "--Industry Overview."
IDENTIFY AND ENTER KEY MARKETS AHEAD OF FULL DEREGULATION
The Company seeks to identify markets that originate or terminate
significant levels of international traffic and are being deregulated. The
Company then seeks to enter these markets ahead of full deregulation to gain
competitive advantages over carriers that enter after deregulation is complete.
These advantages include (i) developing multiple sales and distribution channels
and a customer base prior to widespread competition, (ii) acquiring experienced
management, including technical and marketing personnel, and (iii) achieving
name recognition as an early competitor to the incumbent PTTs. The Company's
Local Operator in each market is managed independently, with centralized
strategic, financial and network support. The Company expects each Local
Operator to be independently profitable.
The Company believes that its early entry into deregulating markets has
provided, and will continue to provide, it with an advantage in obtaining
licenses as they become available over carriers which attempt to enter the
market after deregulation is complete. The securing of necessary licenses, which
is limited in some circumstances to a small number of entrants into the
deregulating market, is essential to the Company's strategy and the Company will
endeavor to enter into arrangements with a licensee to gain access to such
market if the Company itself cannot secure successfully the license.
In countries that are in the process of deregulating, competition is often
restricted to a limited number of specific services. In such cases, the Company
employs a two-stage market penetration strategy whereby initially the Company
takes advantage of current market conditions and, within the context of its
established strategy and service offerings, provides the fullest range of
services
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permissible under local regulation. The Company thereby gains an early toehold
in the market, affording it the opportunity to become a recognized international
carrier and to begin to build its own marketing channels and customer base prior
to the opening of markets to broader competition. Subsequently, as deregulation
permits, the Company expands its service offerings, thereby giving the Company
the opportunity to increase the amount of business it does with its existing
customers and to increase its market penetration by building on its name
recognition, marketing channels and expanded service offerings to attract
additional customers. However, there can be no assurance regarding the timing or
extent of deregulation in any particular country. See "Risk Factors--Government
Regulations Restrict Our Operations."
TARGET SMALL AND MEDIUM-SIZED BUSINESSES
The Company focuses on offering high quality products and services to small
and medium-sized businesses that originate in excess of $500 per month in
international telephone calls. The Company believes that this segment accounts
for a significant percentage of international calling traffic in most markets
and offers significant market opportunities because it has traditionally been
underserved by the major global telecommunications carriers and the PTTs. By
offering a broad range of interrelated services and continuing its commitment to
provide high quality customer service, the Company seeks to strengthen its
direct relationships with a diverse and rapidly growing customer base and build
customer loyalty.
Small and medium-sized businesses account for the majority of all
businesses. For example, the EU estimated in 1996 that there were 15 million
small and medium-sized businesses in the EU and that businesses that employ
fewer than 100 workers in the aggregate accounted for more than one half of all
EU employment and almost half of all business revenue. In addition, Europe's
small to medium-sized businesses were projected to produce total
telecommunications revenues larger than those of the major multinational
business sector. For the six-month period ended June 30, 1998, approximately 25%
of the Company's revenues were derived from sales to other carriers, 57% were
derived from commercial customers, including small and medium-sized businesses,
and 18% were derived from calling card customers.
BUILD A COST COMPETITIVE GLOBAL NETWORK
By integrating its current and future owned switching facilities, known as
points of presence ("POPs"), into RSL-NET, the Company believes that it will be
able to originate, transport and terminate traffic utilizing its own network,
thereby bypassing the high costs associated with the transport of the
international portion of a call through a third party carrier. Substantially all
of the Local Operators have network switching facilities to provide
international voice and other telecommunications services in their markets. The
Company currently connects its facilities principally by a combination of
ownership interests in fiber optic systems and private leased lines. The Company
intends to continue to make significant investments in its own fiber routes and
other transmission facilities where such facilities become available and if such
investments are cost effective and warranted by traffic patterns.
The Company uses what it believes is state-of-the-art technology in its
switching facilities. The Ericsson switches used by the Company allow the
Company to interconnect its switches to existing PTT and carrier networks around
the world and to develop new services and upgrade network software on an
efficient basis.
EXPAND MARKETING AND DISTRIBUTION CHANNELS
The Company will continue to develop marketing and distribution channels to
expand its customer base, particularly in its target market of small to
medium-sized businesses. The Company has been innovative in seeking marketing
partners to better identify potential customers and penetrate markets on a
cost-efficient basis. Also, the Company capitalizes on cross-selling
opportunities as it adds new customer bases and products through acquisitions
and strategic alliances. In addition, the Company plans to introduce a universal
brand image to create worldwide name recognition.
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PURSUE STRATEGIC ACQUISITIONS AND ALLIANCES
The Company seeks to acquire control of businesses with an established
customer base, compatible operations, licenses to operate as an international
carrier, experience with additional or emerging telecommunications products and
technologies, and experienced management. In addition, the Company seeks to
enter into strategic alliances that the Company believes will enable an
accelerated and cost effective expansion of its business. Recent examples
include:
o In June 1998, the Company entered into a marketing and distribution
services agreement with Metro Holding, the management holding company for
Metro AG, one of the largest retailers in Europe with 750 operating units
in 18 European countries. This arrangement is designed to provide the
Company access to Metro AG's extensive distribution network and customer
base and is expected to significantly accelerate the Company's
penetration into key European markets.
o In July 1998, the Company acquired the business of WestComm from CBS
Corporation for $90 million. WestComm provides voice telephony, data
services (including frame relay and TCP/IP networks) and Internet access
through a network of six national switches. The WestComm acquisition
expands the range of the Company's services and enhances its ability to
originate and terminate U.S. long distance traffic.
o In July 1998, the Company acquired Westel from British Columbia Railway
Company ("BC Rail") for approximately $38 million. Westel is a
telecommunications company that provides a brand range of enhanced
telecommunications services through British Columbia, including long
distance, data, private line and Internet access. Westel significantly
expands the Company's presence in Canada, which is one of the key
destinations of U.S.-originated long distance traffic.
o In August 1998, the Company acquired the business of Motorola Tel.co in
the United Kingdom, Germany and Belgium from Motorola Inc. for
approximately $68.1 million. Motorola Tel.co resells wireless services
and related products in these countries to a base of over 360,000
subscribers. This transaction significantly increases the number of
direct customer relationships in Europe and will allow the Company to
cross sell long distance and wireless services.
LEVERAGE EXPERTISE OF MANAGEMENT TEAM
The Company has attracted experienced management from the
telecommunications industry to facilitate the integration of its regional
operations. Many of its key managers have had significant experience with
incumbent providers and early competitors in deregulating markets. In addition,
the Company generally retains key management in the companies it acquires. As a
result, the Company believes that it is well positioned to manage the
integration of acquisitions and the rapid growth of its customer base and
network infrastructure.
EXPAND INTERNET-BASED TELEPHONY AND ON-LINE SERVICE OFFERINGS
Through Delta Three, the Company seeks to expand its IP telephony service
offerings by increasing its investment in Internet gateway servers and expanding
its sales and marketing channels. Delta Three uses IP protocol as a transmission
standard for voice communications over the public Internet and private
intranets, extranets and dedicated leased lines, at substantially reduced
transmission and termination costs. Delta Three allows customers to place long
distance and international phone calls over Internet or IP networks using
standard telephones without requiring additional equipment. Delta Three also
offers prepaid calling card services, PC to phone and phone to PC services to
retail customers, and termination to wholesale customers. In addition to
offering IP telephony services, the Company plans to develop value added
services on the Internet and to provide on-line customer service and billing.
The Company believes that Delta Three positions the Company at the forefront of
the rapidly emerging IP telephony industry. See "Business--Delta Three
Operations."
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NETWORK
The Company generally utilizes a single switch technology platform for its
international telephony gateway switches comprised of state-of-the-art Ericsson
AXE-10 switches. The Company believes that a single switch platform gives the
Company a strategic advantage in developing new services and allows the Company
to upgrade network software on a more efficient basis when compared to those
other global carriers that employ multiple switch technologies. The Company is
also pursuing alternative transmission technologies such as the Internet and
managed IP networks in order to minimize its operating costs. See "--IP
Telephony Operation--General."
OWNED FACILITIES
The Company's owned facilities include switches and interests in
international fiber optic cable systems. The Company's 17 international
telephony gateway switches are located in New York, Los Angeles, London,
Stockholm, Paris, Frankfurt, Helsinki, Vienna, Milan, Copenhagen, Lisbon,
Sydney, Zurich and Tokyo. In addition, the Company operates 16 national switches
throughout its operations. The Company's existing international telephony
gateway switches conform to international signaling and transmission standards
provided for in International Telegraph and Telephone Constructive Committee
("CCITT") recommendations and allow the Company to interconnect its network to
existing PTT and carrier networks around the world while maintaining quality and
dependable services. The Company's switch and related equipment purchases have
been financed by Ericsson, and the Company believes it has developed a favorable
working relationship with Ericsson which will enable the Company to benefit from
Ericsson financing for future Ericsson purchases, although there can be no
assurance that this will be the case. The Company's switching facilities are
easily expandable to accommodate growth.
The Company also owns capacity on various international digital fiber optic
cable systems. The Company's United States operations currently own IRUs on the
CANUS-1, CANTAT-3, PTAT-1, NPC, RIOJA 2, ODIN 1, RIOJA 3, ODIN 2, APCN,
JASURAUS, FLAG (various segments), Estepona-Tetouan, Gemini, Americas 1, and
Taino-Carib undersea fiber optic cable systems and owns MIUs in the ANTILLAS I,
TAT-12/13 and Southern Cross submarine cable systems. The Company also owns
capacity on the CMC and MCC terrestrial (Japan) fiber optic cable systems. The
Company has currently committed to purchase capacity in the submarine fiber
systems of Japan--USA, Pan American, MAYA and TAT-14. The Company also is
currently in negotiations to purchase capacity for its United States operations
in the TPC-5, Guam--Philippines, R-J-K, AC-1, PC-1, PAC-1, MAC and FLAG
(additional segments) undersea fiber optic cable systems. The Company's Swedish
operation owns IRUs in the CANUS-1, CANTAT-3, SWE-FIN, SWE-Latvia and KATTEGAT-1
submarine cables. The Company's United Kingdom operation owns IRUs on the
UK-NL14, CANTAT-3 and PTAT-1, GEMINI, CANUS-1, UK-GER 6, RIOJA 2 and RIOJA 3
undersea fiber optic cable systems. The Company's Australian operation owns IRUs
in the APCN, JASAURUS, NPC and Southern Cross undersea fiber optic cable systems
and on the CMC and MCC terrestrial fiber optic cable systems.
The Company also, together with its joint venture partner in Mexico,
acquired switches and fiber cable covering 14 cities in Mexico, which 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 22 operating agreements (one of which allows the Company to transmit
traffic into three countries), which provide potential direct access to
Australia, Azerbaijan, Bolivia, Chile, Denmark, the Dominican Republic, Japan,
Jordan, Korea, Malaysia, Morocco, The Netherlands, New Zealand, Norway, the
Philippines, Russia, Srpska, Suriname, Sweden, Switzerland and the United
Kingdom. The Company currently only transmits and terminates traffic pursuant to
operating agreements in the Dominican Republic, the United Kingdom, Denmark, The
Netherlands, Russia, the Philippines and Norway. See "--U.S. Operations--U.S.
Network Architecture." The Company believes that these agreements constitute
significant assets and that the Company is one of only a limited
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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 which it
originates traffic to transmit domestic calls from its end-users to its switch.
While the Company intends to purchase or construct transmission facilities where
such facilities are available for purchase or may be constructed and such
purchase or construction is cost-effective and warranted by traffic patterns, a
significant percentage of its transmission facilities will continue to be
leased. Leased capacity is typically obtained on a per minute basis or a
point-to-point fixed cost basis. The Company utilizes leased satellite
facilities for traffic to and from those countries where digital undersea fiber
optic cables are not available or cost-effective. Leased satellite facilities
are also used for redundancy when digital undersea cable service is temporarily
interrupted. See "Risk Factors--We Depend on Other Carriers."
NETWORK MANAGEMENT SYSTEMS
The Company generally utilizes redundant, highly automated state-of-the-art
telecommunications equipment in its network and can, in cases of component or
facility failure, use the network management facilities to redirect calls to
another carrier's facilities. Back-up power systems and automatic traffic
re-routing enable the Company to provide a high level of reliability to its
customers. Computerized automatic network monitoring equipment allows fast and
accurate analysis and resolution of service problems. The Company maintains
separate network management facilities for its U.S. and European operations,
each of which maintains separate least-cost routing systems. U.S. network
management is operated from the Company's facilities in New York, Los Angeles
and Pittsburgh. European network management is operated centrally from the
Company's switching center in London. See "Risk Factors--The Rapidly Changing
Industry in Which We Operate Presents Risks and Uncertainties," "--We Depend on
Effective Information Systems" and "--The Year 2000 Technology Problem Places
Our Technology Systems at Risk."
NETWORK STRATEGY
The Company has connected, or is in the process of connecting, its current
switches in all of the countries in which it operates. The Company has connected
its current switches and expects to connect its future switches by investing in
IRUs, MIUs or transmission capacity on a point-to-point fixed cost basis,
subject to local regulatory conditions. In each new market the Company enters,
the Company intends to install its own switching facilities which will then be
integrated into RSL-NET to improve the Company's overall cost structure. The
Company transmits traffic from its Local Operators on capacity leased on a
variable cost per minute basis until it believes an investment in owned
facilities or fixed cost lease arrangements between countries or on a particular
route is warranted. To the extent traffic can be transported between two Local
Operators over MIUs, IRUs, domestic circuits or lines leased on a fixed cost
point-to-point basis, there is almost no marginal cost to the Company. In such
cases, the Company will be able to bypass the traditional settlement process for
the transport and termination of international traffic. The settlement rates for
international correspondence are based on negotiated rates which, according to
an FCC estimate in August of 1997, were up to 70% higher than the actual cost.
The Company expects that it will realize significant cost savings by routing an
increasing portion of its international traffic over its owned and leased
facilities as opposed to corresponding via operating
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agreements, in particular once the markets in which the Company operates
deregulate sufficiently to allow interconnect. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Effect of
Deregulation on European Cost of Services." In addition, each of the Local
Operators maintains an independent cost structure for all other traffic. By
directly linking its operations, the Company will be better able to implement a
least cost routing system. See "--International Long Distance Mechanics," "Risk
Factors--The Company Has A Short Operating History," "--We Have Recently Entered
into Newly Opening Markets," "--We Are Unable to Predict Traffic Volume" and
"--We Depend on Other Carriers."
For calls to countries where the Company does not have a Local Operator,
the Company seeks to establish and utilize an operating agreement with a local
carrier. While this method generates higher costs than transporting calls
between the Local Operators, it has the potential to generate higher margin
return minutes. The Company has not generated significant return minutes to
date. In addition, by strategically establishing its Local Operators and
obtaining operating agreements, the Company will seek to arbitrage the
differential in settlement rates between countries.
Origination and termination of traffic 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 provide, local services as a competitive 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. See "Risk Factors--Government
Regulations Restrict Our Operations" and "--Industry Overview," "--International
Long Distance Mechanics," "--North American Operations--U.S. Operations" and
"--European Operations--General."
LONG DISTANCE SERVICES
The Company provides domestic and international long distance services to
its customers. In nearly every country in which the Company operates in Europe,
the Company provides domestic long distance services. In the United States, the
Company is certified and tariffed or otherwise authorized to originate
intrastate, interexchange calls in 49 states and the District of Columbia and
can terminate calls throughout the United States.
PRIVATE LINE SERVICE
The Company can provide dedicated point-to-point connections to businesses
requiring dedicated private telephone lines for high volumes of voice and data
between the customer's offices in certain countries where the Company has
revenue generating operations.
CALLING CARDS
The Company's calling cards are either prepaid cards or post paid cards
(for which calls are billed in arrears). The Company's calling cards provide
international call access to or between many countries that have direct dial
service with the United States. Prepaid calling cards are similar products to
other calling cards, but differ in marketing focus as well as the method of
payment. A customer purchases a prepaid card that entitles the customer to make
phone calls on the card up to a certain limit. The
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Company also offers prepaid calling cards that are rechargeable. In all cases,
the card number is proprietary to the customer and is secured by means of a
personal identification number. The Company currently offers these products in
most of its existing operations.
VALUE-ADDED SERVICES
The Company currently offers facsimile services in all of its operations,
toll-free dialing in the United States, the United Kingdom and Sweden and
Internet access in the United States, Sweden and Canada and, in the future,
intends to offer most of these services in all markets where it is allowed to do
so. The Company also intends to introduce the following services: (i)
video-teleconferencing, (ii) on-line billing services, (iii) consolidated
billing for all services offered by the Company, (iv) on-line directory
assistance, (v) on-line conference calling, and (vi) international directory
assistance. In addition, through Delta Three, the Company can offer
international long distance voice service to niche markets utilizing IP
telephony at discounts to standard international calls.
INTERNATIONAL TERMINATION AND TRANSIT
International termination on a wholesale basis involves the sale of long
distance services to another long distance company that resells the services to
its customers. Selling bulk capacity to other carriers generates traffic
sufficient to allow the Company to obtain volume discounts when it leases
capacity on a per-minute basis and allows it to generate revenues from otherwise
unused capacity on its MIUs, IRUs and point-to-point leases. Transit traffic
originates and terminates outside of a particular country, but is transported
through that country on a carrier's network to take advantage of lower costs.
WIRELESS SERVICES
The Company provides wireless services to corporate, business and
residential subscribers. Through its agreements with network operators, the
Company provides subscribers with connection and access to wireless networks and
sells airtime services. The Company charges its subscribers for service
activation, monthly access, per-minute airtime and custom calling features, and
generally offers a variety of pricing options, most of which combine a fixed
monthly access fee and per-minute charges. Subscribers are also offered a wide
range of cellular telephones and accessories. Currently, the Company provides
wireless services in the United Kingdom, Germany, Belgium and Australia. The
Company intends to cross-sell long distance services to these subscribers.
DATA SERVICES
The Company offers a range of data transmission services to its customers
in certain countries, including frame relay, Internet access, remote access,
e-mail, packet switching, LAN integration and network and facilities management.
CUSTOMERS
SMALL AND MEDIUM-SIZED BUSINESSES. The Company focuses on offering high
quality products and services to small and medium-sized businesses with
significant international telephone usage (i.e., generally in excess of $500 per
month in international phone calls). The Company has focused on industries which
traditionally have significant volumes of international traffic. The Company
believes that small and medium-sized businesses have generally been underserved
by the major global telecommunications carriers and the PTTs, which have focused
on offering their lowest rates and best services primarily to higher volume
multinational business customers. The Company offers these companies
significantly discounted international calling rates as compared to the standard
rates charged by the major carriers and PTTs.
Small and medium-sized businesses account for the majority of all
businesses and the Company believes that in most markets they account for a
significant percentage of the international long distance traffic originated in
those markets. For example, the EU estimated that in 1996 there were 15 million
small and medium-sized businesses in the EU and that businesses that employ
fewer than 100 workers
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accounted for more than one half of all EU employment in 1996 and almost half of
all business revenue. Consistent with that, it was estimated in 1997 that in the
United Kingdom, companies employing fewer than 250 people spent about $6 billion
to $7 billion per year on telecommunications services as compared to about
$8 billion to $9 billion per year for businesses employing in excess of 250
people and only $3 billion per year for the multinationals.
CARRIERS. The Company offers international termination and transit traffic
services to other carriers, including resellers, on a wholesale basis, as a
"carriers' carrier." The Company's carrier customers as a group currently
provide the Company with a relatively stable customer base and thereby assist
the Company in projecting potential utilization of its network facilities. In
addition, the significant levels of traffic volume generated by such carrier
customers enable the Company to obtain large usage discounts based on volume
commitments. The Company believes that revenues from its carrier customers will
continue to represent a significant portion of the Company's overall revenues in
the future. See "Risk Factors--We Are Unable to Predict Traffic Volume."
RESIDENTIAL CUSTOMERS. The Company targets residential customers in
neighborhoods with large immigrant populations and/or with high international
calling patterns. The Company intends to capitalize on global immigration
patterns to target ethnic communities, primarily for its prepaid calling cards.
LARGE CORPORATIONS. Primarily as a result of the Westcomm acquisition, the
Company services a number of large corporations in the United States. The
Company also targets large corporations on those routes where the Company's cost
structure allows it to compete effectively. See "--North American
Operations--U.S. Operations."
MARKETING AND SALES
The Company has developed a wide range of marketing and distribution
channels focused on reaching a broad range of customers in the most
cost-effective manner. The Company markets its products and services through
(i) its direct sales forces, (ii) strategic alliances with companies that have
access to significant customer bases, (iii) networks of independent agents and
distributors, (iv) strategic alliances with resellers and (v) telemarketing
organizations. The Company's services are currently marketed independently by
the Local Operators in each country.
The Company continually seeks innovative ways to expand the scope of its
marketing channels and to enhance its ability to identify and retain customers.
For example, the Company has recently entered into a strategic alliance with
Metro Holding. The Company's alliance with Metro Holding will assist the Company
in promoting, marketing, selling and distributing the Company's services through
Metro AG's wholesale and retail operations in Europe. In addition, the Company
capitalizes on cross-selling opportunities as it adds new customer bases and
products through acquisitions and strategic alliances. Following its acquisition
of Motorola Tel.co, the Company intends to cross-sell its fixed wire and other
traditional long distance services to the Motorola Tel.co subscriber base and
Motorola Tel.co's wireless services to existing customers. The Company also
plans to introduce a universal brand image to create worldwide name recognition
for the Company.
Residential customers are targeted in neighborhoods with large immigrant
populations, utilizing resource materials and third party market research
companies, among other things, as resources for this information. Carriers
typically approach the Company directly to inquire about the Company's transit
and termination rates.
DIRECT SALES. Most Local Operators maintain their own direct sales force.
Generally, sales representatives are compensated primarily on a commission
basis. The Company intends to expand its direct sales force as it expands
existing operations and commences additional operations.
INDEPENDENT AGENTS. The Company also markets its services through an
indirect sales force comprised of independent agents. These agents include,
among others, companies which have a sales force or individuals marketing
related services such as telephone systems, copiers, fax machines or
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other office equipment to the Company's targeted customer segments. The
Company's indirect sales force will be an increasingly important sales channel
to access the local market.
DISTRIBUTORS. The Company has relationships with a small number of
distributors in the United States as well as in certain countries in Europe for
the sale of prepaid cards and will seek such arrangements in its other markets.
In addition, through the acquisition of Motorola Tel.co, the Company has greatly
expanded its dealer network.
TELEMARKETING SALES. The Company's U.S. and European operations use the
services of independent telemarketing sales organizations in certain of their
markets. Telemarketing sales are targeted to cover small to medium-sized
business and niche residential customers. Commercial customers are offered long
distance services while residential customers are offered long distance services
and a blend of prepaid and similar products. The Company expects that its
telemarketing sales agents will become an increasingly important means to
attract customers in related markets, including in the U.S.
ON-LINE SALES. The Company intends to offer potential subscribers the
ability to subscribe on-line for the Company's services and to obtain on-line
billing, directory assistance and conference calling.
CUSTOMER MANAGEMENT
The Company strives to provide competitive pricing, high quality services
and superior customer care service and believes that these factors are important
to its ability to compete effectively. The Company works closely with its
customers to develop competitively priced telecommunications and value-added
services (such as customized billing) that are tailored to their needs. The
Company has invested significant resources in developing information systems to
allow it to provide accurate and timely responses to customer inquiries. In
addition, each of the Local Operators has customer service and engineering
personnel available to address service and technical problems as they arise.
HEADQUARTERS OPERATIONS
The Company directs the operations of its subsidiaries, including the
management of the growth of current operations, the expansion of operations into
new markets, the formation of potential joint ventures and strategic alliances
and the execution of acquisitions. Identification of key markets, determination
of the vehicles through which, as well as the manner in which, the Company will
enter such markets and oversight of the implementation of these plans is also
done at the Company level. The Company is continuously reviewing and considering
investment and acquisition opportunities. The Company intends to pursue
acquisitions which it believes will expand or enhance its current operations.
All such acquisitions will be identified, negotiated and consummated at the
Company level, generally working together with local and regional management in
cases where the acquisitions supplement existing operations. In addition, the
Company seeks alliances with carriers to expand the scope of the Company's
network and improve its competitive profile.
The Company currently provides centralized financial services for all of
the Local Operators, including financial planning and analysis, cost control and
network management. The Company attempts to coordinate the acquisition of
additional transmission capacity (either leased or purchased) with the growth of
traffic volumes of each Local Operator. The Company assists in securing
financing and discounts for these expenditures as well as other capital
expenditures through its arrangements with particular vendors. The Company also
maintains global treasury functions, including the management of cash flows
between the Local Operators for the transmission of traffic between them, as
well as the allocation of working capital.
The Company expects to eventually link all of its switching facilities to a
central billing system administered at the Company level, and provide the
billing information to Local Operators which will then invoice the customers
directly. The invoice will be branded with the Company's name and will be
payable to a Company account in the Local Operator's country.
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The Company manages the expansion of RSL-NET, including the acquisition of
additional capacity for existing operations and the integration of developing
and new Local Operators into RSL-NET. The Company coordinates the routing of
traffic on RSL-NET to effect routing on a least cost basis. Least cost routing
involves the programming of the Company's switches to transport international
calls over the route which is most likely to produce the lowest cost to the
Company without compromising call quality. The Company consolidates the least
cost routing information of each of its Local Operators to allow them to take
advantage of each others' cost structure.
The Company is in the process of coordinating the marketing activities of
the Local Operators and plans to introduce a universal brand image to create
worldwide name recognition for the Company. In addition, the Company intends to
direct the service offerings of the Local Operators to enable the Company to
provide services to a single customer in more than one country. The Company
intends to then provide the customer with a single bill and designate a primary
customer service representative to address the customer's overall needs.
NORTH AMERICAN OPERATIONS
U.S. OPERATIONS
OVERVIEW
The United States is the largest single market in terms of international
long distance call terminations and originations. The top seven destinations for
U.S.-originated calls in 1996 were Canada, Mexico, the United Kingdom, Germany,
Japan, Hong Kong and France. The Company initiated its U.S. operations in March
1995 with its initial investment in RSL North America and has grown the business
significantly since then. The Company primarily operates in the United States
through RSL USA. The Company operates in the United States as a full service
international long distance carrier with multiple "214" licenses issued under
the Communications Act, which permit it to provide international
telecommunications services. The Company's principal offices for its U.S.
operations are located in the New York, Los Angeles and Pittsburgh metropolitan
areas, and RSL USA maintains sales offices in 11 U.S. metropolitan areas.
During 1998, the Company acquired WestComm, which offers voice telephony
and data services (including frame relay and TCP/IP networks) and Internet
access to a customer base consisting primarily of small to medium-sized
businesses in the United States. WestComm operates six switches strategically
located in the United States and employs approximately 335 people. The Company
has the exclusive right to the use of the Westinghouse Communications brand name
and a non-exclusive right to the use of the Westinghouse logo in connection with
providing telecommunications services in the United States and Canada for three
years following the date of the acquisition.
SERVICES AND CUSTOMERS
The Company offers its customers in the United States international and
domestic long distance, private line, calling card, data, Internet access and
value added services. Since the first quarter of 1996, the Company has focused
its U.S. operations on providing international and domestic long distance
services to small and medium-sized businesses. The Company also provides, or
plans to provide, local services as a competitive LEC in certain U.S. States by
reselling the services of facilities-based LECs.
In addition, through RSL COM PrimeCall, Inc. ("RSL PrimeCall"), the Company
specializes in the provision of prepaid calling cards for niche ethnic markets.
MARKETING AND SALES
The Company markets its services and products in the United States through
a variety of channels, including direct sales and indirect sales through
independent agents and distributors and third-party telemarketing sales. The
Company's U.S. operations employ sales and marketing employees and have
relationships with master agents with an underlying network of independent
agents, distributors and
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telemarketing agents. The Company expects that its telemarketing sales agents
will become an increasingly important means to attract customers in related
markets, including in the U.S. In addition, the Company employs a retail and
wholesale sales force dedicated to the sale of promotional post and prepaid card
products. The Company currently employs approximately sixty sales professionals
experienced in designing and developing integrated voice and data
telecommunications solutions. The Company believes that its engineering and
network management capabilities, as well as its ongoing service and support
personnel, will allow it to attract and retain commercial customers.
U.S. NETWORK ARCHITECTURE
The Company operates an Ericsson AXE-10 international gateway switch in New
York and Los Angeles. The Company's international telephony gateway switches
conform to CCITT recommendations and are directly connected to each other via
leased lines on a fixed cost, point-to-point basis. In 1998, the Company agreed
to acquire an OC3 transport facility from IXC Communications, Inc. for
approximately $14 million. The Company also operates seven domestic switches
strategically located in the United States and a prepaid card platform in New
York. The Company's data network consists of a Magellan Passport backbone with a
ring network architecture for reliability. The Magellan Passport network is
connected to Telematics switches which concentrate and collect the data from
certain geographic regions in which the Company conducts its business or, in
some circumstances, from individual customers.
The Company's US operations own IRUs in the following fifteen undersea
fiber optic cable systems: CANUS-1, CANTAT-3, PTAT-1, NPC, RIOJA 2, RIOJA 3,
ODIN 1, ODIN 2, APCN, JASAURUS, FLAG (various segments), Estepona-Tetouan,
Gemini, America 1 and Taino-Carib systems. In addition, RSL USA owns MIUs on
three undersea fiber optic cable systems, which are the ANTILLAS I,
TAT-12/TAT-13 and Southern Cross systems. The Company also owns MIUs on the CMC
and MCC terrestrial (Japan) fiber optic cable systems. The Company has committed
to purchase capacity on the Japan-USA, Pan American, MAYA and TAT-14 undersea
fiber optic cable systems. The Company also is currently in negotiations to
purchase IRUs for its United States operations on the TPC-5, Guam-Philippines,
R-J-K, AC-1, PC-1, PAC-1, MAC and in the FLAG (additional segments) undersea
fiber optic cable systems.
The Company currently is a party to 22 operating agreements (one of which
allows the Company to transmit traffic into three countries), which provide
potential direct access from the U.S. to Australia, Azerbaijan, Bolivia, Chile,
Denmark, the Dominican Republic, Japan, Jordan, Korea, Malaysia, Morocco, The
Netherlands, New Zealand, Norway, the Philippines, Russia, the Republic of
Srpska, Suriname, Sweden, Switzerland and the United Kingdom. The Company
believes that it is one of only a limited number of carriers within the United
States that has been able to secure a significant number of operating agreements
with carriers outside the United States. The Company currently only transmits
and terminates traffic pursuant to operating agreements in the Dominican
Republic, the United Kingdom, Denmark, The Netherlands, Russia, the Philippines
and Norway. The Company transmits call traffic bound for all other destinations
through leased capacity. The remaining operating agreements are inactive because
the Company has not yet invested in international transmission capacity for
those routes, in certain cases because call volume on such routes does not
warrant such an investment. By activating these operating agreements as well as
any additional operating agreements it may obtain, the Company believes it will
be able to significantly lower its costs of terminating international traffic.
The Company's failure to begin transmitting traffic pursuant to any such
operating agreement could lead to the termination of the agreement.
The Company also operates the network management control facilities from
which the Company administers and monitors the Company's switches and facilities
and provides customer service, 24-hour network monitoring, trouble reporting and
response procedures, service implementation and billing assistance. The Company
designates a specific customer service representative for each commercial
customer to oversee the installation and maintenance of the phone equipment, the
start-up of service and problem resolution.
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INFORMATION SYSTEMS AND BILLING
The Company owns and operates an Electronic Data Systems ("EDS") IXPlus
System that runs on an IBM AS/400 hardware platform. The Company is utilizing
the EDS system in the U.S. to: (i) provide sophisticated billing information
that can be tailored to meet a specific customer's requirements, (ii) provide
high quality customer service, (iii) detect and reduce fraud, (iv) integrate
efficiently additions to its customer base and (v) provide real time traffic and
call detail management. The EDS IXPlus System is operated and maintained by the
Company in its Los Angeles office. The Company has also implemented a customer
care and trouble management system, as well as developed what it believes is a
state-of-the-art information system that produces, among other things,
profitability margin analysis, routing statistics and overall traffic trends by
country, customer, vendor and switch. The Company's information systems are
important to its operations as they allow the Company to assess and determine
quickly customer billing and collection problems, production by and compensation
or commissions owed to agents, sales representatives and distributors, proper
pricing for the Company's services and other matters which are important to the
operation of the Company. The billing and information systems purchased by the
Company in connection with its acquisition of WestComm are being integrated into
the Company's current operations.
The Company has reviewed the EDS IXPlus System in connection with the Year
2000 problem and the Company expects to receive from its vendor, at no
additional cost to the Company, a Year 2000 compliant version of the EDS IXPlus
System by June 30, 1999. The Year 2000 compliant EDS system is expected to be
operational in early 1999. In addition, the Company's standardized desktop and
server configurations and software applications are already Year 2000 compliant.
See "Risk Factors--We Depend on Effective Information Systems" and "--The Year
2000 Problem Places Our Technology Systems at Risk."
COMPETITION
The Company competes with AT&T, Sprint, MCI WorldCom and other U.S.-based
and foreign carriers, many of which have considerably greater financial and
other resources than the Company. Certain of the larger U.S. based carriers have
entered into joint ventures with foreign carriers to provide international
services. In addition, certain foreign carriers have entered into joint ventures
with other foreign carriers to provide international services and have begun to
compete or invest in the U.S. market, creating greater competitive pressures on
the Company. The Company believes that its services are competitive in terms of
price and quality with the service offerings of its competitors in the U.S.
market.
REGULATORY ENVIRONMENT
The Company's U.S. operations are subject to extensive federal and state
regulation. Federal laws and FCC regulations apply to interstate
telecommunications (including international telecommunications that originate or
terminate in the United States), while particular state regulatory authorities
have jurisdiction over telecommunications originating and terminating within the
state. There can be no assurance that future regulatory, judicial and
legislative changes will not have a material adverse effect on the Company, that
domestic or international regulators or third parties will not raise material
issues with regard to the Company's compliance or noncompliance with applicable
regulations or that regulatory activities will not have a material adverse
effect on the Company.
FEDERAL. The FCC currently regulates the Company as a non-dominant carrier
with respect to 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
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of services on specific international routes on the basis of the Company's
foreign ownership and affiliations or a determination that the Company had the
ability to discriminate against U.S. competitors. In 1997, for example, the FCC
classified Sprint as a dominant carrier for the provision of U.S. international
services on the U.S.-France and U.S.-Germany routes in connection with
investments in Sprint by France Telecom and Deutsche Telekom.
Among domestic carriers, LECs are currently classified as dominant carriers
with respect to the local exchange services they provide, and no interstate,
interexchange carriers, including RBOCs which are permitted to offer long
distance service outside their service areas, are classified as dominant. Until
recently, AT&T was classified as a dominant carrier, but AT&T successfully
petitioned the FCC for non-dominant status in the domestic interstate,
interexchange and international markets. Therefore, certain pricing restrictions
that once applied to AT&T have been eliminated, likely making AT&T's prices more
competitive than the Company's prices. Nonetheless, the FCC placed certain
conditions on AT&T's reclassification to promote the development of vigorous
competition in the international services marketplace.
The Company has the authority to provide domestic, interstate
telecommunications services. The Company has also been granted authority by the
FCC to provide switched international telecommunications services through the
resale of switched services of United States facilities based carriers, to
generally resell international private lines not connected to the PSTN or which
are connected to the PSTN in Canada, New Zealand, Australia, Sweden, The
Netherlands, Luxembourg, Norway, Denmark, France, Germany, Belgium, Austria,
Switzerland, 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 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
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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 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.
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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 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. See "Risk Factors--Government Regulations Restrict Our
Operations."
The vast majority of states require carriers to apply for certification to
provide telecommunications services before commencing intrastate service and to
file and maintain detailed tariffs listing the rates for intrastate service.
Many states also impose various reporting requirements and require prior
approval for all transfers of control of certified carriers, assignments of
carrier assets, carrier stock offerings and the incurrence by carriers of
certain debt obligations. In some states, regulatory approval may be required
for acquisitions of telecommunications operations. In the past, the Company has
sought and successfully obtained such approval for its acquisitions.
CANADIAN OPERATIONS
OVERVIEW
The Company operates in Canada through Westel and RSL COM Canada Inc. ("RSL
Canada") which operates the Canadian operations of WestComm. Westel began
commercial operations in Canada in 1993.
SERVICES AND CUSTOMERS
The Company offers its customers in Canada a broad range of enhanced
telecommunications services including long distance, data, private line and
Internet access throughout British Columbia and Southern Ontario, including
metropolitan Toronto. The Company's customer base in Canada consists of both
commercial and residential customers.
MARKETING AND SALES
The Company markets its services in Canada through a variety of channels,
including direct sales and indirect sales through independent agents and an
external telemarketing company, association groups and ethnic niche marketing.
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CANADIAN NETWORK STRUCTURE
Westel operates a domestic switch in Vancouver. Westel leases capacity on
the network owned and operated by MK Network (as defined below) pursuant to a
long-term services agreement. MK Network employs a state-of-the-art Synchronous
Optical Network/Synchronous Digital Hierarchy microwave network adjacent to, and
extending beyond, the historical rail right-of-way of BC Rail. The network
employs a star configuration with a network operation center in Vancouver. This
low-cost network extends over 3,000 kilometers and serves 10 major population
centers including Greater Vancouver. In addition, Westel has installed an
Asynchronous Transfer Mode ("ATM") switching apparatus in six network nodes in
order to support its high speed data products.
INFORMATION SYSTEMS AND BILLING
Westel's billing system, which was upgraded in 1996, provides it with the
ability, among other things, (i) to produce one invoice for multiple services
provided to a customer and (ii) to store and track customer usage. Westel's
critical information systems have been assessed for Year 2000 compliance and the
non-compliant systems are expected to be made compliant by the beginning of
1999.
COMPETITION
Westel's principal competitor in British Columbia is BC Telecom ("BCTel"),
the dominant local access and long distance provider in British Columbia. The
Company also faces competition from national telecommunications providers
including AT&T Canada Long Distance Services Company and Sprint Canada Inc., as
well as the separate regional telephone companies (similar to BCTel) in the
other provinces of Canada. The Company also faces increasing competition from
cable companies, such as Rogers Communications Inc. and Shaw Cable, cellular
service providers and Personal Communications Service (PCS) providers such as
Microcell Solutions, Mobility Canada and Clearnet.
REGULATORY ENVIRONMENT
The principal federal legislation governing telecommunications in Canada is
contained in the Telecommunications Act, effective as of October 1993 (the
"Telecom Act"). The Telecom Act defines a number of objectives of the Canadian
telecommunications policy, one of which is to promote Canadian ownership and
control of the telecommunications infrastructure. Generally, the Telecom Act
limits eligibility to operate as a telecommunications common carrier in Canada
to Canadian-owned and controlled corporations incorporated or continued under
the laws of Canada. The Radiocommunications Act (the "Radiocom Act"), which
governs the licensing and regulation of radio apparatus, has adopted the same
Canadian ownership and control restrictions set out in the Telecom Act. The
Telecom Act defines a "telecommunications common carrier" as a person owning and
operating transmission facilities (which is defined as any wire, cable, radio,
optical or other electromagnetic system for the transmission of
telecommunications services and which does not include switches).
The effect of the Telecom Act, the Radiocom Act and the regulations
promulgated under such Acts are to prohibit Canadian facilities-based carriers
from being controlled by non-Canadians and to set a maximum effective foreign
ownership level (directly and through a "qualified corporation" (as defined in
the regulations under the Telecom Act)) of such carriers at 46.7% of the voting
shares.
In compliance with the Telecom Act and the Radiocom Act, Westel transferred
(the "MK Network Transfer") its telecommunications facilities (as defined in the
Telecom Act) to MK Telecom Network Inc. ("MK Network"), an entity in which the
Company owns a 46.7% beneficial interest, effective as of the Company's closing
of the acquisition of Westel. MK Network is majority-owned and controlled, in
accordance with the Telecom Act and the Radiocom Act, by a Canadian citizen.
Concurrently with the consummation of the MK Network Transfer, Westel entered
into a long-term agreement with MK Network for the provision of
telecommunications services.
As a signatory to the WTO Agreement, Canada has agreed to end Teleglobe
Canada's monopoly on the sale of international long distance services to
customers in Canada commencing on October 1, 1998 with full deregulation
expected to be effective by the beginning of the year 2000. The Canadian
Radio-television and Telecommunications Commission (the "CRTC") has issued to
the Company an
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international telecommunications service license, effective January 1, 1999,
pursuant to which the Company intends to offer international long distance
services to its customers in Canada.
While the Canadian telecommunications market continues to move towards full
deregulation, the CRTC retains a critical regulatory function in Canada. As a
reseller of telecommunications services, Westel is required to register with the
CRTC and to comply with a variety of CRTC mandated obligations (including the
requirement to make contribution payments to support the affordability of
universal local services), but is not subject to any Canadian foreign ownership
and control restrictions.
Unlike the U.S. telecommunications market, the Canadian telecommunications
market does not contain a mandated structural separation between the incumbent
local service providers and long distance service providers. However, the CRTC
has implemented certain non-structural safeguards to encourage competition in
the provision of long distance services. In particular, the CRTC has required
incumbent local access providers to (i) resell capacity on their underlying
local facilities to third party carriers and (ii) provide interconnection
arrangements to competing long distance providers. As a result of the ability of
the incumbent local access providers to maintain a virtual monopoly in the
provision of local services, these telecommunications companies have been able
to secure the largest market shares in their respective operating territories
for the provision of long distance services.
EUROPEAN OPERATIONS--GENERAL
OVERVIEW
The Company began European operations in 1996, when most Member States of
the EU were in the initial stages of deregulation, and currently has operations
in 14 countries in Europe. In anticipation of deregulation, the Company has
established a significant presence in most major EU markets through a series of
acquisitions commencing in 1995. Pursuing its "first to market" entry strategy,
the Company has made significant investments in advance of customer acquisition
to establish operations, retain qualified personnel and build a recognized name.
In the fully deregulated European markets in which it operates, the Company
(i) has been permitted to interconnect its switches directly with the local
exchange network, instead of through more expensive means, such as leased lines
or dial-in access, and (ii) has linked, or is in the process of linking, with
RSL-NET through owned international transmission facilities directly, instead of
entering into long-term lease agreements for international capacity at a high
fixed cost or purchasing per-minute of use termination rates from the dominant
carrier. The Company intends to make significant investments to acquire its own
international transmission facilities where such facilities are available and
ownership of such facilities is cost effective and warranted by traffic
patterns.
The Company has recently completed a number of alliances and acquisitions
in Europe that will significantly expand its distribution channels and broaden
its customer base and product offerings. See "--Overview--Europe."
INFORMATION SERVICES, SYSTEMS AND BILLING
RSL Europe has developed its own proprietary information and billing system
employing a Hewlett Packard 9000 UNIX server and a Sybase, Inc. ("Sybase")
developed customized software package (collectively, the "System"). The System
provides for billing, customer service, management information, financial
reporting and related functions. The Company has invested significant resources
into the development of the System and the Company's management worked closely
with Sybase to develop software which reflects the experiences of the Company's
management in the telecommunications industry. The System has been designed to
be easily integrated into the operations of each of its current, planned and
future European Local Operators and may ultimately be used as the centralized
information system for the Company. The System currently provides centralized
billing, customer service, and information systems to several of the Company's
European entities. The Company believes that the System is a key asset of the
Company and an important advantage in the management of its growth.
The System provides for sophisticated, automatic, itemized billing that can
be tailored to meet each customer's specific requirements, including customized
tariffs and discount schemes. The Company
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expects that the System will also facilitate integration and central oversight
of its European operations through automated data entry by its Local Operators
and through easily generated financial status, sales information, performance
and sales commission reports.
The Company has reviewed the System in connection with the Year 2000
problem and has determined that the System is Year 2000 compliant. The Company's
standardized desktop and server configurations and software applications in
Europe are also Year 2000 compliant. The Company is in the process of reviewing
its Ericsson international telephony gateway and domestic switches in Europe in
connection with the Year 2000 problem and the Company expects that its switches
will be Year 2000 compliant by June 30, 1999. See "Risk Factors--We Depend on
Effective Information Systems" and "--The Year 2000 Problem Places Our
Technology Systems at Risk."
In connection with the acquisition of Motorola Tel.co, the Company acquired
the proprietary information and billing system developed by Motorola Tel.co.
This billing system is a uniform billing platform that has been customized to
address the specific requirements of each of the Company's cellular operations
in Europe. The Year 2000 compliant version of this billing system is expected to
be operational in early 1999. The Company is in the process of reviewing its
existing billing System and that of its cellular operations and expects to
implement an integration of the two systems during 1999.
REGULATORY ENVIRONMENT
Most 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. See "Risk Factors--
Government Regulations Restrict Our Operations."
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
international market. However, the effective implementation of this or any EC
directive by member states is subject to substantial delay. See "Risk
Factors--Government Regulations Restrict Our Operations."
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
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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. See "Risk Factors--Government Regulations Restrict Our Operations."
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. See "--International Long Distance
Mechanics."
U.K. OPERATIONS
OVERVIEW
The Company's U.K. operations began generating revenues in May 1996.
SERVICES AND CUSTOMERS
The Company offers its customers in the United Kingdom international and
domestic long distance services, as well as wireless services. Customers access
the fixed wire long distance services by direct access, prefix dialing and
dial-in. Direct access services are provided by connecting customers to the
Company's London switches by means of lines leased from British Telecom or C&W.
Prefix dialing services are provided by means of access to the Company's London
switches by way of the PSTN using the Company's access codes. Oftel has stated
that preselect will be introduced in the UK market in 2000. In anticipation of
this move, the Company intends to install at least five local switches to
facilitate the offering of local services. The Company is able to offer its
customers a comprehensive set of wireless service offerings through its
agreements with multiple network operators in the United Kingdom. The Company's
customer base in the United Kingdom consists primarily of carriers, commercial
customers and prepaid account customers, as well as certain residential
customers. The Company's current commercial customers include multinationals and
large national companies, as well as small and medium-sized businesses.
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MARKETING AND SALES
The Company markets its services in the United Kingdom through a variety of
channels, including direct sales, indirect sales through independent agents, and
telemarketing sales. The Company also relies heavily on its network of agents to
sell its long distance calling services in the United Kingdom. The Company
believes that several of the agents have existing relationships with businesses
in the Company's target market which better position them to identify and sell
services to prospective customers. In addition, through the acquisition of
Motorola Tel.co, the Company has greatly expanded its dealer network and certain
of these dealers have long-term agreements with the Company.
U.K. NETWORK ARCHITECTURE
The Company operates two Ericsson switches in the United Kingdom: an
international gateway switch and a domestic switch, both located in London. The
Company intends to connect its local switches with leased fiber that the Company
believes is available at economical rates. Prior to December 1996, the Company
was prohibited from owning interests in fiber optic cable coming in or out of
the United Kingdom. As a result, the Company had been transmitting call traffic
bound for destinations outside of the United Kingdom through leased capacity
provided by British Telecom and C&W. The Company's United Kingdom operation owns
IRUs on the UK-NL14, CANTAT-3 and PTAT-1, GEMINI, CANUS-1, UK-GER 6, RIOJA 2 and
RIOJA 3 undersea fiber optic cable systems. The Company intends to invest in its
own transmission facilities where such facilities become available and if such
investments are cost effective and warranted by traffic patterns.
COMPETITION
The Company's principal competitors in the United Kingdom are British
Telecom, the dominant supplier of telecommunications services in the United
Kingdom, and C&W. The Company also faces competition from emerging licensed
public telephone operators (who are constructing their own facilities-based
networks) such as Energis, and from resellers including MCI WorldCom, Esprit and
Global One. The Company also competes in the wireless service market with the
four wireless network operators (Vodafone, CellNet, Orange and One-to-One), as
well as other wireless service providers.
REGULATORY ENVIRONMENT
The Company was awarded an International Facilities Based
Telecommunications License (an "IFBTL") in the United Kingdom in December 1996.
An IFBTL entitles the Company to acquire IRUs and MIUs on international
satellite and cable systems, resell international private lines, as well as
interconnect with, and lease capacity at wholesale rates from British Telecom
and C&W. In addition, the Company holds an International Simple Voice Resale
("ISVR") license in the United Kingdom. An ISVR license allows the Company to
resell international private lines, as well as interconnect with, and lease
capacity at wholesale rates from, British Telecom and C&W.
With respect to the provision of wireless services, the regulatory
environment in the United Kingdom has been under review by Oftel for more than
two years following the publication of Oftel's consultative document Fair
Trading in Mobile Service Provision in May 1996. This was followed by a
statement titled Fair Trading in Mobile Service Provision in April 1997. An
important development resulting from these regulatory statements is that Oftel
will, when competition among network operators is in the opinion of Oftel fully
effective, amend the licenses issued to Vodafone and CellNet to remove the
requirement that these two network operators offer wireless services to service
providers. These policy statements are currently under review. If Oftel does not
modify its position, the Company believes, although no assurances can be made in
this regard, that applications for judicial review will be filed by independent
service providers.
GERMAN OPERATIONS
OVERVIEW
RSL COM Deutschland GmbH ("RSL Germany") was formed in April 1996 for the
purpose of acquiring Sprint's international voice business in Germany. Sprint,
which commenced its German voice business in 1993, was required to divest itself
of its German and French international voice businesses pursuant to the terms of
the Global One joint venture agreement.
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The Company is in the process of establishing a network of eight national
switches in Germany connected by leased lines. The Company's capital expansion
plan includes installing remote POPs and the purchase of domestic circuits in
order to interconnect its German national network.
SERVICES AND CUSTOMERS
The Company offers its customers in Germany domestic and international
fixed wire long distance and wireless services. The Company's customers in
Germany are provided with fixed wire long distance services by direct access and
prefix dialing. The Company is able to offer its customers a comprehensive set
of wireless service offerings through its agreements with multiple network
operators in Germany. The Company's current customer base in Germany consists of
small, medium-sized and large business customers, residential customers and
calling card customers. Following receipt of its Category 4 license, RSL Germany
commenced the use of its interconnect and began operating pursuant to such
license. RSL Germany has also applied for a Class 3 Infrastructure License.
MARKETING AND SALES
The Company employs direct sales and marketing employees in Germany. The
Company currently has five sales offices in Germany, located in Munich, Hamburg,
Wiehl, Stuttgart and in Frankfurt. RSL Germany is expanding its direct sales
force as a part of its growth strategy by adding additional sales
representatives. The Company currently markets its services through a variety of
channels including indirect sales, resellers and agents. The Company has
expanded its network of independent sales agents in Germany through the
acquisition of Motorola Tel.co.
GERMAN NETWORK ARCHITECTURE
RSL Germany currently operates an Ericsson AXE 10 international gateway
switch which is connected directly to the Company's international telephony
gateway switches in London, New York, Paris and Vienna. The Company is in the
process of installing an additional seven Ericsson AXE switches. International
transmission facilities are currently leased from other carriers. The Company
has interconnect agreements with other carriers for excess and termination of
its international traffic. The Company is currently in the process of
negotiating with German carriers and certain prospective developers of
telecommunications infrastructure to purchase or lease capacity to meet its
demands in the near future with respect to German-originated traffic.
COMPETITION
In Germany, the Company competes with facilities-based carriers, wireless
network operators and resellers. The Company's principal competitor in Germany
is Deutsche Telekom, the dominant supplier of telecommunications services in
Germany. The Company also faces competition from emerging public telephone
operators (who are constructing their own facilities-based networks) such as
Arcor (Mannesmann and DBKom), O.telo (RWE and VEBA) and VIAG Interkom (VIAG and
British Telecom), from resellers, including MCI WorldCom, call-back providers,
such as TelePassport, and wireless network operators, such as Mannesmann
Mobilfunk and E-Plus Mobilfunk. After deregulation on January 1, 1998,
alternative networks became available to route and terminate voice traffic.
REGULATORY ENVIRONMENT
Effective January 1, 1998, the German telecommunications market was fully
liberalized. The Telecommunications Act (Telekommunikationsgesetz) ("TKG"),
which became effective on August 1, 1996, implements the telecommunications
policy of the EU into national law. The TKG called for the immediate
liberalization of public switched voice telephony with effect as of January 1,
1998. Accordingly, public switched voice telephony services, previously provided
by Deutsche Telekom, may now be provided on the basis of self-operated networks.
Pursuant to the TKG, a license is required in order to operate transmission
lines for public use and to provide voice telephony services. RSL Germany was
issued a Category 4 license on a nationwide basis to transmit voice traffic via
the Company's international telecommunications network. As of March 1998,
Category 4 licenses have been granted to 49 companies in Germany.
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To monitor licensing, rate and interconnection regulation as well as
numbering and customer protection, the TKG established the Regulatory Authority
for Telecommunications and Post. The Regulatory Authority deals primarily with
interconnection issues. The TKG and the respective ordinance (Network Access
Ordinance "Netzugangsverordnung" or "NZV") provide that any public
telecommunications network operator is obliged to offer interconnection at the
request of other operators of such networks. Therefore, market dominating
providers, such as Deutsche Telekom, must allow other providers access to their
telecommunications networks. RSL Germany has entered into an interconnection
agreement with Deutsche Telekom and therefore is able to accept calls from and
terminate calls with Deutsche Telekom and other third party networks, thereby
facilitating the offering of national and international telecommunication
services via the RSL Germany network.
DUTCH OPERATIONS
OVERVIEW
The Company operates in The Netherlands through RSL COM Nederland B.V.
("RSL Netherlands"). RSL Netherlands is an international carrier with switches
installed in Rotterdam and Amsterdam. RSL Netherlands began generating revenues
in October 1995.
SERVICES AND CUSTOMERS
The Company offers its customers in The Netherlands international long
distance services utilizing direct access, prefix dialing and dial-in access,
and prepaid calling cards. The Company's customer base in The Netherlands
consists primarily of commercial and calling card customers.
MARKETING AND SALES
The Company markets its services in The Netherlands through a variety of
channels, including direct sales through representatives, indirect sales through
independent agents and telemarketing sales. The Company believes that many of
the agents have existing relationships with businesses in the Company's target
market which better position them to identify and sell services to prospective
customers. The Company sells its prepaid calling cards through independent
distributors.
DUTCH NETWORK ARCHITECTURE
In The Netherlands, the Company operates two Nortel Meridian switches,
directly linked by leased capacity, from its offices in Rotterdam and Amsterdam.
The Company is currently in the process of installing in The Netherlands an
Ericsson AXE-10 gateway switch. RSL Netherlands is linked directly to the
Company's London gateway by leased facilities and resells the services of
British Telecom and Global One on all routes where it is economical to do so.
COMPETITION
The Company's principal competitor in The Netherlands is PTT Telecom
Netherlands, the dominant supplier of telecommunications services in The
Netherlands. The Company also faces competition from emerging licensed public
telephone operators (who are constructing their own facilities-based networks)
such as MCI WorldCom and from mega-carriers including Concert and Global One.
Assuming deregulation occurs, it is expected that alternative networks
currently under construction will become available to route and terminate voice
traffic.
REGULATORY ENVIRONMENT
As of July 1, 1997, restrictions on voice telephony services over cable
infrastructure were liberalized, in effect bringing about full liberalization of
the telecommunications market in The Netherlands.
Under the current licensing regime, two new licensees, other than the Dutch
PTT, may operate nationwide fixed telecommunications networks: Telfort, a joint
venture between British Telecom and the Dutch Railway Company, and Enertel, a
consortium of Dutch electricity companies and a large Dutch cable television
company. Furthermore, hundreds of licenses to operate regional fixed networks
have been granted mainly to electricity and cable television companies.
Nevertheless, neither the use of
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leased lines capacity and other leased facilities, nor the services provided by
the Company, requires a license.
A new telecommunications act has been approved by both houses of the Dutch
parliament, and has been signed by the Queen. The exact date of the new law's
effectiveness is still under discussion. The new act is expected to consolidate
the full liberalization of the Dutch telecommunications market and introduce a
new licensing regime. Although the details of that new regime are not yet
certain, the Company expects it may be required to obtain a registration with
the new regulatory authority in order to provide its current services. Such a
registration is, however, mainly a formality, and is not intended to restrict
access to the market.
FRENCH OPERATIONS
OVERVIEW
RSL COM France S.A. ("RSL France") was formed in April 1996 for the purpose
of acquiring Sprint's international voice business in France. Sprint was
required to divest itself of its French and German international voice
businesses under the terms of the Global One joint venture agreement. Sprint
commenced its international voice business in France in 1994.
SERVICES AND CUSTOMERS
The Company offers its customers in France international and domestic long
distance services and national long distance services, both fixed-to-mobile and
fixed-to-fixed, utilizing direct access over leased lines and dial-in access. In
May 1998, RSL France was granted L.33.1 and L.34.1 licenses which entitle it to
own and operate a public network in 9 out of 18 interconnection zones of France
and enable it to provide telephone services throughout France. In addition, RSL
France is no longer restricted from providing its services to the public.
Direct access is provided via a leased line connection between the
customer's phone system and the Company's switches. The Company's French
customer base consists of carrier customers and direct access and dial-in access
commercial customers. The Company's customers in France include small and
medium-sized businesses, residential and calling card customers.
MARKETING AND SALES
The Company markets its services through a variety of channels, including
direct sales and indirect sales through independent agents as well as private
installers and consultants. The Company's French operation employs sales
representatives and has relationships with various independent agents. The
Company intends to expand its direct sales force and agent network as a part of
its growth strategy.
FRENCH NETWORK ARCHITECTURE
RSL France operates an Ericsson AXE-10 and AXE10 CCP international
telephony gateway switch in its main switching center located at Nanterre. It
also operates on AXE10 SSP at Marseilles which provides interconnection with
France Telecom. The services are currently available in 12 regions in France
pursuant to L.33.1 and L.34.1 Licenses. RSL France also operates five switches
located as follows: two in Paris, and one each in Marseilles, Nice and Nanterre.
A new wide band network using the latest optic fiber technology (SDH/STM16)
is being built.
COMPETITION
The Company's principal competitor in France is France Telecom, the
dominant supplier of telecommunications services in France, and Modulance
Global r3 and TRF, which offer discount long distance services to the largest
commercial customers. The Company also faces competition from emerging licensed
public telephone operators (who are constructing fiber networks in major
metropolitan areas and who are interconnected to France Telecom), such as
Worldcom, COLT, SIRIS, CEGETEL, and Bouygues, and from resellers, including
Omnicom and Esprit. Upon deregulation, alternative networks currently under
construction are expected to become available to route and terminate traffic
domestically.
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REGULATORY ENVIRONMENT
In accordance with the Telecommunications Laws passed in July 1996, the
liberalization process is regulated by a new government authority, the French
Telecommunications Authority ("Autorite de Regulation des Telecommunications"),
which was established in January 1997. The telecommunications market in France
was scheduled to be liberalized on January 1, 1998. RSL France obtained an
authorization to operate a public network and to offer public telephony pursuant
to articles L.33.1 and L.34.1 of the Postal and Telecommunications Code on May
12, 1998 and this authorization was published in the French Official Gazette on
May 30, 1998. Since then, RSL France is legally authorized to operate a public
network and to offer telephony services to the public. Therefore, dial-in access
is no longer restricted to closed-user groups. To the extent that RSL France
obtained on May 12, 1998 its authorization pursuant to articles L.33.1 and
L.34.1 of the P & T Code, it is authorized to provide international and domestic
long distance services utilizing direct access or dial-in access in those areas
where the Company establishes POPs. These services are to be provided utilizing
direct access through interconnection with other operators of a public network
(i.e., operators holding an L.33.1 license).
Currently, France Telecom and Telecom Development are the only operators
capable of providing interconnection services on a national scale in France. New
operators of public networks should be able to interconnect with France
Telecom's PSTN as from the date they have obtained the authorization pursuant to
articles L.33.1 and/or L.34.1 of the P & T Code, from a strictly legal point of
view. In practice, interconnection with France Telecom for all new entrants
faces significant delay. However, regulatory French law does not set forth any
compulsory delay for France Telecom to provide interconnection. In its
contractual offer, France Telecom only commits to make its best effort to
provide interconnection within an 18 month period as from the order.
The terms and conditions of interconnection offered by France Telecom will
provide for "direct interconnection" of calls originated by RSL France
subscribers to France Telecom subscribers throughout France, even where RSL
France has no POPs, while "indirect interconnection" of calls originated by
France Telecom subscribers to RSL France subscribers will be available only in
those areas where RSL France has POPs. Currently, POPs of RSL France are located
in Lille, Lyon, Toulouse, Marseilles and Nice.
Under the terms of the authorization granted to RSL France, the French
government expects RSL France to commit approximately $12 million in capital
expenditures for infrastructure over the next three to five years.
In November 1997, RSL France entered into a joint venture agreement with
the Chamber of Commerce and Industry of Marseilles Provence (the "CCIMP") and
Teleport Marseilles Provence ("Teleport"), a licensed telecommunications service
provider in Marseilles, France, to promote international telecommunications
services in certain regions of France. Through Teleport, RSL France will be
permitted to provide, to a maximum of 20,000 users, telecommunications services
in Marseilles and in other regions of France. Beginning in October 1998, RSL
France expects to offer, pursuant to its L.33.1 and L.34.1 licenses, nationwide
services in Marseille through an interconnection link to France Telecom acquired
as a result of the joint venture with Teleport.
RSL France has filed a complaint with the governmental body in charge of
telecommuncations matters regarding certain effects caused by low retail
tariffs, that RSL France has alleged prevent competition and set barriers to
entry for entrants.
SWEDISH OPERATIONS
OVERVIEW
The Company operates in Sweden through RSL COM Sweden AB ("RSL Sweden").
The Company acquired a majority interest in RSL Sweden in November 1995. RSL
Sweden is licensed as an international carrier in Sweden, which permits it to
transmit long distance services nationally and internationally. The Company's
Swedish operations began operating and generating revenues in May 1996.
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SERVICES AND CUSTOMERS
The Company offers domestic and international long distance and value-added
services to its customers in Sweden. Customers access the Company's switch
utilizing prefix dialing and direct access. The Company's customer base in
Sweden consists primarily of commercial customers and residential customers.
MARKETING AND SALES
The Company's Swedish operation markets its services through a variety of
channels, including direct sales, indirect sales through independent agents and
telemarketing sales. The Company employs full-time sales and marketing employees
in Sweden. The Company primarily relies on its network of independent sales
agents to sell its long distance calling services in Sweden. In addition, the
Company sells its services through a chain of independent telecommunications
stores with locations throughout Sweden, as well as through a large association
comprised of individuals and businesses. The Company believes that many of its
agents have existing relationships with businesses in the Company's target
market which better position them to identify, and sell services to, prospective
customers.
SWEDISH NETWORK ARCHITECTURE
In Sweden, the Company operates an Ericsson AXE-10 international telephony
gateway switch from its offices outside of Stockholm. RSL Sweden is connected to
RSL-NET by leased facilities. The Company's Swedish operation owns IRUs in the
CANUS-1, CANTAT-3, SWE-FIN, SWE-Latvia and KATTEGAT-1 submarine cables. RSL
Sweden currently has operating agreements with carriers in Denmark and Norway,
as well as direct connections to a carrier in Latvia and the Company's
operations in the United Kingdom, the United States and Finland.
COMPETITION
The Company's principal competitor in Sweden is Telia, the dominant
supplier of telecommunications services in Sweden. The Company also faces
competition from emerging licensed public telephone operators (which are
constructing their own fiber networks), such as Tele 2 and MCI WorldCom, and
from resellers, including Telenordia, Telecom Finland and Tele 8. Upon the
completion of the construction of the new fiber networks, the Company will have
alternative means of routing and terminating calls.
REGULATORY ENVIRONMENT
The Swedish telecommunications market was deregulated by the
Telecommunications Act of 1993. Pursuant to the Act, the Company, through RSL
Sweden, holds a full license to provide fixed wire telephony in the Swedish
market. As a licensed carrier, the Company may purchase IRUs or lease fixed
capacity from other providers, or utilize the PSTN to originate and terminate
its traffic. Presently, the Company's services are accessed primarily by prefix
dialing. However, the Telecommunications Act has recently been amended and the
Company believes that such amendments, which will be effective by the middle of
1999, will require the provider of the PSTN to offer pre-selected access to
other carriers.
FINNISH OPERATIONS
OVERVIEW
Finland is a strategically important market because it serves as a gateway
to Russia. The Company operates in Finland through RSL COM Finland Oy ("RSL
Finland"), a wholly-owned subsidiary of the Company. The Company acquired a
majority interest in RSL Finland in November 1995. RSL Finland is a fully
licensed international long distance carrier in Finland. The Company's Finnish
operations began operating and generating revenues in May 1996.
SERVICES AND CUSTOMERS
The Company offers its customers in Finland international and domestic long
distance services utilizing direct access and prefix dialing. The Company's
customer base in Finland consists primarily of commercial and residential
customers. In addition, a majority of the Company's revenues in Finland are
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derived from recurring rental and servicing fees related to the rental of
telecommunications terminal equipment, telecommunications systems and ancillary
equipment under multi-year contracts between business customers and the
Company's 90%-owned subsidiary, Telecenter Oy, an independent agent in Finland.
MARKETING AND SALES
The Company markets its services in Finland through a variety of channels,
including direct sales and indirect sales through independent agents. The
Company relies heavily on its direct sales to sell its long distance calling
services in Finland.
FINNISH NETWORK ARCHITECTURE
In Finland, the Company operates an Ericsson AXE-10 international telephony
gateway switch in its offices in Helsinki. RSL Finland primarily utilizes RSL
Europe's network for international termination. International termination is
also achieved by RSL Finland through connections to Sonera Corporation (formerly
known as Telecom Finland) and other carriers' international circuits. RSL
Finland utilizes an operating agreement with a Russian carrier and is directly
connected to RSL Sweden.
COMPETITION
The Company's principal competitor in Finland is Sonera Corporation, the
dominant supplier of telecommunications services in Finland. The Company also
faces competition from emerging licensed public telephone operators (who are
constructing their own facilities-based networks), such as Finnnet, Telia,
Global One and Faciliacom.
REGULATORY ENVIRONMENT
There are two classes of operators in Finland, (i) network operators, which
have their own network of domestic transmission lines, and (ii) service
operators, which cannot own domestic transmission lines or IRUs, but can have
their own switching facilities. RSL Finland was granted a license to provide
services as a network operator in March 1997. However, RSL Finland does not have
its own network of domestic transmission lines, except for a fiber optic network
in the city of Helsinki, expected to become operational in the beginning of
1999.
In April 1997, the New Telecommunications Market Act was enacted, which
removes the last restrictions applicable to telecommunications and enforces
competition. As a result, network operators are obligated to rent full network
capacity, including local loops, to other operators. In addition, the New
Telecommunications Market Act provides that companies will only need to hold a
license in order to provide services as a mobile phone network operator.
DANISH OPERATIONS
The Company operates in Denmark through RSL COM Denmark A/S ("RSL
Denmark"), a wholly owned subsidiary of RSL Netherlands, which initiated its
operations in April 1997 and began generating revenues in May 1997.
SERVICES AND CUSTOMERS
RSL Denmark currently offers its customers international and domestic long
distance services utilizing prefix dialing. The services are offered to
commercial customers as a subscription service.
MARKETING AND SALES
The services are distributed through direct sales by the Company and by
appointed resellers. The Company's interconnect prefix, which was recently
installed, provides customers with the option of using the Company's direct
line, without requiring a physical connection.
DANISH NETWORK ARCHITECTURE
The Company has installed an Ericsson AXE-10 international telephony
gateway switch in Copenhagen. The Company routes all calls through Tele
Danmark's network via the interconnect agreement between the Company and Tele
Danmark and other Danish telecommunication providers.
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COMPETITION
The Company's principal competitor in Denmark is Tele Danmark, the dominant
supplier of telecommunications services in Denmark. In January 1998, the Danish
government sold a controlling interest in Tele Danmark, to U.S.-based Ameritech.
The Company also faces competition from various other carriers, primarily Telia
(the Swedish PTT), the smaller Tele 2 (NetCom Systems), Mobilix A/S (the Danish
subsidiary of France Telecom) and Global One, which are all connected to Tele
Danmark's fixed line network via interconnect agreements. Recently, several of
these carriers have entered into agreements with Powercom, a subsidiary of two
Danish power suppliers, to offer telecommunications services over Powercom's
fixed line network, which has hitherto been used to manage power transmission.
Mobilix A/S has also entered into an agreement with the Danish national railway
agency to develop the agency's fixed line network for telecommunications
services.
Tele Danmark offers full scale telephony in all areas. Telia and Mobilix
both hold mobile licenses, offer a variety of telecommunications services and
have the goal of eventually becoming full-scale operators.
REGULATORY ENVIRONMENT
All telecommunications services in Denmark were liberalized in 1996.
Currently, the Company may, through RSL Denmark, provide national and
international telephony in the Danish market, except wireless telephony, which
requires a license. Tele Danmark, in practice, still has an effective (but not
legal) monopoly on the ownership of fixed lines. Thus, the Company can only
construct its own fixed lines, lease fixed lines from Tele Danmark or operate
through interconnection agreements, but competition is growing on the market of
fixed lines, and it is expected that pending regulation may further limit Tele
Danmark's market control, although there can be no assurance in this regard.
Effective April 1, 1998, Tele Danmark implemented a new tariff structure which
basically results in a reduction of Tele Danmark's minute rates and an increase
in the price of the basic telephony subscription service. This amendment may
ultimately force RSL Denmark to lower its rates as a result of stronger price
competition.
PORTUGUESE OPERATIONS
The Company operates in Portugal through its 39% investment in Maxitel
Servicos e Gestao de Telecomunicacoes, SA ("Maxitel"). The Company made its
initial investment in Maxitel in April 1997. Maxitel commenced operations in the
international voice and data business in December 1994.
SERVICES AND CUSTOMERS
Maxitel offers international and long distance voice services to closed
user groups of companies utilizing autodialers and direct access. In addition,
Maxitel offers store and forward and real-time fax services.
MARKETING AND SALES
Maxitel markets its services through a direct sales force and is developing
an indirect sales force through independent agents. Maxitel operates primarily
in the Lisbon and Oporto areas.
PORTUGUESE NETWORK ARCHITECTURE
Maxitel operates an Ericsson AXE-10 international telephony gateway switch
in its offices in Lisbon and is in the process of converting its entire customer
terminal equipment to this new platform. The Oporto node is already working in
this new configuration. Additionally, Maxitel leases satellite transmission
capacity on Orion, Hispasat and Intelsat.
COMPETITION
Maxitel's primary competitor is Portugal Telecom, the dominant supplier of
telecommunications services in Portugal. The Company also competes with the
local Portuguese affiliates of global carriers such as Global One and with
resellers in the Portuguese market.
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REGULATORY ENVIRONMENT
Fixed-wire voice telephony services were subject to a monopoly until March
1997. Under the terms of the current legislation it is possible for companies
other than Portugal Telecom to offer both national and international voice
services to closed user groups. Interconnection to the Portugal Telecom PSTN is
permitted for such services. The privatization process of Portugal Telecom was
concluded at the end of 1997 and the Portugese government maintains a 25%
interest in Portugal Telecom. Full deregulation is expected to occur by
January 1, 2000.
ITALIAN OPERATIONS
OVERVIEW
The Company operates in Italy through RSL Italy in which it acquired an 85%
interest in August 1997. RSL Italy, under its former ownership, commenced
operations in 1995. In July 1998, as a consequence of a capital increase in RSL
Italy that was funded by the Company but not by the minority shareholders of RSL
Italy, the Company's interest in RSL Italy was increased to 99.30%. Beginning on
July 14, 2000, however, RSL Italy's minority shareholders will have a call
option right to purchase a quota which would reduce the Company's ownership
interest in RSL Italy to 85% of (i) the entire capital, if at that time RSL
Italy will have no additional shareholders, or (ii) the capital then held in the
aggregate by the Company and the present minority shareholders, if at that time
RSL Italy will have additional shareholders. In addition, in July 1998, RSL
Italy acquired 75% of the equity of Comesa ("Comesa"), a telecommunications
company located in Northern Italy and a subsidiary of RSL Italy.
SERVICES AND CUSTOMERS
RSL Italy offers its customers in Italy international and domestic long
distance services utilizing dial-in access via autodialers and dedicated access
lines. RSL Italy's current customer base consists primarily of small and
medium-sized businesses. RSL Italy markets its services also through Comesa.
MARKETING AND SALES
RSL Italy markets its services through a direct sales force and an indirect
sales force and has acquired a network of independent agents through Comesa.
ITALIAN NETWORK ARCHITECTURE
RSL Italy currently operates as a reseller, purchasing wholesale facilities
from other Italian carriers. RSL Italy has installed an Ericsson AXE-10
international telephony gateway switch and two AT&T Definity switches in Milan.
RSL Italy is installing an Ericsson AXE-10 switch and has installed three AT&T
Definity switches in the Rome area. Additionally, the Company intends to install
18 additional POPs and intends to lease and, if available and cost-effective and
warranted by traffic patterns, purchase, domestic circuits and IRUs. The Company
has linked RSL Italy with RSL-NET in London and in Paris.
COMPETITION
RSL Italy's primary competitor is Telecom Italia S.p.A. ("Telecom Italia"),
the dominant supplier of telecommunications services in Italy. The Company also
competes with the local Italian affiliates of global carriers such as British
Telecom, Global One and 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).
REGULATORY ENVIRONMENT
Under the current regime, certain domestic and international voice services
(such as those presently offered by RSL Italy) do not fall within the definition
of "voice telephony" as contained in Directive 90/388/EEC and construed by
Italian authorities. In order to render these voice services (the "Specified
Voice Services"), the would-be operator is required to file a declaration with,
or obtain an authorization from, the Italian Ministry of Communications. Whether
the would-be operator needs the declaration or the authorization depends on the
type of links to the PSTN actually necessary to render
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Specified Voice Services. In fact, for Specified Voice Services to be offered
through switched links to the PSTN, the declaration is required, whereas the
authorization is needed for Specified Voice Services to be offered through
dedicated links. This regime is expected to be replaced in the near future by a
"general authorization" regime pursuant to Directive 97/13/EC.
As of January 1, 1998, domestic and international voice services that fall
within the above-mentioned definition of "voice telephony" can be rendered only
after having obtained an individual license from the Ministry of Communications
and the NRA, an independent body, established in 1998, which is taking over most
of the regulatory and monitoring functions of the Ministry of Communications. A
separate individual license is necessary, inter alia, to establish and provide
public telecommunications networks.
In light of the above and in compliance with the Full Competition
Directive, the "voice telephony" monopoly in Italy has been abolished. However,
"voice telephony" is currently principally provided by Telecom Italia and a few
other telecommunications organizations (see "--Competition" above).
Specific rules to further implement the Full Competition Directive and
other subsequent EU Directives have been enacted with respect to significant
matters, including numbering, universal service, fees to be paid in connection
with individual licenses as well as interconnection. As to the latter, the
relevant legislation has been challenged by Telecom Italia through a request of
a temporary restraining order. The Court has postponed the decision on the
temporary restraining order, so that the challenged interconnection legislation
is now still valid and enforceable. The decision on the merits of the challenge
is expected not earlier than mid-1999.
Also, on November 25, 1998, the NRA adopted a resolution whereby Telecom
Italia's interconnection offer of July 1998 must be amended so as to bring such
offer further in line with the recommendations and principles of the European
Union and the Italian legislation on interconnection. Telecom Italia challenged
this resolution before the Administrative Court by requesting a temporary
restraining order that would suspend the binding effects of the NRA's
resolution. The Administrative Court rejected Telecom Italia's request for the
temporary restraining order. Telecom Italia may appeal the Administrative
Court's decision on the temporary restraining order before the State Council.
The decision on the merits of Telecom Italia's challenge is expected not earlier
than the end of 1999.
Further implementing legislation is expected to be enacted in the near
future with reference to other matters, including a regime that will replace the
current regulations on, among other things, the Specified Voice Services.
The effective liberalization of the Italian telecommunications market will
depend on the actual application of the rules enacted and to be enacted as well
as on the actual exercise of the powers and functions of the NRA.
RSL Italy has the approvals and authorizations required to offer its
domestic and international Specified Voice Services.
In addition, in July 1998, RSL Italy obtained an individual license to
establish a telecommunications network in order to provide "voice telephony"
services in Italy. RSL Italy is currently implementing the activities necessary
to benefit from the rights established and the obligations imposed by this
individual license and it is negotiating an interconnection agreement with
Telecom Italia.
AUSTRIAN OPERATIONS
OVERVIEW
The Company operates in Austria through RSL Austria in which it currently
holds a 90% interest. However, the Minority Interestholder (as defined herein)
of RSL Austria was granted the right to increase his ownership interest in RSL
Austria to up to 24.9%, subject to certain conditions which have been satisfied.
The Company is in the process of evaluating the number of shares of RSL Austria
required to be issued to such Minority Interestholder.
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SERVICES AND CUSTOMERS
RSL Austria began offering international and national long distance voice
services utilizing autodialers, direct access, call by call and calling cards in
March 1998. RSL Austria's targeted customers are small to medium-sized
businesses.
MARKETING AND SALES
RSL Austria markets its services through both a direct and indirect sales
force as well as independent agents.
AUSTRIAN NETWORK ARCHITECTURE
RSL Austria began offering services in March 1998 as a full licensed
operator. The Company has installed an Ericsson AXE-10 telephony international
gateway switch in Vienna which is operational. This international gateway switch
in Austria will enable RSL Austria to expand the products and services it
offers.
COMPETITION
RSL Austria's primary competitors in Austria are Telecom Austria (the
"TA"), the dominant supplier of telecommunications services in Austria, UTA and
others. The Company competes with the local Austrian affiliates of global
carriers such as Global One and Swisscom. In addition, the Company is competing
with resellers in the Austrian market.
REGULATORY ENVIRONMENT
New telecommunications legislation was passed in July 1997 which permitted
interconnection with the TA's PSTN beginning on January 1, 1998. Competition in
all voice telephony services is now permitted. Telecommunications services are
subject to licenses granted by an Austrian regulatory authority to applicants
with sufficient technical and economic facilities. The Company has been granted
a license to operate as a full service telecommunications provider of local,
long distance and international services in Austria. In February 1998, RSL
Austria signed an interconnection agreement with the TA.
SPANISH OPERATIONS
OVERVIEW
RSL Communications Spain, S.A. ("RSL Spain") was formed in December 1997.
The Company operates in Spain through RSL Europe which holds a 90% interest in
RSL Spain.
SERVICES AND CUSTOMERS
Only Telefonica de Espana, S.A. ("Telefonica de Espana"), Uni2 and
Retevision, S.A. ("Retevision") are licensed to provide international long
distance services in Spain. The range of services that can currently be provided
by RSL Spain, pending further deregulation, is limited to closed-user group
services, resale of capacity, fax and Internet services.
MARKETING AND SALES
RSL Spain markets its services through both a direct and indirect sales
force.
SPANISH NETWORK ARCHITECTURE
The Company has installed an Ericsson AXE-10 international gateway switch
in Madrid, which is linked to Ericsson MD110 POPs in Barcelona, Valencia and
Mabella.
COMPETITION
The Company's main competitor in Spain is Telefonica de Espana, the company
that has traditionally enjoyed a monopoly in the provision of telecommunications
services and the current dominant supplier of telecommunications services in
Spain. The Company also faces competition from Retevision, an emerging public
telephone operator which was granted the second nation-wide license to provide
voice telephony services, and which is in the process of building its own
network, and Uni2, which was awarded a third nation-wide license to provide
voice telephony services, but has not yet
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started to operate. Retevision, started operations at the beginning of 1998.
Cable operators have been authorized to provide voice telephony services since
January 1998. The Company also faces competition from resellers, which at
present, generally, have small operations in Spain, and from mega-carriers
interested in long distance services upon deregulation of the market.
REGULATORY ENVIRONMENT
Market deregulation is expected in Spain by December 1, 1998. Spain was one
of the Member States which was granted a waiver of up to five years to implement
the Full Competition Directive. After negotiations to determine the specific
duration of the waiver period, the EC granted Spain an additional period, until
November 30, 1998, for the complete deregulation of voice telephony and public
telecommunications networks. Spain is now moving towards deregulation. Major
events in the Spanish telecommunications market have occurred in the last two
years, including (i) the complete privatization of Telefonica de Espana which
took place at the beginning of 1997, (ii) the licensing of Retevision and its
privatization, (iii) the third basic telephony license, granted in May 1998 to
Lnce and authorization to enable cable operators to provide voice telephony as
of December 1998, (iv) the third license for mobile telephone service granted to
Retevision (which had already been operating under a voice telephony license),
and (v) the creation of the Telecommunications Market Commission as a regulatory
independent entity.
The 1987 Telecommunications Act was previously enacted for a monopolistic
market. The General Telecommunications Act, a new telecommunications act, was
approved by the Parliament in April 1998. The legislation is intended to address
issues inherent to a competitive market such as a new licensing procedure,
universal service, definition of public service obligations, interconnection
rules, numbering, tariffs, etc., and will require further implementation by
means of regulations. Implementing regulations were enacted and the regulatory
framework was established during 1998. Telecommunications services in Spain are
subject to licenses granted by a Spanish regulatory authority. In February 1998,
RSL Spain was granted a license to provide closed-user group services, resale of
capacity, fax services and internet services in Spain. RSL Spain has also
applied for a basic voice telephony license (license type B1) and for licenses
to resell telecommunications services and to provide value added services.
BELGIAN OPERATIONS
OVERVIEW
The Company primarily operates in Belgium through RSL Belgium, in which the
Company currently holds a 90% interest. In addition, the Company offers wireless
services to its customers through RSL Telco Belgium S.A./N.V. ("RSL Telco
Belgium"), a wholly owned subsidiary of the Company.
SERVICES AND CUSTOMERS
The Company, through RSL Belgium and RSL Telco Belgium, offers its
customers in Belgium international long distance voice services utilizing
dial-in access via autodialers and wireless services. In addition to the dial-in
access services currently offered by RSL Belgium, RSL Belgium was granted a
license to offer international and domestic fixed wire long distance service.
RSL Belgium intends to commence offering its customers international and
domestic long distance fixed wire voice services utilizing pre-fix dialing
during 1999. Through existing agreements with each of the wireless network
operators in Belgium, the Company is able to offer its customers a comprehensive
set of wireless service offerings. The Company's customer base in Belgium
consists primarily of small and medium-sized businesses.
MARKETING AND SALES
The Company markets its services in Belgium through a direct and indirect
sales force as well as independent agents. RSL Belgium has offices in Zaventem,
Gent, Liege, Antwerp and Charleroi.
BELGIAN NETWORK ARCHITECTURE
RSL Belgium currently operates as a reseller, purchasing wholesale
facilities from other carriers operating in Belgium. The Company has installed
an Ericsson AXE-10 international telephony gateway switch in Belgium and the
switch became fully operational in the fourth quarter of 1998.
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COMPETITION
RSL Belgium's primary competitor is Belgacom, the former PTT and the
dominant supplier of telecommunications services in Belgium. RSL Belgium also
competes with local Belgian affiliates of global carriers, such as Global One
and Unisource, local resellers, as well as subsidiaries of other U.S. and
European telecommunication companies, such as WorldxChange, C&W Telemart, and
others. The Company also competes for wireless subscribers with the two Belgian
wireless network operators, Proximus and Mobistar, as well as other wireless
service providers.
REGULATORY ENVIRONMENT
The Belgian Parliament passed the first Belgian Telecommunications Act (the
"Belgian Act") in March 1991, in order to liberalize the Belgian
telecommunications market. Since then, the Belgian Act was amended on numerous
occasions, most recently in December 1997. On January 1, 1998, the last
remaining monopolies of Belgacom ceased to exist. The Belgian Act provides,
among other things, for regulations regarding licensing, rate and
interconnection regulation, universal service obligations, numbering and
customer protection. Since December 1997 and the summer of 1998, many of the
Royal Decrees necessary to implement the provisions of the Belgian Act have
become law. According to these Royal Decrees, providers of voice telephony
services must apply for a voice telephony license with the Belgian Institute for
Post and Telecommunications (the "BIPT") the Belgian regulatory authority. The
licenses are granted by the Minister for Telecommunications, upon recommendation
of the BIPT. Prior to this regime, which only existed since July 1998, such
providers had to apply for a temporary license. The Company applied for and
obtained such a temporary license and will apply for a new permanent voice
telephony license.
SWISS OPERATIONS
OVERVIEW
The Company operates in Switzerland through RSL COM Schweiz AG ("RSL
Switzerland") in which it currently holds a 78.5% interest. RSL Switzerland
started operations in 1995 as a long distance carrier for closed user groups.
SERVICES AND CUSTOMERS
While in the past RSL Switzerland targeted multinationals and supplied
international voice and fax services, RSL Switzerland is, in addition to such
multinationals, currently targeting small to medium-sized businesses.
MARKETING AND SALES
RSL Switzerland markets its services through both a direct sales force and
an indirect sales force.
SWISS NETWORK ARCHITECTURE
The Company is in the process of installing an Ericsson AXE-10
international telephony gateway switch. Customer access will be over leased
lines or over the three carrier selection codes which were assigned to the
Company in December 1997.
COMPETITION
RSL Switzerland's primary competitors in Switzerland are Swisscom, Diax,
Sunrise, GlobalOne, Colt, MCI WorldCom, Equant and other smaller resellers.
REGULATORY ENVIRONMENT
The sale of value-added telecommunication services (data networks) as well
as telecommunications equipment such as telephones and fax machines was
liberalized in 1992. The transmission of voice for closed user groups has been
permitted since July 1, 1995. With the new law on telecommunication services
which came into force on January 1, 1998, Switzerland is a fully liberalized
telecommunications market.
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LATIN AMERICAN OPERATIONS--GENERAL
RSL Latin America was formed in mid-1997 as a joint venture pursuant to a
shareholders agreement (the "Latin America Joint Venture Agreement"), between
the Company and Coral Gate Investments Ltd., a British Virgin Islands
corporation ("Coral Gate"), which is an affiliate of Inversiones Divtel, D.T.,
C.A. ("Divtel"), a Venezuelan corporation, and a member of the Cisneros Group.
RSL Latin America is 51% owned by RSL and 49% owned by the Cisneros Group. RSL
Latin America is in an early stage of its development and most of Latin America
is in the earliest stages of deregulation. As a result, the Company's Latin
American operations have not generated significant revenues.
RSL Latin America's primary purpose is to develop, through local operating
companies formed in conjunction with local partners, a pan-Latin American
network and operations spanning Mexico, Central and South America and the
Caribbean.
In August 1998, the Company acquired a 49% interest in PCM Communicaciones
S.A. de C.V. ("PCM"), a licensed long distance telecommunications service
provider in Mexico. Pursuant to Mexican regulatory requirements and a joint
venture agreement with the majority shareholders of PCM, PCM will develop a
telecommunications network in Mexico and RSL Mexico will market and sell
domestic and international long distance telecommunications services primarily
to small and medium-sized businesses in Mexico. Also in August 1998, the Company
together with PCM, acquired switches and fiber cable covering 14 cities in
Mexico, which are expected to be fully installed by the end of 1998.
Since most Latin American countries currently restrict competition to a
limited number of specific services, the Company has developed a two stage
market penetration strategy to capitalize on the current and future
opportunities in Latin America. The first step is to take advantage of current
market conditions and, within the parameters of the Company's product line, to
provide the fullest range of services permissible under the local regulation.
The Company seeks to build a customer base within its target segments prior to
full market liberalization, and when the market opens to competition, the
Company will have an established base in its target areas.
VENEZUELAN OPERATIONS
OVERVIEW
The Company operates in Venezuela through RSL COM Venezuela C.A. ("RSL
Venezuela"), acquired in connection with the Latin America Joint Venture
Agreement. RSL Venezuela was organized in 1992.
SERVICES AND CUSTOMERS
RSL Venezuela offers its customers in Venezuela international long distance
voice services utilizing dedicated access along with prepaid and postpaid cards
and provides value-added telecommunications services. RSL Venezuela's customer
base consists primarily of small and medium-sized businesses.
MARKETING AND SALES
RSL Venezuela markets its services through a direct sales force and
telemarketing and uses distributors to market its prepaid calling card products.
VENEZUELAN NETWORK ARCHITECTURE
RSL Venezuela currently operates an Ericsson MD 110 switch directly linked
via a Panamsat-1 satellite circuit to the Company's New York international
gateway switch.
COMPETITION
RSL Venezuela's primary competitor is CANTV, the dominant supplier of
telecommunications services in Venezuela. RSL Venezuela also competes with local
Venezuelan affiliates of global carriers, such as British Telecom, Global One
and Mercury, regional competitors, such as Impsat, Texcom S.A. and Charter
Communications, and callback operators.
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REGULATORY ENVIRONMENT
The Venezuelan telecommunications market is regulated by the Ministry of
Transportation and Telecommunications, by means of the National
Telecommunications Commission ("Conatel"). CANTV holds an exclusive monopoly on
the provision of local, domestic and international switched fixed telephone
services within Venezuela until November 2000. However, certain value-added
services are open to competition, although a concession from Conatel is
required. RSL Venezuela currently holds concessions for value added and data
services which allow it to provide international voice services via dedicated
access provided on a private network. RSL Venezuela is not required to obtain a
concession to provide prepaid and post paid card services. RSL Latin America has
registered 100% of the foreign investment made in RSL Venezuela as required by
Venezuelan foreign investment regulations.
ASIA/PACIFIC RIM OPERATIONS--GENERAL
The Company carries on its Asian operations through RSL Asia, a 91.5%-owned
subsidiary of the Company and RSL COM Asia/Pacific Ltd. ("RSL Asia/Pacific"), a
wholly-owned subsidiary of the Company based in Hong Kong. In October 1996, RSL
Asia established RSL Australia to carry on its Australian operations. In March
1997, the Company incorporated RSL Japan as a wholly-owned subsidiary of RSL
Asia/Pacific to initiate the Company's operations in Japan. RSL Asia and RSL
Asia/Pacific intend to capitalize on the trend toward deregulation within the
region to establish operations in key countries.
The Company has hired a managing director to oversee and develop RSL
Japan's operations. In January 1998, RSL Japan was granted an International
Simple Resale license by Japan's Ministry of Ports and Telecommunications (the
"MPT") to resell international telephony, fax and data services to and from
Japan. RSL Japan has also received a Type II value added network provider
license and expects to provide such services in the third quarter of 1998. RSL
Japan may apply for a Type I license in Japan to provide facilities-based
international long distance service. The Company has installed an Ericsson
AXE-10 international telephony gateway switch in its offices in Tokyo. The
Company's Tokyo switch is currently connected to the Company's Australian
switch.
AUSTRALIAN OPERATIONS
OVERVIEW
The Company operates in Australia through RSL Australia, a wholly-owned
subsidiary of RSL Asia. The Company began generating revenues in Australia in
April 1997.
SERVICES AND CUSTOMERS
As a result of its acquisition of the customer bases of several Australian
resellers, the Company's fixed wire customer base in Australia has grown
significantly and consists primarily of commercial customers. The Company offers
these customers local services and domestic and international long distance
services. RSL Australia also offers prepaid cards and wireless telephony
services to residential customers. The Company recently entered the wireless
telephony business in Australia. The Company has commenced efforts to cross-sell
fixed wire services to its wireless subscribers and wireless services to its
fixed wire customers.
MARKETING AND SALES
The Company plans to market its services in Australia through a variety of
channels, including direct sales and indirect sales through independent agents.
The Company's current revenues are generated primarily from the fixed wire
customer base acquired from the Call Australia Group and the wireless telephony
customer bases acquired from First Direct Communications Pty., Limited and Link
Telecommunications Pty., Ltd. In addition, RSL Australia maintains an extensive
calling card distribution network.
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AUSTRALIAN NETWORK STRUCTURE
The Company has installed an Ericsson AXE-10 international gateway switch
in its offices in Sydney and two domestic switches in Melbourne and Brisbane
which are directly linked to each other. In addition, RSL Australia operates a
prepaid card platform. The Company's Australian operation owns IRUs in the APCN,
JASAURUS, NPC and Southern Cross undersea fiber optic cable systems and on the
CMC and MCC terrestial fiber optic cable systems.
COMPETITION
The Company's principal competitors in Australia are the two licensed
general carriers Telstra Corporation Limited (the former PTT) and C & W Optus
Limited. Each of these competitors provides a bundle of services including
mobile, local, and domestic and international long distance. In addition, the
Company faces competition from switch-based and switchless resellers such as
AAPT Limited, Primus Limited, WorldCom Limited, One-Tel Limited, Macquarie
Corporate Pty Limited, Hutchison Telecommunications Pty Limited and Vodatone Pty
Limited.
REGULATORY ENVIRONMENT
The Telecommunications Act 1997 (the "Australian Act") in Australia makes a
distinction between carriers and carriage service providers and requires a
carrier to be licensed under the Australian Act. A carriage service provider,
while not licensed, is required to comply with the terms of the Australian Act
including the service provider rules under the Australian Act. RSL Australia is
not required to be licensed as a carrier since it does not own a network unit in
Australia. A network unit is defined under the Australian Act as a line link
connecting distinct places in Australia at least 500 meters apart and includes a
radiocommunications facility used to supply a public mobile telecommunications
service. RSL Australia does not intend at this time to apply for a carrier
license.
IP TELEPHONY OPERATION--GENERAL
In mid-1997, the Company acquired Delta Three, a telecommunications
provider utilizing packet switched networks, such as the Internet and networks
based on Internet protocols, to provide telecommunications services and to
transmit voice communications.
The Internet is an interconnected global computer network of tens of
thousands of packet-switched networks using Internet protocols. Technology
trends over the past decade have removed the distinction between voice and data
segments. Traditionally, voice conversations have been routed on analog lines.
Today, voice conversations are routinely converted into digital signals and sent
together with other data over high-speed lines. In order to satisfy the high
demand for low-cost communications, software and hardware developers have
developed technologies capable of allowing the Internet and managed IP networks
to be utilized for voice communications.
Delta Three offers services that provide real-time voice conversations over
the Internet and IP networks ("IP Telephony"). These services work by the use of
an Internet gateway server ("IP Telephony Gateway"), which provides a connection
between the PSTN and Delta Three's IP networks and converts analog voice signals
into digital signals. These signals are in turn compressed and split into
packets which are sent over the Internet or IP network like any other packets
and reassembled by a second IP Telephony Gateway as audio output at the
receiving end. The packets are converted back into analog format and then to the
telephone number dialed.
Certain Internet Telephony software today requires one or both parties to a
call to use computers that are connected to the Internet or an IP network at the
time of the call. In addition to these types of services, Delta Three provides
services that allow both parties to use ordinary telephones. Although current
Internet Telephony does not provide comparable sound quality to traditional long
distance service, the sound quality of IP Telephony has increased over the past
few years, and the Company expects such quality to continue to improve; however
there can be no assurance in this regard.
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DELTA THREE OPERATIONS
OVERVIEW
Delta Three began operations in May 1996 and began offering commercial IP
telephony services in January 1997. Delta Three currently offers commercial
service between 23 countries and it plans to extend the service to additional
countries within the next two years.
SERVICE AND CUSTOMERS
Delta Three utilizes the Internet and managed IP networks traditionally
used for data communications, as a transmission medium for ordinary telephone
calls. The primary service offered by Delta Three enables customers to place
long distance and international phone calls to be carried over the Internet
while using a standard telephone, without any additional equipment. Delta Three
also offers a service that enables customers to place long distance calls from a
personal computer to a standard telephone. Delta Three offers these services at
a price which is at a significant discount to standard international calls.
Delta Three operates as a wholesale carrier for international long distance
resellers on a point-to-point basis and as a retail carrier, servicing its own
network and marketing the use of its network to residential customers in
designated areas and corporations. Currently, most of the minutes sold by Delta
Three are sold to the Company on a wholesale basis. Delta Three recently entered
into a joint venture agreement with Quintel Entertainment, Inc., a direct sales
and marketing company, to market and sell Delta Three's services to customers in
the U.S. and Canada. Delta Three expects to increase its retail customers base
as a result of this joint venture.
Delta Three currently provides IP Telephony service from the U.S., Europe,
Australia and Japan with termination capabilities to 23 points of presence
around the world utilizing RSL-NET.
MARKETING AND SALES
Delta Three's strategy is initially to utilize wholesale contracts to
increase the volume on its network and then to add retail and corporate clients
onto the network, which it will market under its name. Delta Three is also
focused on providing high margin innovative value-added services in niche
markets. Delta Three utilizes the Web as an additional sales venue to offer
services to retail customers and is increasing its resources towards on-line
marketing and sales. Delta Three also offers the Company the ability to purchase
minutes wholesale at preferred rates.
DELTA THREE NETWORK
The Delta Three network consists of IP Telephony Gateways, primarily IPTC
Ericsson platforms, located within key metropolitan areas in target countries. A
Delta Three customer dials an access number where a Delta Three system prompts
the customer for an access code and the desired phone number. The system then
opens a connection with a remote IP Telephony Gateway and instructs the IP
Telephony Gateway to place a local call to the telephone the customer has
dialed. Once the local call is transmitted, the IP Telephony Gateway converts
the call into a form which can be routed over the Internet and transfers the
call to a second Internet Gateway. The IP Telephony Gateway may be connected by
(i) the Internet accessed through an Internet service provider, (ii) capacity
leased on a private Intranet and (iii) leased private lines. By routing calls in
such a manner, Delta Three is able to avoid the high costs associated with the
settlement process. Delta Three has also entered into a co-development agreement
with Ericsson to develop IP Telephony Gateways and application technology.
REGULATORY ENVIRONMENT
While regulation still plays a significant role in traditional
telecommunications markets, the Internet is largely unregulated, permitting
business opportunities to flourish and to rapidly follow technological
developments. To date, the FCC has never directly exercised regulatory
jurisdiction over Internet-based services. The rapid development of the
Internet, raises the question of whether the language of the Communications Act
of 1934, as amended by the Telecommunications Act of 1996, or existing FCC
regulations, covers particular services offered over the Internet.
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The FCC and most foreign regulators have not yet attempted to regulate the
companies that provide the software and hardware for IP Telephony, the access
providers that transmit their data, or the service providers, as common carriers
or telecommunications services providers. Therefore, the existing systems of
access charges and international accounting rates, to which traditional long
distance carriers are subject, are not imposed on providers of IP Telephony
services. As a result, such providers may offer calls at a significant discount
to standard international calls. There can be no assurance, however, that the
FCC and/or foreign regulators will not regulate IP Telephony or Internet service
providers in the future. In a recent Report to Congress, the FCC indicated that
certain forms of phone-to-phone Internet Telephony may bear the characteristics
of telecommunications, as opposed to information, services, thereby subjecting
them to regulation as common carrier offerings.
The level of regulation of IP Telephony differs significantly from country
to country and, in many countries, IP Telephony is not regulated any differently
than other Internet service. In some countries IP Telephony is illegal. There
can be no assurance that regulation of IP Telephony will not increase around the
world. See "Risk Factors--Government Regulations Restrict Our Operations."
EMPLOYEES
As of September 1, 1998, the Company employed approximately 2,000 people,
including officers, administrative and salaried selling personnel. The Company
considers its relationship with its employees to be good.
PROPERTIES
The Company's principal office is at Clarendon House, Church Street,
Hamilton, Bermuda.
The Company maintains executive offices at 767 Fifth Avenue, New York, New
York, where the Company occupies approximately 11,000 square feet under a lease
which expires on January 31, 2002. The lease provides for annual lease payments
of $767,000.
The Company also maintains a 3,040 square foot office at 60 Hudson Street,
New York, New York which houses the Company's international telephony gateway
and domestic switches located in New York. The lease extends until March 2006
and provides for annual lease payments of $312,240.
The Company has entered into a lease to maintain a 14,000 square foot
office at 430 Park Avenue, New York, New York for RSL USA's Eastern United
States offices. The lease extends until June 29, 2001 and provides for annual
lease payments of $375,000.
The Company maintains a 15,000 square foot office at 5550 Topanga Canyon
Boulevard, Woodland Hills, California which houses RSL USA's western offices.
The lease for such space extends until January 15, 2003 and provides for annual
lease payments of $333,000.
The Company, as a result of the acquisition of WestComm, leases office
space in Pittsburgh, Pennsylvania and various other sales offices for annualized
aggregate rent of approximately $1.8 million. The lease for the principal office
in Pittsburgh extends until July 31, 2008.
The Company maintains an office at Churchill House, 142-146 Old Street,
London, England which is used as the location for the London international
gateway switch and the London domestic switch. The lease extends until October
1, 2005 and provides for annual lease payments of $90,000 until October 2000 and
may be increased thereafter.
The Company maintains office space at Victoria House, London Square, Cross
Lanes, Guildford, Surrey, which is RSL Europe's headquarters. The lease extends
until August 20, 2006 and provides for annual lease payments of approximately
$245,000, which may increase in December 1999 and December 2004.
The Company maintains additional office space for RSL Europe at 21/27
Tabernacle Street, London, England. The lease extends until 2008 and provides
for annual lease payments of approximately $420,000, and may be increased in
July 2003. The space is rent free until April 1999.
In addition, the Company maintains offices with respect to its other
foreign operations, for which the aggregate annual lease payments equal
approximately $3.0 million.
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The Company, through its direct and indirect subsidiaries, also leases
additional office spaces for its operations.
LEGAL PROCEEDINGS
In mid-1997 AT&T filed with the FCC an opposition to the Company's requests
for modification of the International Settlement Policy to implement the
Company's accounting rates for international long distance service between the
United States and each of Denmark, the Dominican Republic, Finland, Norway and
the United Kingdom. AT&T has alleged, inter alia, that the requests violate the
principles underlying the International Settlement Policy and the FCC's
non-discrimination policy. The Company does not believe that the FCC's
resolution of this matter reasonably can be expected to have a material adverse
effect on its business or results of operations.
In April 1997, the Attorney General of the State of Illinois filed a
complaint against LDM arising from alleged instances of unauthorized changes in
subscribers' selections of interexchange carriers ("slamming"). In October 1997,
the Attorney General of the State of New Jersey served a subpoena on LDM seeking
information also relating to various slamming complaints lodged against LDM.
Both the Illinois complaint and the New Jersey subpoena relate to alleged
activity by LDM occurring prior to its acquisition by RSL USA. In March 1998 and
in May 1998, the Attorney General of the State of Florida served a subpoena on
each of LDM and RSL USA, respectively, seeking information relating to slamming
in connection with the unauthorized changing or combining of local and long
distance telephone service providers or billing for telephone related services.
The Florida subpoenas relate to alleged activity by LDM which would have
primarily occurred prior to LDM's acquisition by RSL USA. There are also pending
against LDM before the FCC and various state public service commissions informal
complaints relating to alleged slamming activities. Pursuant to the terms of the
stock purchase agreement between RSL USA and the shareholders of LDM, RSL USA is
entitled to indemnification for losses, costs and expenses as a result of, among
other things, "slamming" and related matters. The Company does not believe that
the resolution of these matters reasonably can be expected to have a material
adverse effect on its business or results of operations.
The Company also is, from time to time, a party to litigation that arises
in the normal course of its business operations. The Company is not presently a
party to any such litigation that the Company believes could reasonably be
expected to have a material adverse effect on its business or results of
operations.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Certain information concerning directors and executive officers of the
Company and certain of its subsidiaries is set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------------------- ------- ----------------------------------------------
<S> <C> <C>
Ronald S. Lauder.............................. 54 Director and Chairman of the Board
Itzhak Fisher................................. 42 Director, Chief Executive Officer and
President
Donald R. Shassian............................ 43 Executive Vice President, Chief Financial
Officer and Treasurer
Richard E. Williams........................... 46 Chief Executive Officer and President of RSL
Europe
Adrian Coote.................................. 44 Managing Director of RSL Australia
Edmond J. Thomas.............................. 55 Chief Executive Officer and President of RSL
USA
Karen van de Vrande........................... 48 Vice President of Marketing
Nir Tarlovsky................................. 32 Vice President of Business Development
Nesim N. Bildirici............................ 31 Vice President of Mergers and Acquisitions
Mark J. Hirschhorn............................ 34 Vice President--Finance, Global Controller and
Assistant Secretary
Roland T. Mallcott............................ 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
Gustavo A. Cisneros........................... 53 Director
Fred H. Langhammer............................ 54 Director
Leonard A. Lauder............................. 65 Director
Eugene A. Sekulow............................. 67 Director
Jacob Z. Schuster............................. 50 Director and Assistant Secretary
Nicolas G. Trollope........................... 51 Director
</TABLE>
All directors hold office, subject to death, removal or resignation, until
the next annual meeting of shareholders and thereafter until their successors
have been elected and qualified. Officers of the Company serve at the pleasure
of their respective Boards of Directors, subject to any written arrangements
with the Company. See "--Employment Arrangements." Set forth below is certain
information with respect to the directors, executive officers and other senior
management of the Company.
Ronald S. Lauder co-founded the Company, has served as its Chairman since
1994 and is the principal and controlling shareholder of the Company. He is also
a founder and has served as the non-executive Chairman of the Board of Central
European Media Enterprises Ltd. ("CME"), an owner and operator of commercial
television stations and networks in Central and Eastern Europe since 1994.
Mr. Lauder is a principal shareholder of The Estee Lauder Companies Inc. ("Estee
Lauder") and has served as Chairman of Estee Lauder International, Inc. and
Chairman of Clinique Laboratories, Inc. since returning to the private sector
from government service in 1987. From 1983 to 1986, Mr. Lauder
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served as Deputy Assistant Secretary of Defense for European and NATO affairs.
From 1986 to 1987, Mr. Lauder served as U.S. Ambassador to Austria. Mr. Lauder
is a director of Estee Lauder. He is Chairman of the Board of Trustees of the
Museum of Modern Art, Treasurer of the World Jewish Congress, a member of the
Board of Governors of the Joseph H. Lauder Institute of Management and
International Studies at the University of Pennsylvania and a member of the
Visiting Committee of the Wharton School at the University of Pennsylvania.
Itzhak Fisher, a co-founder of the Company, has been a director, President
and Chief Executive Officer of the Company since its inception in 1994. From
1992 to 1994, Mr. Fisher served as General Manager of Clalcom Inc., the
telecommunications subsidiary of Clal (Israel), Ltd., Israel's largest
investment corporation ("Clal"). Prior to joining Clal, from 1990 to 1992,
Mr. Fisher served as the Special Consultant to the President of BEZEQ, the
Israel Telecomunication Corp. Ltd., Israel's national telecommunications
company. Mr. Fisher previously was a consultant to Mobil Oil Corporation, in the
telecommunications field. In addition, Mr. Fisher co-founded Medic Media, Inc.,
a company engaged in the business of renting telephone and television systems in
hospitals throughout Israel, and was a director and its President and Chief
Executive Officer.
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.
Jacob Z. Schuster has been a director or Assistant Secretary of the Company
since 1994. Mr. Schuster served as the Executive Vice President and Treasurer of
the Company from 1994 through 1998, and had been the Chief Financial Officer of
the Company from February 1997 until December 1998. From 1986 to 1992,
Mr. Schuster was a General Partner and the Treasurer of Goldman, Sachs & Co.
("Goldman Sachs"). Mr. Schuster has been President and Treasurer of RSL
Management Corporation ("RSL Management") since November 1995 and Executive Vice
President of RSL Investments Corporation since March 1994. Mr. Schuster joined
Goldman Sachs in 1980, was made a General Partner in 1986 and served as
Treasurer of the firm from 1985 until his retirement from the firm in 1992. In
1993, Mr. Schuster served as a consultant to Goldman Sachs.
Richard E. Williams has served as President and Chief Executive Officer of
RSL Europe since August 1995. From 1992 through 1994, Mr. Williams served as a
director of IDB WorldCom, with responsibility for sales and marketing. From 1990
to 1992, Mr. Williams served as Managing Director and Vice President of
Operations (Europe, Africa and Middle East) of WICAT Systems, a computer systems
company. From 1968 to 1990, Mr. Williams served in various technical, research,
sales, and management capacities at British Telecom, most recently serving as a
General Manager from 1988 to 1990.
Adrian Coote has been Managing Director of RSL Australia since October
1996. From May 1993 to October 1996, Mr. Coote served as Director of Engineering
and Operations of Vodafone Pty. Limited, an Australian mobile carrier,
responsible for the design, implementation and operation of its mobile network
and subscriber administration systems. From 1987 to 1993, Mr. Coote was General
Manager, Sales, of British Telecom Australasia, responsible for introducing and
managing its private switching systems and global data networks. Prior to
joining British Telecom Australasia, Mr. Coote served in various capacities at
Philips Telecommunications Systems.
Edmond J. Thomas has been Chief Executive Officer and President of RSL USA
since March 1998. From September 1997 until March 1998, Mr. Thomas was the Chief
Operating Officer of Bell Atlantic Global Networks, a division of Bell Atlantic
Corp. From 1994 until 1997, Mr. Thomas was Executive Vice President Science and
Technology of Nynex Corp. ("Nynex") and, from 1991 until 1994, he served as its
Vice President of Research and Development. Mr. Thomas also served as Nynex's
Corporate Director of
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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.
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.
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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.
Gustavo A. Cisneros has been a director of the Company since March 1997.
For more than five years, Mr. Cisneros, together with other members of his
family or trusts established for their benefit, has owned direct or indirect
beneficial interests in certain companies that own or are engaged in a number of
diverse commercial enterprises principally in Venezuela, the United States,
Brazil, Chile and Mexico. Mr. Cisneros has also been the Chairman of the Board
of Directors of Pueblo Xtra International, Inc., a holding company which owns
all of the common stock of Pueblo International, Inc., a company engaged in the
business of operating supermarkets and video rental outlets, since June 1993 and
a Director of Univision Communications Inc., a Spanish-language television
broadcasting company, since May 1994.
Fred H. Langhammer, a director of the Company since September 1997, has
been President of Estee Lauder since 1995, Chief Operating Officer of Estee
Lauder since 1985, and a director of Estee Lauder since January 1996, and was
Executive Vice President of Estee Lauder from 1985 until 1995. Mr. Langhammer
joined Estee Lauder in 1975 as President of its operations in Japan. In 1982, he
was appointed Managing Director of Estee Lauder's operations in Germany. Prior
to joining Estee Lauder, Mr. Langhammer was General Manager of Dodwell (Japan),
a global trading company. He is a member of the Board of Directors of RJR
Nabisco Holdings Corp., the Cosmetics, Toiletries and Fragrance Association, an
industry group, and the American Institute for Contemporary German Studies at
Johns Hopkins University. He is also a Senior Fellow of the Foreign Policy
Association.
Leonard A. Lauder has been a director of the Company since March 1997.
Mr. Lauder is a principal shareholder and, since 1982, has served as Chief
Executive Officer of Estee Lauder and was President of Estee Lauder from 1972
until 1995. He became Chairman of the Board of Directors of Estee Lauder in
1995. He has been a director of Estee Lauder since 1958. Mr. Lauder formally
joined Estee Lauder in 1958 after serving as an officer in the United States
Navy. He is Chairman of the Board of Trustees of the Whitney Museum of American
Art, a Charter Trustee of the University of Pennsylvania and a Trustee of The
Aspen Institute. He also served as a member of the White House Advisory
Committee on Trade Policy and Negotiations under President Reagan.
Eugene A. Sekulow has been a director of the Company since September 1995.
Until his retirement in December 1993, Mr. Sekulow served as Executive Vice
President-International of NYNEX Corporation, having served as President of
NYNEX International Company from 1985 to 1993. Prior to joining NYNEX
International Company, Mr. Sekulow had served as President of RCA International,
Ltd. since 1973. Mr. Sekulow previously served as a member of the United States
State Department Advisory Committee on International Communications and
Information Policy and on the State Department Task Force on Telecommunications
in Eastern Europe.
Nicolas G. Trollope, a director of the Company since July 1996, has been a
partner with the law firm of Conyers, Dill & Pearman, Hamilton, Bermuda, since
1991. Mr. Trollope has been with Conyers, Dill & Pearman since 1975.
Mr. Trollope has served as a director of CME since June 1994 and also serves as
vice-president and secretary of CME.
Other than Ronald S. Lauder and Leonard A. Lauder, who are brothers, no
family relationship exists between any director or executive officer of the
Company.
COMMITTEES OF THE BOARD
The Company's Board of Directors (the "Board of Directors") has an
Executive Committee (the "Executive Committee"), a Compensation Committee (the
"Compensation Committee") and an Audit Committee (the "Audit Committee").
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EXECUTIVE COMMITTEE
The Executive Committee is composed of Ronald S. Lauder, Itzhak Fisher,
Jacob Z. Schuster and Eugene A. Sekulow. A majority of the members of the
Executive Committee must approve any action taken by the Executive Committee.
During the period between meetings of the Board of Directors, the Executive
Committee has all powers and authority of the Board of Directors to manage the
Company's business, except that the Executive Committee, acting alone, cannot
(i) amend the Company's Memorandum of Association or Bye-laws (which also
requires shareholder approval), (ii) adopt an agreement of merger or
consolidation or approve the sale, lease or exchange of all or substantially all
of the Company's property and assets, or (iii) approve or recommend to the
Company's shareholders a dissolution of the Company.
COMPENSATION COMMITTEE
The Compensation Committee is composed of Ronald S. Lauder, Gustavo A.
Cisneros and Eugene A. Sekulow. During a portion of 1997, Itzhak Fisher was a
member of the Compensation Committee. The Compensation Committee is responsible
for determining executive compensation policies and guidelines and for
administering the Company's stock option and compensation plans.
AUDIT COMMITTEE
The Audit Committee is currently composed of Ronald S. Lauder, Eugene A.
Sekulow and Fred H. Langhammer. The Audit Committee is charged with
(i) recommending the engagement of independent accountants to audit the
Company's financial statements, (ii) discussing the scope and results of the
audit with the independent accountants, (iii) reviewing the functions of the
Company's management and independent accountants pertaining to the Company's
financial statements and (iv) performing such other related duties and functions
as are deemed appropriate by the Audit Committee and the Board of Directors.
During a portion of 1997, Itzhak Fisher was a member of the Audit Committee.
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The following table summarizes all plan and non-plan compensation awarded
to, earned by or paid to the Company's current Chief Executive Officer and four
other most highly compensated executive officers for services rendered in all
capacities to the Company in the last three fiscal years (together, the "Named
Executive Officers"). See "--Employment Arrangements."
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-------------
ANNUAL AWARDS
COMPENSATION SECURITIES
--------------------------- UNDERLYING
SALARY BONUS(1) OPTIONS/SARS
NAME AND PRINCIPAL POSITION YEAR ($) ($) (NUMBER)
- -------------------------------------------------------------------- ---- ------- -------- -------------
<S> <C> <C> <C> <C>
Itzhak Fisher....................................................... 1998 450,000 -- --
President and Chief Executive Officer 1997 400,000 650,000 432,856
1996 350,000 150,000 --
Nir Tarlovsky....................................................... 1998 200,000 -- 216,428
Vice President of Business Development 1997 187,500 300,000 --
1996 178,000 75,000 --
Richard E. Williams(2).............................................. 1998 395,000 -- 216,428
President and Chief Executive Officer of RSL Europe 1997 240,000 165,000 350,400
1996 172,000 50,000 --
Nesim N. Bildirici(3)............................................... 1998 200,000 -- 216,428
Vice President of Mergers and Acquisitions 1997 185,000 300,000 --
1996 165,000 75,000 --
Mark Hirschhorn..................................................... 1998 180,000 -- --
Vice President--Finance 1997 155,000 232,500 16,206
1996 140,000 50,000 93,294
</TABLE>
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- ------------------
(1) Annual bonuses are reported in the year earned, whether paid in that year or
in the following year. Bonuses for 1997 were determined pursuant to the 1997
Performance Plan described below and paid in the first quarter of 1998
following receipt of 1997 audited financial results. The Company has not yet
finally determined or paid bonuses for the year ended December 31, 1998 and
will do so promptly upon completion of and receipt of the Company's 1998
audited financial statements.
(2) Mr. Williams' salary has been converted to U.S. dollars for the purposes of
this table based upon the average exchange rate of British pounds to U.S.
dollars for the periods covered.
(3) Mr. Bildirici is employed by the Company but, during 1996, was employed by
both the Company and RSLAG. For purposes herein, he is treated as an
employee of the Company only for the relevant periods. See "--Fiscal
Year-End Option Values" and "--Compensation Committee Interlocks and Insider
Participation."
No other annual compensation, restricted stock awards, stock appreciation
rights or long-term incentive plan payouts or other compensation (all as defined
in the regulations of the Commission) were awarded to, earned by or paid to the
Named Executive Officers during 1996 or 1997.
STOCK OPTION AND COMPENSATION PLANS
AMENDED AND RESTATED 1995 STOCK OPTION PLAN
In April 1995, the Board of Directors of the Company authorized, and the
shareholders of the Company approved, the RSL Communications, Ltd. 1995 Stock
Option Plan (as later amended and restated, the "1995 Plan"). Under the 1995
Plan, the Company's Compensation Committee was authorized to grant options for
up to 2,847,000 shares of Class A Common Stock. As of December 31, 1997, the
Company had granted options to purchase 2,716,617 shares of Class A Common Stock
under the 1995 Plan. In general, options granted under the 1995 Plan terminate
on the tenth anniversary of the date of grant. The 1995 Plan was developed to
provide incentives to employees of the Company and to attract new employees and
non-employee directors. In connection with the IPO, the 1995 Plan was replaced
by the stock option plans described below. The Company has not granted further
options under the 1995 Plan since the IPO, and will not grant further options
under the 1995 Plan.
1997 STOCK INCENTIVE PLAN
In connection with the IPO, the Company adopted the RSL Communications,
Ltd. 1997 Stock Incentive Plan (the "1997 Plan"). Under the 1997 Plan, the
Company's Compensation Committee is authorized to grant options for up to
3,100,000 shares of Class A Stock. The purposes of the 1997 Plan are to foster
and promote the long-term financial success of the Company and materially
increase shareholder value by (i) motivating superior performance by means of
performance-related incentives, (ii) encouraging and providing for the
acquisition of an ownership interest in the Company by executive officers and
other key employees and (iii) enabling the Company to attract and retain the
services of an outstanding management team upon whose judgment, interest and
special effort the successful conduct of its operations is largely dependent.
The 1997 Plan reflects the Company's view that it is desirable to lengthen the
vesting period and shorten the terms of its options.
The 1997 Plan is administered by the Compensation Committee and provides
for the grant of (i) incentive and non-incentive stock options to purchase Class
A Common Stock; (ii) stock appreciation rights ("SARs"), which may be granted in
tandem with stock options, in addition to stock options, or freestanding; (iii)
restricted stock and restricted units; (iv) incentive stock and incentive units;
(v) deferred stock units; and (vi) stock in lieu of cash (collectively,
"Awards"). As of the date of the IPO, the number of shares of Class A Common
Stock available for Awards granted under the 1997 Plan during its term was
approximately 7.0% of the total number of shares of Class A Common Stock
outstanding on a fully diluted basis (not including Roll-up Rights). The maximum
number of shares for which options or stock appreciation rights may be granted
to any one participant in a calendar year is
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500,000. The Company granted to Itzhak Fisher, pursuant to his new employment
agreement and contingent on the completion of the Company's IPO, options to
acquire 432,856 shares of Class A Common Stock under the 1997 Plan representing
1% of the Common Stock, on a fully-diluted basis (not including Roll-up Rights).
As of September 30, 1998, the Company had granted options to acquire 437,856
shares of Class A Common Stock under the 1997 Plan and 164,250 shares of
restricted stock under the 1997 Plan which vests over three years. See
"--Employment Arrangements." The Company has also granted "restricted units" and
SARs under the 1997 Plan to certain key members of management. The number of
shares of Class A Common Stock into which these restricted units and SARs may be
exercised, which is based on the relative values of the Company's subsidiaries,
cannot be determined at this time.
1997 PERFORMANCE INCENTIVE COMPENSATION PLAN
In September 1997, prior to the IPO, the Company established the RSL
Communications, Ltd. 1997 Performance Incentive Plan (the "1997 Performance
Plan") to enable the Company and its subsidiaries to attract, retain, motivate
and reward the best qualified executive officers and key employees by providing
them with the opportunity to earn competitive compensation directly linked to
the Company's performance. The 1997 Performance Plan was effective for 1997 and
is effective for each of calendar years 1998, 1999 and 2000, unless extended or
earlier terminated by the Board of Directors. The Compensation Committee may
determine that any bonus payable under the 1997 Performance Plan be paid in
cash, in shares of Class A Common Stock or in any combination thereof, provided
that at least 50% of such bonus is required to be paid in cash. In addition, the
1997 Performance Plan permits a participant to elect to defer payment of his
bonus on terms and conditions established by the Compensation Committee. No more
than 400,000 shares of Class A Common Stock may be issued under the 1997
Performance Plan.
Under the 1997 Performance Plan, bonuses are payable if the Company meets
any one or more of the following performance criteria, which are set annually by
the Compensation Committee: (i) amount of or increase in consolidated EBITDA (as
defined) (which consists of earnings (loss) before interest, income taxes,
depreciation and amortization); (ii) revenues; (iii) earnings per share;
(iv) net income; (v) gross profit margin; (vi) maximum capital expenditures;
(vii) return on equity; and/or (viii) return on total capital.
With respect to calendar year 1997 only, a cash bonus pool of $2,675,000
was established by the Board of Directors and approved by the Company's
shareholders prior to the IPO. The Company achieved the specified performance
targets set by the Compensation Committee for 1997 and, under the 1997
Performance Plan, $650,000 was awarded to the Company's Chief Executive Officer,
Mr. Itzhak Fisher. Of the balance of funds remaining in the bonus pool,
approximately $1,250,000 was awarded to key employees of the Company and its
subsidiaries based upon the recommendation of Mr. Fisher and as approved by the
Compensation Committee and the Board of Directors (including $997,500 paid to
the other Named Executive Officers). The $775,000 balance of the $2,675,000 cash
bonus pool was not paid out. Pursuant to the terms of the 1997 Performance Plan,
the awards were paid promptly following the completion of the audit of the
Company's 1997 financial statements. The Compensation Committee determined that
all such bonuses for 1997 were to be paid in cash.
With respect to calendar years 1998 and thereafter, bonus amounts will be
determined as follows: if 100% of such pre-established target or targets are
achieved, participants will generally be eligible to receive a bonus equal to
their base salary for such year. If 120% of such target is achieved, the bonus
potentially payable to participants will generally equal twice their base salary
for such year and, if 80% of such target is achieved, 25% of such base salary.
In the case of the Company's chief executive officer, the amount of such
potential bonus will be 150% of base salary if 100% of the target is achieved,
250% of base salary if 120% of the target is achieved and 25% of such base
salary if 80% of the target is achieved. To the extent the Company's results
exceed 80% of the target but are less than 120% of the target, the amount of the
bonus payable to participants will be adjusted proportionately based on where
such results fall within the ranges set forth above. Any such bonus will consist
of two components. Fifty percent of the amount determined pursuant to the
formula described above will be
97
<PAGE>
payable if the applicable target is achieved. Up to an additional 50% of such
amount will be payable in the discretion of the Compensation Committee. In
addition, the 1997 Performance Plan permits the Compensation Committee to grant
discretionary bonuses to participants, notwithstanding that a bonus would not
otherwise be payable under the 1997 Performance Plan, to recognize extraordinary
individual performance.
The Chief Executive Officer's bonus compensation is based upon an
employment agreement between the Company and Mr. Fisher which provides for
Mr. Fisher's participation in the 1997 Performance Plan as well as other long
term bonus compensation based on the Company's stock performance over time. See
"--Employment Arrangements."
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to grants of stock
options to purchase Class A Common Stock granted to the Named Executive Officers
during the fiscal year ended December 31, 1998. No stock appreciation rights
were granted by the Company to the Named Executive Officers.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------
NUMBER OF % OF TOTAL
SECURITIES OPTION/SARS
UNDERLYING GRANTED TO
OPTIONS/SARS EMPLOYEES EXERCISE OR GRANT DATE
GRANTED IN FISCAL BASE PRICE PRESENT VALUE
NAME (#) YEAR(1) ($/SH) EXPIRATION DATE $ (2)
- --------------------------------------- ----------------- ------------ ----------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Nir Tarlovsky(3)....................... 216,428 33.1 22.00 11/13/05 3,609,610
Richard E. Williams(4)................. 216,428 33.1 22.00 11/13/05 3,609,610
Nesim N. Bildirici(3).................. 216,428 33.1 22.00 11/13/05 3,609,610
</TABLE>
- ------------------
(1) Does not include Incentive Units.
(2) The grant date present value has been calculated as of each grant date:
November 13, 1998 for each of Nesim N. Bildirici, Nir Tarlovsky and
Richard E. Williams, respectively, using a variant of the Black-Scholes
pricing model. In applying the model, the Company assumed a three-month
volatility of 123%, a 4.935% risk-free rate of return and a 7-year option
term. Since this model is assumption-based, it may not accurately determine
the options' present value. The true value of the options, when and if
exercised, will depend on the actual market price of the Class A Common
Stock on the date of exercise.
(3) Shares of Class A Common Stock issuable upon the exercise of options granted
under the 1997 Plan. The exercise price per share is $22.00. The options are
exercisable in three equal installments on February 1, 1999, January 1, 2000
and January 1, 2001.
(4) Shares of Class A Common Stock issuable upon the exercise of options granted
under the 1997 Plan in connection with an employment agreement dated as of
August 14, 1998 between Mr. Williams and the Company. The exercise price per
share is $22.00. The options are exercisable in three equal installments on
August 31, 1999, August 31, 2000, and August 31, 2001.
98
<PAGE>
FISCAL YEAR-END OPTION VALUES
The following table sets forth information with respect to each exercise of
stock options during the fiscal year ended December 31, 1998 by the Named
Executive Officers and the value at December 31, 1998 of unexercised stock
options held by the Named Executive Officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
VALUE OPTIONS/SARS AT OPTIONS/SARS AT
SHARES ACQUIRED ON REALIZED FY-END (#) FY-END($)(2)
NAME EXERCISE (#) $(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------- ------------------- ------------ --------------------------- ----------------------------
<S> <C> <C> <C> <C>
Itzhak Fisher............ 0 0 0/432,856 0/0
Nir Tarlovsky............ 192,127 7,588,929 0/216,428 0/1,623,210
Richard E. Williams...... 350,400 9,765,799 0/216,428 0/1,623,210
Mark Hirschhorn.......... 78,402 1,684,171 0/31,098 0/867,691
Nesim N. Bildirici....... 344,938 9,356,286 0/216,428 0/1,623,210
</TABLE>
- ------------------
(1) Represents the difference between the closing price of the Class A Common
Stock on the date of exercise (as quoted on The Nasdaq National Market, as
published in the Wall Street Journal) and the option exercise price
multiplied by the number of shares underlying the options exercised.
(2) The value of unexercised in-the-money options was calculated by multiplying
the number of underlying shares held by the difference between the closing
price of the Class A Common Stock on December 31, 1998 ($29.50 per share, as
quoted on The Nasdaq National Market, as published in the Wall Street
Journal) and the option exercise price.
COMPENSATION OF DIRECTORS
The Company believes that the interests of its non-employee directors
should be aligned with the interests of the Company's shareholders. To this end,
the Company encourages such directors to make investments in the Class A Common
Stock and compensates such directors for their services to the Company
principally through the grant of stock options and stock awards. The Company
also encourages such directors to hold their shares and options as long as they
are on the Board of Directors (except for transfers for estate and tax planning
and personal liquidity needs).
With respect to the ownership of Class A Common Stock, future directors
generally will be required, prior to joining the Board, to purchase, at the then
fair market value, shares of Class A Common Stock either in the market or, if
trading restrictions apply, from the Company.
DIRECTORS' PLAN
The purposes of RSL Communications 1997 Directors' Compensation Plan (the
"Directors' Plan") are to enable the Company to attract, retain and motivate the
best qualified directors and to enhance a long-term mutuality of interest
between the directors and shareholders of the Company by granting the Directors
shares of, and options to purchase shares of, Class A Common Stock. Under the
Directors' Plan, on the first business day following each annual meeting of the
Company's shareholders during the 10-year term of the Directors' Plan, each
non-employee director (including for these purposes the Chairman of the Board of
Directors), will be granted options to acquire a number of shares of Class A
Common Stock with an aggregate fair market value on the date of grant equal to
$50,000 ($150,000 in the case of Ronald S. Lauder in his capacity as Chairman of
the Board of Directors). Each such option will have a 10-year term. The exercise
price of the options initially will equal the fair market value of the Class A
Common Stock on the date of grant.
Options granted under the Directors' Plan become exercisable in five equal
annual installments commencing on the first anniversary of the date of grant.
The maximum number of shares that may be issued under the Directors' Plan is
250,000. As of December 31, 1998, the Company had granted options to acquire
29,295 shares of Class A Common Stock under the Directors' Plan.
99
<PAGE>
KEY MAN LIFE INSURANCE
The Company maintains $5.0 million key man life insurance policies on the
lives of each of Itzhak Fisher and Richard E. Williams. The Company is the sole
beneficiary of such policies.
CERTAIN EMPLOYMENT ARRANGEMENTS
Each of the Company and RSL North America has entered into an employment
agreement with Itzhak Fisher, which commenced on October 6, 1997 and will
terminate on December 31, 2002. The employment agreements provide that
Mr. Fisher is to serve as President and Chief Executive Officer of the Company
and RSL North America and specify certain of his other duties and reporting
responsibilities. The Company is obligated to use its best efforts to ensure
that Mr. Fisher continues to serve as a director and member of the Executive
Committee of the Company and RSL North America is obligated to use its best
efforts to ensure that Mr. Fisher continues to serve as a director of RSL North
America. Under the employment agreements, Mr. Fisher is entitled to receive, in
the aggregate, a base salary of $400,000, increased by not less than $50,000 on
each January 1, commencing January 1, 1999, plus an additional amount based on
the increase in the consumer price index in the New York metropolitan area. In
no event may Mr. Fisher's base salary, in the aggregate, be less than $50,000
more than the aggregate base salary of any other executive officer of the
Company. The employment agreements also provide that Mr. Fisher is to be a
participant in the 1997 Performance Plan (which generally outlines the bonus
plan for 1997 and future years), and that Mr. Fisher is to receive additional
cash bonuses of $1,500,000 and $1,000,000 if the total return to the Company's
shareholders from the date of the closing of the IPO to December 31, 2000 and
December 31, 2002, respectively, exceeds the return to common shareholders of
(i) the companies included in the peer group or line of business index in the
Company's proxy statement for that period or (ii) if not included in such proxy
statement, a group of companies selected by the Executive and Compensation
Committees as representing investment opportunities comparable to the Company
for the same periods. If Mr. Fisher's employment is terminated for any reason
other than by the Company for Cause (as defined) or by Mr. Fisher without Good
Reason (as defined, including in the event of a change in control), Mr. Fisher
is entitled to a pro-rated bonus if the total return objective is achieved
through the date of such termination. Pursuant to the employment agreements,
upon the closing of the IPO, Mr. Fisher was granted options under the 1997 Plan
to purchase 432,856 shares of Class A Common Stock representing 1.0% of the
outstanding Common Stock on a fully-diluted basis. Forty percent of such options
will be exercisable on December 31, 2000, an additional 30% on December 31,
2001, and an additional 30% on December 31, 2002, except that all such options
will become exercisable in the event that Mr. Fisher's employment is terminated
by the Company without Cause or Mr. Fisher terminates his employment for Good
Reason or by reason of his death or Disability (as defined). The employment
agreement also contains noncompetition provisions applicable during the term of
the employment agreement and for one year thereafter. If Mr. Fisher's employment
is terminated by the Company without Cause, or by Mr. Fisher for Good Reason,
the employment agreements provide that Mr. Fisher is entitled to receive
benefits and his salary (in addition to any vested benefits and previously
earned but unpaid salary) for the balance of the term of the employment
agreement or for at least 12 months, whichever is longer, plus an amount equal
to his bonus under the 1997 Performance Plan for the immediately preceding year.
In the event of Mr. Fisher's death or Disability, he (or his representative or
estate or beneficiary) will be paid, in addition to any previously earned but
unpaid salary and vested benefits, 12 months salary (reduced, in the case of
disability, by any disability benefits he receives). If Mr. Fisher's employment
is terminated for any other reason, he is entitled to receive any previously
earned but unpaid salary and any vested benefits. In addition, if Mr. Fisher's
employment is terminated by the Company without Cause or by Mr. Fisher for Good
Reason or upon Mr. Fisher's death or Disability or the expiration of his
employment agreements, Mr. Fisher will be entitled to two demand registrations
of his shares in accordance with the terms of a registration rights agreement
among the Company and certain of its shareholders including Mr. Fisher.
The Company has entered into employment agreements with Donald Shassian,
Richard Williams, and Mark Hirschhorn. The Company expects to enter into new
employment agreements with two of its
100
<PAGE>
other key employees, Nesim Bildirici and Nir Tarlovsky. The Company has entered
into an agreement with Codan Services Limited, a corporate service company,
located in Bermuda, of which Michael Ashford, the Company's Secretary and a
resident of Bermuda, is a manager. Mr. Ashford serves as the Company's Secretary
pursuant to such agreement.
The Company has also entered into, or is in the process of entering into,
employment agreements with other executive officers of the Company and the
country managers of most of its Local Operators.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee currently are Ronald S. Lauder,
Gustavo A. Cisneros and Eugene A. Sekulow. During the portion of 1997 prior to
the IPO, Andrew Gaspar, a former Board member who resigned on May 7, 1998, and
Itzhak Fisher were members of the Compensation Committee.
RSL Management, which is wholly-owned by Ronald S. Lauder, the Chairman of
the Board and the principal and controlling shareholder of the Company,
subleases an aggregate of 11,000 square feet of office space to the Company at
an annual rent of $767,000. RSL Management subleases such space from Estee
Lauder. Ronald S. Lauder is a principal shareholder of Estee Lauder, and
Leonard A. Lauder, a director of the Company, is also a principal shareholder
and the Chief Executive Officer of Estee Lauder. Ronald S. Lauder and
Leonard A. Lauder are brothers and Fred H. Langhammer, a director of the
Company, is the President and Chief Operating Officer of Estee Lauder. In
addition, RSL Management provided payroll and benefits services to the Company
for an annual fee of $6,000 for 1997. Jacob Z. Schuster, a director of the
Company, is the President and Treasurer of RSL Management. In 1996,
Mr. Schuster received compensation only for his services to RSL Management (and
such compensation was paid by RSL Management). In 1997, Mr. Schuster received
compensation from RSL Management and the Company for services provided by him to
each of RSL Management and the Company. From January 1, 1998 until December 31,
1998, Mr. Schuster devoted 75% of his time to the Company and 25% of his time to
RSL Management and has been compensated by each of the Company and RSL
Management on that basis.
Ronald S. Lauder, the Chairman of the Board of the Company and the
principal and controlling shareholder of the Company, personally guaranteed the
Company's revolving credit facility with The Chase Manhattan Bank (the
"Revolving Credit Facility") in August 1996. The commitment under the Revolving
Credit Facility was $7.5 million at June 30, 1998, which amount was permanently
reduced to $5 million at July 1, 1998.
As consideration for Mr. Lauder's guarantee of the Revolving Credit
Facility, Mr. Lauder received in September 1996, in the aggregate, 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 (the "Lauder Warrants"). The
Lauder Warrants became exercisable on October 3, 1997 and expire on October 3,
2007.
The Company entered into a consulting agreement as of September 1, 1995
with Eugene A. Sekulow, a director of the Company. The consulting agreement
expired August 31, 1997. The consulting agreement provided for Mr. Sekulow to
receive a $24,000 annual fee, as well as an annual grant of options to purchase
21,900 shares of Class A Common Stock, for services rendered as a consultant to
the Company.
101
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company intends to avoid entering into agreements and arrangements
(such as consulting agreements) with its non-employee directors or their
affiliates which, directly or indirectly, would result in compensation being
received by such directors.
The law firm of Conyers, Dill & Pearman, of which Nicolas G. Trollope, a
director of the Company, is a partner, was engaged as the Company's counsel in
Bermuda for the fiscal year ended December 31, 1997 and will continue to be so
engaged for the fiscal year ending December 31, 1998. Mr. Trollope does not
receive compensation as a director; Conyers, Dill & Pearman was paid $47,881 in
1997.
Pursuant to an employment agreement, dated July 31, 1997, between the
Company and Andrew Shields, an executive officer of the Company, the Company
loaned Mr. Shields $100,000 in 1997, to facilitate his relocation to another
state at the Company's request. The principal amount of $100,000 and interest
bearing a rate of 6% is due on August 11, 2002 unless either Mr. Shields sells
shares of Common Stock with an aggregate value equal to or greater than $100,000
or Mr. Shield's employment is terminated, in which cases the note is payable on
demand.
For additional disclosure with respect to certain transactions between the
Company and certain of its directors, see "--Compensation Committee Interlocks
and Insider Participation."
102
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Class A Common Stock and the Class B common shares,
par value $0.00457 (the "Class B Common Stock" and, together with the Class A
Common Stock, the "Common Stock"), at December 31, 1998 by (i) each person known
by the Company to own beneficially more than 5% of the outstanding shares of
either the Class A Common Stock or Class B Common Stock, (ii) each Director of
the Company and each Named Executive Officer who owns shares of any class of the
Company's capital stock and (iii) the Company's directors and executive officers
as a group. Except as otherwise noted below, each of the shareholders identified
in the table has sole voting and investment power over the shares beneficially
owned by such person.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP OVERALL VOTING
--------------------------------------------------------------------------- POWER AND
OWNERSHIP OF
CLASS A COMMON COMMON STOCK
STOCK(1) CLASS B COMMON STOCK --------------
DIRECTORS, EXECUTIVE OFFICERS --------------------- -------------------------------------------------- % OF VOTING
AND 5% SHAREHOLDERS NUMBER PERCENT NUMBER PERCENT POWER(2)
- ------------------------------------- --------- ------- ----------------------- ----------------------- --------------
<S> <C> <C> <C> <C> <C>
Ronald S. Lauder (3)(4)(5)........... 1,363 * 16,606,427 62.2 56.6
Itzhak Fisher (3)(6)................. -- * 4,171,205 15.9 14.4
Leonard A. Lauder (3)(5)(7).......... 454 * 5,733,176 21.8 19.8
RSL Investments Corporation (3)...... -- * 9,496,295 36.2 32.9
E/L RSLG Media, Inc. (3)............. -- * 1,814,579 6.9 6.3
Jacob Z. Schuster (3)(8)............. 41,656 * 1,646,559 6.3 5.7
Gustavo A. Cisneros (9).............. 1,409,083 5.3 -- * *
Coral Gate (10)...................... 1,408,629 5.3 -- * *
Nir Tarlovsky (11)................... 739,947 2.8 270,301 1.0 1.2
Nesim N. Bildirici (12).............. 619,642 2.3 87,958 * *
Mark J. Hirschhorn................... 36,605 * -- * *
Eugene A. Sekulow (13)............... 44,254 * -- * *
Fred H. Langhammer (14).............. 12,680 * -- * *
Richard E. Williams.................. 350,400 1.3 -- * *
Nicolas G. Trollope (15)............. 1,000 * -- * *
All directors and officers as a group
(19 persons) (16).................. 3,635,266 13.6 26,701,047 100.0 92.1
Metro Holding AG (17)................ 3,214,284 12.1 -- * 1.1
Essex Investment (18)................ 1,384,950 5.2 -- * *
Putnam Investments, Inc.(19)......... 3,326,011 12.5 -- * 1.2
<CAPTION>
DIRECTORS, EXECUTIVE OFFICERS
AND 5% SHAREHOLDERS % OWNERSHIP
- ------------------------------------- --------------
<S> <C>
Ronald S. Lauder (3)(4)(5)........... 31.2
Itzhak Fisher (3)(6)................. 7.9
Leonard A. Lauder (3)(5)(7).......... 10.9
RSL Investments Corporation (3)...... 18.0
E/L RSLG Media, Inc. (3)............. 3.4
Jacob Z. Schuster (3)(8)............. 3.2
Gustavo A. Cisneros (9).............. 2.7
Coral Gate (10)...................... 2.7
Nir Tarlovsky (11)................... 1.9
Nesim N. Bildirici (12).............. 1.3
Mark J. Hirschhorn................... *
Eugene A. Sekulow (13)............... *
Fred H. Langhammer (14).............. *
Richard E. Williams.................. *
Nicolas G. Trollope (15)............. *
All directors and officers as a group
(19 persons) (16).................. 56.8
Metro Holding AG (17)................ 6.1
Essex Investment (18)................ 2.6
Putnam Investments, Inc.(19)......... 6.3
</TABLE>
- ------------------
* Less than 1%.
(1) Except as required for the calculation of beneficial ownership pursuant to
Rule 13d-3 under Securities Act, the foregoing does not include
(i) 1,739,766 shares of Class A Common Stock issuable upon the exercise of
outstanding stock options, (ii) 26,245,315 shares of Class A Common Stock
issuable upon the conversion of the shares of Class B Common Stock,
(iii) 459,900 shares of Class A Common Stock issuable upon the conversion
of 459,900 shares of Class B Common Stock issuable pursuant to the Lauder
Warrants, (iv) 917,729 shares of Class A Common Stock issuable upon the
exercise of unexercised Warrants, (v) 109,500 shares of restricted stock,
granted pursuant to the Company's 1997 Stock Incentive Plan or (vi) shares
of Class A Common Stock issuable upon exercise of the Roll-Up Rights or
Incentive Units or in the Telegate Exchange. Shares of Class B Common Stock
are convertible at any time into shares of Class A Common Stock for no
additional consideration on a share-for-share basis.
(2) Represents the percentage of total voting power and the percentage
ownership of the Class A Common Stock and the Class B Common Stock
beneficially owned as of December 31, 1998 by each identified shareholder
and all directors and executive officers as a group. The Class A Common
Stock and the Class B Common Stock are the only authorized classes of the
Company's capital stock with shares outstanding.
(3) The business address of each of the indicated holders of the Company's
securities is 767 Fifth Avenue, New York, New York 10153.
(4) Includes (a) 1,363 shares of Class A Common Stock issuable to Ronald S.
Lauder upon exercise of a like number of options granted to Mr. Lauder
under the Director's Plan, such options vested on October 6, 1998;
(b) 9,496,295 shares of Class B Common Stock owned by RSL Investments
Corporation, a corporation wholly-owned by Mr. Lauder; (c) 1,814,579 shares
of Class B Common Stock owned by EL/RSLG Media, Inc. ("EL/RSLG") (see
note 5); (d) 907,290 shares of Class B Common Stock owned by RAJ Family
Partners L.P., of which Mr. Lauder is a limited partner and a shareholder
of the general partner; (e) 3,928,363 shares of Class B Common Stock owned
directly by Ronald S. Lauder; and (f) 459,900 shares of Class B Common
Stock issuable upon exercise of the Lauder Warrants.
(Footnotes continued on next page)
103
<PAGE>
(Footnotes continued from previous page)
(5) The 1995 Estee Lauder RSL Trust, of which Ronald S. Lauder is a trustee and
the beneficiary, and the 1995 Estee Lauder LAL Trust, of which Leonard A.
Lauder is a trustee and the beneficiary, each own 50% of EL/RSLG's
outstanding common stock. As such, Ronald S. Lauder and Leonard A. Lauder
may each be deemed to beneficially own all of the shares of Class B Common
Stock owned by EL/RSLG. Ronald S. Lauder and Leonard A. Lauder each
disclaim beneficial ownership of some of such shares. Such shares, however,
are only included once in the computation of shares beneficially owned by
directors and executive officers as a group.
(6) Such shares are owned by Fisher Investment Partners, L.P. Mr. Fisher
disclaims beneficial ownership of such shares.
(7) Includes (a) 454 shares of Class A common stock issuable upon the exercise
of a like number of options granted under the Directors' Plan, such options
vested on October 6, 1998; (b) 2,658,056 shares of Class B Common Stock
owned directly by Leonard A. Lauder; (c) 4,866 shares of Class B Common
Stock owned by Mr. Lauder's wife; (d) 348,385 shares of Class B Common
Stock owned by LAL Family Partners, L.P., of which Mr. Lauder is a general
partner; (e) 1,814,579 shares of Class B Common Stock owned by EL/RSLG (see
note 5); and (f) 907,290 shares of Class B Common Stock owned by LWG Family
Partners, L.P., a partnership whose managing partner is a corporation which
is one-third owned by Mr. Lauder. Mr. Lauder disclaims beneficial ownership
of the shares of Class B Common Stock owned by his wife.
(8) Such shares are owned by Schuster Family Partners I, L.P. Mr. Schuster
disclaims beneficial ownership of such shares.
(9) Includes (a) 454 shares of Class A Common Stock issuable upon the exercise
of a like number of options granted under the Directors' Plan, such options
vested on October 6, 1998; and (b) 1,408,629 shares are owned by Coral
Gate, an investment business company organized under the laws of the
British Virgin Islands, which is beneficially owned by Gustavo A. Cisneros
and his brother, Ricardo Cisneros. The business address for Gustavo
Cisneros is 36 East 61st Street, New York, New York 10021.
(10) Such shares are beneficially owned by Gustavo A. Cisneros and his brother,
Ricardo Cisneros. The business address of Coral Gate is 36 East 61st
Street, New York, New York 10021.
(11) Consists of (a) 667,804 shares of Class A Common Stock owned by Tarlovsky
Investment Partners, L.P. ("Tarlovsky Investment Partners"), (b) 72,143
shares of Class A Common Stock issuable upon the exercise of an equal
number of options granted to Mr. Tarlovsky under the 1997 Plan and
(c) 270,301 shares of Class B Common Stock owned by Tarlovsky Investment
Partners.
(12) Consists of (a) 547,499 shares of Class A Common Stock and (b) 72,143
shares of Class A Common Stock issuable upon the exercise of an equal
number of options granted to Mr. Bildirici under the 1997 Plan.
(13) Includes (a) 454 shares of Class A Common Stock issuable upon the exercise
of a like number of options granted under the Director's Plan, such options
vested on October 6, 1998, and (b) 43,800 shares of Class A Common Stock
issuable upon the exercise of an equal number of presently exercisable
options granted to Mr. Sekulow under the 1995 Plan.
(14) Includes (a) 454 shares of Class A common stock issuable upon the exercise
of a like number of options granted under the Directors' Plan, such options
vested on October 6, 1998; and (b) 12,226 shares of Class A Common Stock
held by Mr. Langhammer directly.
(15) Such shares are owned by The Proverbs Trust, a Bermuda trust, of which
Mr. Trollope and his wife are the trustees and beneficiaries.
(16) Includes 228,494 shares of Class A Common Stock issuable upon the exercise
of an equal number of options granted to certain of the directors and
executive officers as a group and 459,900 shares of Class B Common Stock
issuable upon the exercise of the Lauder Warrants.
(17) Such shares are owned by Ligapart, AG, a wholly owned subsidiary of Metro
Holding AG. The address for Metro Holding AG is Neuhofstrasse 4, CH-6340
Baar, Switzerland.
(18) Information as to the shares owned by Essex Investment Company, an
investment adviser registered under Section 203 of the Investment Advisers
Act of 1940, is as of March 31, 1998, and is taken from a Schedule 13G/A
filed with the Commission on August 8, 1998. The address for Essex
Investment Management Company is 125 High Street, Boston, Massachussetts
02110.
(19) Putnam Investments, Inc. ("PI"), which is a wholly-owned subsidiary of
Marsh & McLennan Companies, Inc. ("M&MC"), wholly owns two registered
investment advisers: Putnam Investment Management, Inc., which is the
investment adviser to the Putnam family of mutual funds and The Putnam
Advisory Company, Inc., which is the investment adviser to Putnam's
institutional clients. Both subsidiaries have dispository power over the
shares as investment managers, but each of the mutual fund's trustees have
voting power over the shares held by each fund, and The Putnam Advisory
Company, Inc. has shared voting power over the shares held by the
institutional clients. Purcuant to Rule 13d-4, M&MC and PI have disclaimed
beneficial ownership of such shares. Information as to the shares owned by
PI and such affiliates of PI is taken from a Schedule 13G filed with the
Commission on November 6, 1998. The address for PI is One Post Office
Square, Boston, Massachusetts 02109.
104
<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
CREDIT FACILITIES
Ericsson has provided to certain of the Company's subsidiaries financing
commitments to fund the purchase of additional switches and related equipment.
As of September 30, 1998, such commitments were in the aggregate limited to
approximately $75 million, of which approximately $7.3 million was available.
Borrowings from this equipment vendor accrue interest at a rate of LIBOR plus
either 5.25% or 4.5% depending on the equipment purchased. In addition, the
Company has a Revolving Credit Facility with The Chase Manhattan Bank and a
revolving credit facility with Coast Business Credit, of which $3.9 million and
$2.8 million, respectively, was available at June 30, 1998 under commitments of
$7.5 million and $10.0 million, respectively. The Commitment under the Revolving
Credit Facility with Chase Manhattan Bank was permanently reduced to $5 million
at July 1, 1998.
1996 NOTES
GENERAL
On October 3, 1996, the Issuer issued $300.0 million of 12 1/4% Senior
Notes pursuant to the Indenture, dated October 3, 1996 (the "1996 Indenture"),
among the Issuer, the Guarantor and The Chase Manhattan Bank, as trustee, which
were exchanged on May 22, 1997 for $300.0 million of substantially identical
notes that had been registered under the Securities Act (the "1996 Notes"), of
which $172.5 million in aggregate principal amount remain outstanding as of the
date of this Prospectus. The 1996 Notes are unconditionally guaranteed by the
Guarantor.
PRINCIPAL, MATURITY AND INTEREST
The 1996 Notes are limited in aggregate principal amount to $300.0 million
and will mature on October 3, 2006. Interest on the 1996 Notes accrues at
12 1/4% per annum and is payable semiannually in arrears on May 15 and November
15 of each year. Interest is computed on the basis of a 360-day year comprised
of twelve 30-day months. The Issuer used $102.8 million of the net proceeds of
the 1996 Notes to purchase a portfolio of securities, initially consisting of
U.S. government securities (including any securities substituted in respect
thereof, the "Pledged Securities"), to pledge as security for payment of
interest on the principal of the 1996 Notes. Proceeds from the Pledged
Securities may be used by the Issuer to make interest payments on the 1996 Notes
through November 15, 1999.
RANKING
The 1996 Notes are unsecured senior obligations of the Issuer, rank pari
passu in right of payment with (i) the U.S. Dollar Notes, (ii) the DM Notes,
(iii) the Old 12% Notes, (iv) the Old 10 1/2% Notes, (v) the New Notes and all
existing and future senior obligations of the Issuer, and rank senior in right
of payment to all future subordinated obligations of the Guarantor.
REDEMPTION
The 1996 Notes are not redeemable prior to November 15, 2001. Thereafter,
the 1996 Notes are subject to redemption at the option of the Issuer, in whole
or in part, at the redemption prices (expressed as percentages of principal
amount) set forth below plus accrued and unpaid interest thereon to the
applicable redemption date, if redeemed during the 12-month period beginning on
November 15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ----------------------------------------------------------------------------------------- ----------
<S> <C>
2001..................................................................................... 106.125%
2002..................................................................................... 103.0625%
2003 and thereafter...................................................................... 100.000%
</TABLE>
105
<PAGE>
COVENANTS
The 1996 Indenture restricts, among other things, the Company's ability to
incur additional indebtedness, pay dividends or make certain other restricted
payments, incur certain liens to secure pari passu or subordinated indebtedness,
engage in any sale and leaseback transaction, sell, assign, transfer, lease,
convey or otherwise dispose of substantially all of the assets of the Company,
enter into certain transactions with affiliates, or incur indebtedness that is
subordinated in right of payment to any senior indebtedness and senior in right
of payment to the 1996 Notes. The 1996 Indenture permits, under certain
circumstances, the Guarantor's subsidiaries to be deemed unrestricted
subsidiaries and thus not subject to the restrictions of the 1996 Indenture.
EVENTS OF DEFAULT
The 1996 Indenture contains standard events of default, including (i)
defaults in the payment of principal, premium or interest, (ii) defaults in the
compliance with covenants contained in the indenture, (iii) cross defaults on
more than $10 million of other indebtedness, (iv) failure to pay more than $10
million of judgments that have not been stayed by appeal or otherwise and (v)
the bankruptcy of the Issuer or certain of its subsidiaries.
U.S. DOLLAR NOTES
GENERAL
On February 27, 1998, the Issuer issued (i) $200 million of Senior Notes
(the "Old Senior Notes") pursuant to an Indenture, dated as of February 27, 1998
(the "Senior Notes Indenture"), between the Issuer, the Guarantor and The Chase
Manhattan Bank, as trustee, and (ii) $328.1 million principal amount at maturity
of Senior Discount Notes (the "Old Discount Notes") pursuant to an Indenture,
dated as of February 27, 1998 (the "Senior Discount Notes Indenture" and,
together with the Senior Notes Indenture, the "U.S. Dollar Notes Indentures"),
among the Issuer, the Guarantor and The Chase Manhattan Bank, as trustee. On
June 19, 1998, the Old Senior Notes were exchanged for $200 million of
substantially identical notes that had been registered under the Securities Act
(the "Senior Notes") and on June 29, 1998, the Old Discount Notes were exchanged
for $328.1 million principal amount at maturity of substantially identical notes
that had been registered under the Securities Act (the "Senior Discount Notes"
and, together with the Senior Notes, the "U.S. Dollar Notes"). The U.S. Dollar
Notes are unconditionally guaranteed by the Guarantor.
PRINCIPAL, MATURITY AND INTEREST
The U.S. Dollar Notes are initially limited in aggregate principal amount
at maturity to $528.1 million and will mature on March 1, 2008. Interest on the
Senior Notes accrues at 9 1/8% per annum and is payable semiannually on March 1
and September 1 of each year, commencing September 1, 1998. No interest will be
payable on the Senior Discount Notes prior to September 1, 2003. From and after
March 1, 2003, interest on the Senior Discount Notes will accrue at 10 1/8% on
the principal amount at maturity of such notes and is payable semiannually on
March 1 and September 1 of each year, commencing September 1, 2003. Interest on
the U.S. Dollar Notes is computed on the basis of a 360-day year comprised of
twelve 30-day months.
RANKING
The U.S. Dollar Notes are unsecured senior obligations of the Issuer and
the Guarantor, rank pari passu in right of payment with (i) the 1996 Notes,
(ii) the DM Notes, (iii) the Old 12% Notes, (iv) the Old 10 1/2% Notes, and (v)
the New Notes and all existing and future senior obligations of the Issuer and
the Guarantor, and rank senior in right of payment to all future subordinated
obligations of the Issuer and the Guarantor.
106
<PAGE>
REDEMPTION
The U.S. Dollar Notes are not redeemable prior to March 1, 2003.
Thereafter, the U.S. Dollar Notes are subject to redemption at the option of the
Issuer, in whole or in part, at the redemption prices (expressed as percentages
of stated principal amount) set forth below plus accrued and unpaid interest
thereon to (but excluding) the applicable redemption date, if redeemed during
the 12-month period beginning on March 1 of the years indicated below:
SENIOR NOTES
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ------------------------------------------------------------------------------------ ----------------
<S> <C>
2003................................................................................ 104.562%
2004................................................................................ 103.042%
2005................................................................................ 101.521%
2006 and thereafter................................................................. 100.000%
</TABLE>
SENIOR DISCOUNT NOTES
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ------------------------------------------------------------------------------------ ----------------
<S> <C>
2003................................................................................ 105.06%
2004................................................................................ 103.37%
2005................................................................................ 101.68%
2006 and thereafter................................................................. 100.00%
</TABLE>
In addition, at any time on or before March 1, 2001, in the event the
Guarantor receives net cash proceeds from the public or private sale of its
common stock, the Issuer (to the extent the Issuer receives such proceeds and
has not used such proceeds, directly or indirectly, to redeem or repurchase
other securities pursuant to optional redemption provisions) may, at its option,
apply an amount equal to any such net cash proceeds or any portion thereof to
redeem up to 33 1/3% of the aggregate principal amount at maturity of the U.S.
Dollar Notes at a redemption price equal to 109.125% of the principal amount
thereof, in the case of the Senior Notes, and 110.125% of the accreted value, in
the case of the Senior Discount Notes, plus accrued and unpaid interest thereon,
if any, to the date of redemption, provided that at least 66 2/3% of aggregate
principal amount at maturity of the Senior Notes or Senior Discount Notes, as
applicable, remains outstanding immediately after such redemption.
COVENANTS
The U.S. Dollar Notes Indentures restrict, among other things, the
Company's ability to incur additional indebtedness, pay dividends or make
distributions in respect of its capital stock, make investments or certain other
restricted payments, create liens, sell assets, issue or sell capital stock of
certain subsidiaries, enter into transactions with stockholders or affiliates or
effect a consolidation or merger.
EVENTS OF DEFAULT
The U.S. Dollar Notes Indentures contain standard events of default,
including (i) failure to pay principal of (or premium, if any, on) any U.S.
Dollar Note when due, (ii) failure to pay any interest on any U.S. Dollar Note
when due, continued for 30 days, (iii) failure to perform covenants or
agreements under the U.S. Dollar Notes Indentures or the U.S. Dollar Notes, (iv)
cross-defaults against certain other indebtedness, (v) failure to pay more than
$10.0 million of judgments that have not been stayed by appeal and (vi) certain
events of bankruptcy, insolvency or reorganization affecting the Guarantor and
certain of its subsidiaries.
107
<PAGE>
DM NOTES
GENERAL
On March 15, 1998, the Issuer issued DM 296.0 million principal amount at
maturity of 10% Senior Discount Notes (the "Old DM Notes") pursuant to an
Indenture, dated as of March 16, 1998, among the Issuer, the Guarantor, and The
Chase Manhattan Bank, as trustee. On June 29, 1998, the Old DM Notes were
exchanged for DM 296.0 million principal amount at maturity of substantially
identical notes that had been registered under the Securities Act (the "DM
Notes" and, together with the U.S. Dollar Notes, the "1998 Notes"). The DM Notes
are unconditionally guaranteed by the Guarantor.
PRINCIPAL, MATURITY AND INTEREST
The DM Notes are initially limited in aggregate principal amount at
maturity to DM296.0 million (approximately $99.1 million initial accreted value)
and will mature on March 15, 2008. No interest is payable on the DM Notes prior
to September 15, 2003. From and after March 15, 2003, interest on the DM Notes
will accrue on the principal amount at maturity of such notes at the rate of 10%
per annum and is payable semiannually on March 15 and September 15 of each year,
commencing September 15, 2003. Interest is computed on the basis of a 360-day
year comprised of twelve 30-day months.
RANKING
The DM Notes are unsecured senior obligations of the Issuer and the
Guarantor, rank pari passu in right of payment with (i) the 1996 Notes,
(ii) the U.S. Dollar Notes, (iii) the Old 12% Notes, (iv) the Old 10 1/2% Notes
and (v) the New Notes and all other existing and future senior obligations of
the Issuer and the Guarantor, and rank senior in right of payment to all future
subordinated obligations of the Issuer and the Guarantor.
REDEMPTION
The DM Notes are not redeemable prior to March 15, 2003. Thereafter, the DM
Notes are subject to redemption, at the option of the Issuer, in whole or in
part, at the redemption prices (expressed as percentages of the principal amount
thereof) set forth below plus accrued interest to but excluding the redemption
date, if redeemed during the 12-month period beginning March 15 of the years
indicated:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ------------------------------------------------------------------------------------ ----------------
<S> <C>
2003................................................................................ 105.000%
2004................................................................................ 103.333%
2005................................................................................ 101.667%
2006 and thereafter................................................................. 100.000%
</TABLE>
In addition, at any time prior to March 15, 2001, in the event the
Guarantor receives net cash proceeds from the public or private sale of its
common stock, the Issuer (to the extent the Issuer receives such proceeds and
has not used such proceeds, directly or indirectly, to redeem or repurchase
other securities pursuant to optional redemption provisions) may, at its option,
apply an amount equal to any such net cash proceeds or any portion thereof to
redeem, from time to time, DM Notes in a principal amount at maturity of up to
an aggregate amount equal to 33 1/3% of the aggregate principal amount at
maturity of the DM Notes, provided, however, that DM Notes in an amount equal to
at least 66 2/3% of the aggregate principal amount at maturity of the DM Notes
remain outstanding immediately after such redemption.
COVENANTS; EVENTS OF DEFAULT
The DM Notes Indenture contains covenants and provides for events of
default which are identical in all material respects to the covenants and events
of default contained in the U.S. Dollar Notes Indentures.
108
<PAGE>
OLD 12% NOTES
GENERAL
On November 9, 1998, the Company, through the Issuer, issued the Old 12%
Notes, pursuant to an Indenture, dated as of November 9, 1998 (the "12% Notes
Indenture"), among the Issuer, the Guarantor and The Chase Manhattan Bank, as
Trustee. The 12% Notes are unconditionally guaranteed by the Guarantor.
PRINCIPAL, MATURITY AND INTEREST
The Old 12% Notes are initially limited in aggregate principal amount at
maturity to $100 million (approximately $94.5 million initial accreted value)
and will mature on November 1, 2008. Interest on the Old 12% Notes will accrue
on the principal amount at maturity of such notes at the rate of 12% per annum
and is payable semiannually on November 1 and May 1 of each year, commencing May
1, 1999. Interest is computed on the basis of a 360-day year comprised of twelve
30-day months.
RANKING
The Old 12% Notes are unsecured senior obligations of the Issuer and the
Guarantor, rank pari passu in right of payment with (i) the 1996 Notes, (ii) the
U.S. Dollar Notes, (iii) the DM Notes, (iv) the Old 10 1/2% Notes and (v) the
New Notes all other existing and future senior obligations of the Issuer and the
Guarantor, and rank senior in right of payment to all future subordinated
obligations of the Issuer and the Guarantor.
REDEMPTION
The Old 12% Notes are not redeemable prior to November 1, 2003. Thereafter,
the 12% Notes are subject to redemption, at the option of the Issuer, in whole
or in part, at the redemption prices (expressed as percentage of the accreted
value thereof) set forth below plus accrued interest to but excluding the
redemption date, if redeemed during the 12-month period beginning November 1 of
the years indicated:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ------------------------------------------------------------------------------------ ----------------
<S> <C>
2003................................................................................ 106%
2004................................................................................ 104%
2005................................................................................ 102%
2006 and thereafter................................................................. 100%
</TABLE>
In addition, at any time prior to November 1, 2001, in the event the
Guarantor receives net cash proceeds from the public or private sale of its
common stock, the Issuer (to the extent the Issuer receives such proceeds and
has not used such proceeds, directly or indirectly, to redeem or repurchase
other securities pursuant to optional redemption provided) may, at its option,
apply an amount equal to any such net cash proceeds or any portion thereof to
redeem, from time to time, Old 12% Notes in a principal amount at maturity of up
to an aggregate amount equal to 33 1/3% of the aggregate principal amount at
maturity of the Old 12% Notes, provided, however, that Old 12% Notes in an
amount equal to at least 66% of the aggregate principal amount at maturity of
the Old 12% Notes remain outstanding immediately after such redemption.
COVENANTS; EVENTS OF DEFAULT
The Old 12% Notes Indenture contains covenants and provides for events of
default which are identical in all material respects to the covenants and of
default contained in the U.S. Dollar Notes Indentures and the DM Notes
Indenture.
109
<PAGE>
OLD 10 1/2% NOTES
GENERAL
On December 8, 1998, the Company, through the Issuer, issued the Old
10 1/2% Notes, pursuant to an Indenture, dated as of December 8, 1998 (the
"10 1/2% Notes Indenture" and, together with the 12% Notes Indenture, the
"Indentures"), among the Issuer, the Guarantor and The Chase Manhattan Bank, as
Trustee. The Old 10 1/2% Notes are unconditionally guaranteed by the Guarantor.
PRINCIPAL, MATURITY AND INTEREST
The Old 10 1/2% Notes are initially limited in aggregate principal amount
to $100 million and will mature on November 15, 2008. Interest on the Old
10 1/2% Notes will accrue on the principal amount of such notes at the rate of
10.5% per annum and is payable semiannually on November 15 and May 15 of each
year, commencing May 15, 1999. Interest is computed on the basis of a 360-day
year comprised of twelve 30-day months.
RANKING
The Old 10 1/2% Notes are unsecured senior obligations of the Issuer and
the Guarantor, rank pari passu in right of payment with (i) the 1996 Notes, (ii)
the U.S. Dollar Notes, (iii) the DM Notes, (iv) the Old 12% Notes and (v) the
New Notes all other existing and future senior obligations of the Issuer and the
Guarantor, and rank senior in right of payment to all future subordinated
obligations of the Issuer and the Guarantor.
REDEMPTION
The Old 10 1/2% Notes are not redeemable prior to November 1, 2003.
Thereafter, the 10 1/2% Notes are subject to redemption, at the option of the
Issuer, in whole or in part, at the redemption prices (expressed as percentage
of the accreted value thereof) set forth below plus accrued interest to but
excluding the redemption date, if redeemed during the 12-month period beginning
November 1 of the years indicated:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ------------------------------------------------------------------------------------ ----------------
<S> <C>
2003................................................................................ 105.25%
2004................................................................................ 103.50%
2005................................................................................ 101.75%
2006 and thereafter................................................................. 100%
</TABLE>
In addition, at any time prior to November 1, 2001, in the event the
Guarantor receives net cash proceeds from the public or private sale of its
common stock, the Issuer (to the extent the Issuer receives such proceeds and
has not used such proceeds, directly or indirectly, to redeem or repurchase
other securities pursuant to optional redemption provided) may, at its option,
apply an amount equal to any such net cash proceeds or any portion thereof to
redeem, from time to time, Old 10 1/2% Notes in a principal amount at maturity
of up to an aggregate amount equal to 33 1/3% of the aggregate principal amount
at maturity of the Old 10 1/2% Notes, provided, however, that Old 10 1/2% Notes
in an amount equal to at least 66% of the aggregate principal amount at maturity
of the Old 10 1/2% Notes remain outstanding immediately after such redemption.
COVENANTS; EVENTS OF DEFAULT
The Old 10 1/2% Notes Indenture contains covenants and provides for events
of default which are identical in all material respects to the covenants and of
default contained in the U.S. Dollar Notes Indentures and the DM Notes
Indenture.
110
<PAGE>
REGISTRATION RIGHTS AGREEMENTS FOR OLD NOTES
The Issuer and the Guarantor have entered into Exchange and Registration
Rights Agreements (the "Registration Rights Agreements") pursuant to which the
Issuer and the Guarantor have agreed, for the benefit of the holders of the Old
Notes, to use their reasonable best efforts (i) to file with the Commission a
registration statement (the "Exchange Offer Registration Statement") under the
Securities Act relating to the Exchange Offers and (ii) to use their reasonable
best efforts to consummate each Exchange Offer as soon as practicable, but no
later than 270 days following the original issue dates of the applicable Old
Notes. The Issuer and the Guarantor have further agreed to hold the Exchange
Offers open for at least 30 days, and to exchange New Notes for all Old Notes
validly tendered and not withdrawn before the Expiration Date (as defined).
Under existing Commission interpretations, the New Notes would in general
be freely transferable after the Exchange Offers without further registration
under the Securities Act of 1933, as amended (the "Securities Act") except that
broker-dealers ("Participating Broker-Dealers") receiving New Notes in the
Exchange Offers will be subject to a prospectus delivery requirement with
respect to resale of those New Notes. The Commission has taken the position that
Participating Broker-Dealers may fulfill their prospectus delivery requirements
with respect to the New Notes (other than a resale of any unsold allotment from
the original sale of the Notes) by delivery of the prospectus contained in the
Exchange Offer Registration Statement. Under the Registration Rights Agreements,
the Issuer and the Guarantor are required to allow Participating Broker-Dealers
and other persons, if any, subject to similar prospectus delivery requirements
to use the prospectus contained in the Exchange Offer Registration Statement in
connection with the resale of such New Notes. The Exchange Offer Registration
Statement will be kept effective for a period of 90 days after the Exchange
Offers have been consummated in order to permit resales of New Notes acquired by
broker-dealers in after-market transactions. Each holder of the Old Notes (other
than certain specified holders) who wishes to exchange such Old Notes for New
Notes in the Exchange Offer with respect to such Old Notes will be required to
represent that any New Notes to be received by it will be acquired in the
ordinary course of its business, that at the time of the commencement of the
Exchange Offer with respect to such Old Notes it has no arrangement with any
Person to participate in the distribution (within the meaning of the Securities
Act) of the New Notes and that it is not an affiliate of the Issuer or the
Guarantor.
However, if on or before the date of consummation of the Exchange Offers
the existing Commission interpretations are changed such that the New Notes
would not in general be freely transferable on such date, the Issuer and the
Guarantor will, in lieu of effecting registration of the New Notes, use their
reasonable best efforts to cause a registration statement under the Securities
Act relating to a shelf registration of the Old Notes for resale by holders (the
"Resale Registration") to become effective and to remain effective for a period
of up to two years after original issue dates of the Old Notes. The Issuer and
the Guarantor will, in the event of the Resale Registration, provide to the
holders of the Old Notes copies of the prospectus that is a part of the
registration statement filed in connection with the Resale Registration, notify
such holders when the Resale Registration for the Old Notes has become effective
and take certain other actions as are required to permit unrestricted resales of
the Old Notes. A holder of Old Notes that sells such Old Notes pursuant to the
Resale Registration generally would be required to be named as a selling
securityholder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Registration Rights Agreements that are applicable to such a
holder (including certain indemnification obligations).
In the event that (i) the Exchange Offers have not been consummated with
respect to the Old Notes within 270 days after the original issue dates of the
Old Notes (or, if applicable, the Resale Registration is not effective within
such period) or (ii) any Resale Registration required by the Registration Rights
Agreements is filed and declared effective but shall thereafter cease to be
effective (except as specifically permitted therein) without being succeeded
promptly by an additional registration statement filed and declared effective
(any such event referred to in clauses (i) and (ii), a "Registration Default"),
then interest will accrue (in addition to any stated interest on the Old Notes)
at the rate of 0.5% per annum, determined daily, on the principal amount of the
Old 10 1/2% Notes and the Accreted Value of the
111
<PAGE>
Old 12% Notes with respect to which there is a Registration Default, for the
period from and including the date of occurrence of the Registration Default to
but excluding such date as no Registration Default is in effect.
The summary herein of certain provisions of the Registration Rights
Agreements does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, all the provisions of the Registration Rights
Agreements, copies of which are filed as exhibits to the Registration Statement
of which this Prospectus constitutes a part.
112
<PAGE>
THE EXCHANGE OFFERS
TERMS OF THE EXCHANGE OFFERS; PERIOD FOR TENDERING OLD NOTES
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letters of Transmittal, the Issuer will accept for
exchange Old Notes which are properly tendered on or prior to the applicable
Expiration Date and not withdrawn as permitted below. As used herein, the term
"Expiration Date" means 5:00 p.m., New York time, on February 25, 1999;
provided, however, that if the Issuer, in its sole discretion, has extended the
period of time for which any Exchange Offer is open, the term "Expiration Date"
means with respect to such Exchange Offer the latest time and date to which such
Exchange Offer is extended.
As of the date of this Prospectus, $200,000,000 aggregate principal amount
of Old 10 1/2% Notes and $100,000,000 aggregate principal amount at maturity of
Old 12% Notes are outstanding. This Prospectus, together with the Letters of
Transmittal, is first being sent on or about January 27, 1999 to all holders of
Old Notes known to the Issuer. The Issuer's obligation to accept Old Notes for
exchange pursuant to the Exchange Offers is subject to certain conditions as set
forth below under "--Certain Conditions to the Exchange Offers."
The Issuer expressly reserves the right, at any time or from time to time,
to extend the period of time during which any Exchange Offer is open, and
thereby delay acceptance for exchange of any Old Notes pursuant to such Exchange
Offer, by giving oral or written notice of any extension, amendment,
non-acceptance or termination to the holders of Old Notes as promptly as
practicable, such notice in the case of any extension to be issued by means of a
press release or other public announcement no later than 9:00 a.m., New York
City time, on the next business day after the previously scheduled Expiration
Date.
PROCEDURES FOR TENDERING OLD NOTES
The tender to the Issuer of Old Notes by a holder thereof as set forth
below and the acceptance thereof by the Issuer will constitute a binding
agreement between the tendering holder and the Issuer upon the terms and subject
to the conditions set forth in this Prospectus and in the accompanying Letters
of Transmittal. Except as set forth below, a holder who wishes to tender Old
Notes for exchange pursuant to the Exchange Offers must transmit a properly
completed and duly executed Letter of Transmittal, including all other documents
required by such Letter of Transmittal, to The Chase Manhattan Bank, as exchange
agent (the "Exchange Agent") at the address set forth below under "--Exchange
Agent" on or prior to the Expiration Date. In addition, either (1) certificates
of such Old Notes must be received by the Exchange Agent along with the Letter
of Transmittal, or (2) a timely confirmation of a book-entry transfer (a
"Book-Entry Confirmation") of such Old Notes, if such procedure is available,
into the account of the Book-Entry Depositary (as defined) at The Depository
Trust Company (the "Book-Entry Transfer Facility"), must be received by the
Exchange Agent prior to the Expiration Date with the Letter of Transmittal or
Agent's Message in lieu of such Letter of Transmittal, or (3) the holder must
comply with the guaranteed delivery procedures described below. The term
"Agent's Message" means a message, transmitted by the Book-Entry Transfer
Facility to and received by the Book-Entry Depositary and forming a part of a
Book-Entry Confirmation, which states that the Book-Entry Transfer Facility has
received an express acknowledgment from the tendering participant, which
acknowledgment states that such participant has received and agrees to be bound
by, and makes the representations and warranties contained in, the Letter of
Transmittal and that the Issuer may enforce such Letter of Transmittal against
such participant. The Exchange Agent will also act as exchange agent for the
Book-Entry Depositary in effecting such book-entry exchange. THE METHOD OF
DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS
IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY IS BY MAIL, IT IS
RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT
REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE
TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE
ISSUER.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the Old Notes surrendered for exchange
pursuant thereto are tendered (1) by a registered holder of Old Notes who has
not completed the box entitled "Special Issuance Instructions"
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or "Special Delivery Instructions" on the Letter of Transmittal or (2) for the
account of an Eligible Institution (as defined). In the event that signatures on
a Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantees must be by a firm which is a member
of a registered national securities exchange or a member of the National
Association of Securities Dealers, Inc. or by a commercial bank or trust company
having an office or correspondent in the United States (collectively, "Eligible
Institutions"). If Old Notes are registered in the name of a person other than a
signer of the Letter of Transmittal, the Old Notes surrendered for exchange must
be endorsed by, or be accompanied by a written instrument or instruments of
transfer or exchange, in satisfactory form as determined by the Issuer in its
sole discretion, duly executed by, the registered holder with the signature
thereon guaranteed by an Eligible Institution.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Notes tendered for exchange will be determined by
the Issuer in its sole discretion, which determination shall be final and
binding. The Issuer reserves the absolute right to reject any and all tenders of
any particular Old Notes not properly tendered or to not accept any particular
Old Notes the acceptance of which might, in the judgment of the Issuer or its
counsel, be unlawful. The Issuer also reserves the absolute right to waive any
defects or irregularities or conditions of the Exchange Offers as to any
particular Old Notes either before or after the applicable Expiration Date
(including the right to waive the ineligibility of any holder who seeks to
tender Old Notes in the Exchange Offers). The interpretation of the terms and
conditions of the Exchange Offers as to any particular Old Notes either before
or after the Expiration Date (including the Letter of Transmittal and the
instructions thereto) by the Issuer shall be final and binding on all parties.
Unless waived, any defects or irregularities in connection with tenders of Old
Notes for exchange must be cured within such reasonable period of time as the
Issuer shall determine. Neither the Issuer, the Exchange Agent nor any other
person shall be under any duty to give notification of any defect or
irregularity with respect to any tender of Old Notes for exchange, nor shall any
of them incur any liability for failure to give such notification.
If a Letter of Transmittal is signed by a person or persons other than the
registered holder or holders of Old Notes tendered pursuant to such Letter of
Transmittal, such Old Notes must be endorsed or accompanied by appropriate
powers of attorney, in either case signed exactly as the name or names of the
registered holder or holders that appear on the Old Notes.
If a Letter of Transmittal or any Old Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
the Issuer, proper evidence satisfactory to the Issuer of their authority to so
act must be submitted.
By tendering, each holder will represent to the Issuer that, among other
things, the New Notes acquired pursuant to the Exchange Offers are being
obtained in the ordinary course of business of the person receiving such New
Notes, whether or not such person is the holder, and that neither the holder nor
such other person has any arrangement or understanding with any person to
participate in the distribution of the New Notes. In the case of a holder that
is not a broker-dealer, each such holder, by tendering, will also represent to
the Issuer that such holder is not engaged in, or intends to engage in, a
distribution of the New Notes. If any holder or any such other person is an
"affiliate," as defined under Rule 405 of the Securities Act, of the Issuer, or
is engaged in or intends to engage in or has an arrangement or understanding
with any person to participate in a distribution of such New Notes to be
acquired pursuant to the Exchange Offers, such holder or any such other person
(1) could not rely on the applicable interpretations of the staff of the
Commission and (2) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Each broker-dealer that receives New Notes for its own account in exchange for
Old Notes, where such Old Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities, must acknowledge that
it will deliver a prospectus in connection with any resale of such New Notes.
See "Plan of Distribution." The Letters of Transmittal state that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
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ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to an Exchange Offer,
the Issuer will accept, promptly after the applicable Expiration Date, all Old
Notes properly tendered pursuant to such Exchange Offer and will issue the New
Notes to be issued pursuant to such Exchange Offer promptly after acceptance of
such Old Notes. See "--Certain Conditions to the Exchange Offers."
For the purposes of the Exchange Offers, the Issuer shall be deemed to have
accepted properly tendered Old Notes for exchange when, as and if the Issuer has
given oral or written notice thereof to the Exchange Agent, with written
confirmation of any oral notice to be given promptly thereafter.
For each Old Note accepted for exchange, the holder of such Old Note will
receive a New Note having a principal amount (or principal amount at maturity
and Accreted Value) equal to that of the surrendered Old Note. Interest on the
New Notes will accrue from the last interest payment date on which interest was
paid on the Old Notes surrendered in exchange therefor or, if no interest has
been paid on such Old Notes, from the date of original issue of such Old Notes.
Holders of Old Notes whose Old Notes are accepted for exchange will not receive
any payment in respect of accrued interest on such Old Notes otherwise payable
on any interest payment date the record date for which occurs on or after
consummation of the Exchange Offer with respect to such Old Notes. In the event
that the Exchange Offer is not consummated or a registration statement pursuant
to a Resale Registration is not declared effective with respect to any Old Notes
on or prior to the 270th day following the applicable date of original issue of
such Old Notes, additional interest will be payable with respect to such Old
Notes. See "Registration Rights Agreements for Old Notes."
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offers will be made only after timely receipt
by the Exchange Agent of (1) certificates for such Old Notes or a timely
Book-Entry Confirmation of such Old Notes into the Exchange Agent's account at
the Book-Entry Transfer Facility, (2) a properly completed and duly executed
Letter of Transmittal or an Agent's Message in lieu thereof and (3) all other
required documents. If any tendered Old Notes are not accepted for any reason
set forth in the terms and conditions of the Exchange Offer with respect to such
Old Notes or if Old Notes are submitted for a greater principal amount or
original issue price than the holder desired to exchange, such unaccepted or
non-exchanged Old Notes will be returned without expense to the tendering holder
thereof (or, in the case of Old Notes tendered by book-entry transfer into the
Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the
book-entry procedures described below, such non-exchanged Old Notes will be
credited to an account maintained with such Book-Entry Transfer Facility) as
promptly as practicable after the expiration or termination of the Exchange
Offers.
BOOK-ENTRY TRANSFER
The Book-Entry Depositary (as defined) will make a request to establish an
account with respect to the Old Notes at the Book-Entry Transfer Facility for
purposes of the Exchange Offers within two business days after the date of this
Prospectus, and any financial institution that is a participant in the
Book-Entry Transfer Facility's systems may make book-entry delivery of Old Notes
by causing the Book-Entry Transfer Facility to transfer such Old Notes into the
account of the Book-Entry Depositary at the Book-Entry Transfer Facility in
accordance with the Book-Entry Transfer Facility's procedures for transfer.
Although delivery of Old Notes may be effected through book-entry transfer at
the Book-Entry Transfer Facility, the Letters of Transmittal (or facsimile
thereof or an Agent's Message in lieu thereof) with any required signature
guarantees and any other required documents, must, in any case, be transmitted
to and received by the Exchange Agent at one of the addresses set forth below
under "--Exchange Agent" on or prior to the applicable Expiration Date or the
guaranteed delivery procedures described below must be complied with.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Old Notes desires to tender such Old Notes
and the Old Notes are not immediately available, or time will not permit such
holder's Old Notes or other required documents to reach the Exchange Agent
before the applicable Expiration Date, or the procedure for book-entry transfer
cannot be completed on a timely basis, a tender may be effected if (1) the
tender is made through an Eligible Institution, (2) prior to the Expiration
Date, the Exchange Agent received from such
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Eligible Institution a notice of guaranteed delivery ("Notice of Guaranteed
Delivery"), substantially in the form provided by the Issuer (by telegram,
telex, facsimile transmission, mail or hand delivery), setting forth the name
and address of the holder of Old Notes and the amount of Old Notes tendered,
stating that the tender is being made thereby and guaranteeing that within three
New York Stock Exchange ("NYSE") trading days after the date of execution of the
Notice of Guaranteed Delivery, the certificates for all physically tendered Old
Notes, in proper form for transfer, or a Book-Entry Confirmation, as the case
may be, together with a properly completed and duly executed Letter of
Transmittal (or a facsimile thereof or Agent's Message in lieu thereof) with any
required signature guarantees and any other documents required by the Letter of
Transmittal will be deposited by the Eligible Institution with the Exchange
Agent and (3) the certificates for all physically tendered Old Notes, in proper
form for transfer, or a Book-Entry Confirmation, as the case may be, together
with a properly completed and duly executed Letter of Transmittal (or facsimile
thereof or Agent's Message in lieu thereof) with any required signature
guarantees and all other documents required by the Letter of Transmittal, are
received by the Exchange Agent within three NYSE trading days after the date of
execution of the Notice of Guaranteed Delivery.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New
York City time, on the applicable Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at one of the addresses set forth below under
"--Exchange Agent." Any such notice of withdrawal must specify the name of the
persons having tendered the Old Notes to be withdrawn, identify the Old Notes to
be withdrawn (including the principal amount or principal amount at maturity of
such Old Notes), and (where certificates for Old Notes have been transmitted)
specify the name in which such Old Notes are registered, if different from that
of the withdrawing holder. If certificates for Old Notes have been delivered or
otherwise identified to the Exchange Agent, then, prior to the release of such
certificates the withdrawing holder must also submit the serial numbers of the
particular certificates to be withdrawn and a signed notice of withdrawal with
signatures guaranteed by an Eligible Institution unless such holder is an
Eligible Institution. If Old Notes have been tendered pursuant to the procedure
for book-entry transfer described above, any notice of withdrawal must specify
the name and number of the account at the Book-Entry Transfer Facility to be
credited with the withdrawn Old Notes and otherwise comply with the procedures
of the Book-Entry Transfer Facility. All questions as to the validity, form and
eligibility (including time and receipt) of such notices will be determined by
the Issuer, whose determination shall be final and binding on all parties. Any
Old Notes so withdrawn will be deemed not to have been validly tendered for
exchange for purposes of the Exchange Offers. Any Old Notes which have been
tendered for exchange but which are not exchanged for any reason will be
returned to the holder thereof without cost to such holder (or, in the case of
Old Notes tendered by book-entry transfer into the Exchange Agent's account at
the Book-Entry Transfer Facility pursuant to the book-entry transfer procedures
described above, such Old Notes will be credited to an account maintained with
such Book-Entry Transfer Facility for the Old Notes) as soon as practicable
after withdrawal, rejection of tender or termination of the Exchange Offer with
respect to such Old Notes. Properly withdrawn Old Notes may be retendered by
following one of the procedures described under "--Procedures for Tendering Old
Notes" above at any time on or prior to the Expiration Date.
CERTAIN CONDITIONS TO THE EXCHANGE OFFERS
Each Exchange Offer shall be subject to the following conditions:
(1) neither such Exchange Offer, nor the making of any exchange by a holder
violates applicable law or any applicable interpretation of the staff of the
Commission, (2) the due tendering of Old Notes in accordance with such Exchange
Offer, (3) no action or proceeding shall have been instituted or threatened in
any court or by or before any governmental agency with respect to such Exchange
Offer which, in the Issuer's judgment, would reasonably be expected to impair
the ability of the Issuer to proceed with such Exchange Offer, (4) there shall
not have been adopted or enacted any law, statute, rule or regulation which, in
the Issuer's judgment, would reasonably be expected to impair the ability of the
Issuer to proceed with such Exchange Offer, (5) there shall not have been
declared by U.S. federal or New York State authorities a banking moratorium
which, in the Issuer's judgment, would reasonably be expected to impair the
ability
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of the Issuer to proceed with such Exchange Offer and (6) each holder of Old
Notes (other than any Participating Broker-Dealer) who wishes to exchange such
Old Notes for New Notes in such Exchange Offer shall have represented that
(A) it is not an affiliate of the Issuer, (B) any New Notes to be received by it
were acquired in the ordinary course of business and (C) at the time of the
commencement of such Exchange Offer it has no arrangement with any person to
participate in the distribution (within the meaning of the Securities Act) of
the New Notes and shall have made such other representations as may be
reasonably necessary under applicable Commission rules, regulations or
interpretations to render the use of Form S-4 or another appropriate form under
the Securities Act available; provided, however, that none of the foregoing
conditions shall relieve the Issuer of its obligations under the Registration
Rights Agreements or effect any increase in the interest rate borne by the Old
Notes pursuant to the Registration Rights Agreements.
The foregoing conditions are for the sole benefit of the Issuer and may be
asserted by the Issuer regardless of the circumstances giving rise to any such
condition or may be waived by the Issuer in whole or in part at any time and
from time to time. The failure by the Issuer at any time to exercise any of the
foregoing rights shall not be deemed a waiver of any such right and each such
right shall be deemed an ongoing right which may be asserted at any time and
from time to time.
EXCHANGE AGENT
The Chase Manhattan Bank has been appointed as the Exchange Agent for the
Exchange Offers. All executed Letters of Transmittal should be directed to the
Exchange Agent at one of the addresses set forth below. Questions and requests
for assistance, requests for additional copies of this Prospectus or of the
Letters of Transmittal and requests for Notices of Guaranteed Delivery should be
directed to the Exchange Agent addressed as follows:
Delivery To The Chase Manhattan Bank, Exchange Agent
<TABLE>
<S> <C> <C>
By Mail: Facsimile Transmission Number: By Hand:
The Chase Manhattan Bank (212) 946-8161/62 The Chase Manhattan Bank
Global Trust Services Global Trust Services
450 West 33rd Street 450 West 33rd Street
15th Floor 15th Floor
New York, NY 10001 New York, NY 10001
Attn: Robert S. Peschler, Assistant Attn: Robert S. Peschler,
Vice President Assistant Vice President
Confirm by Telephone: By Overnight Courier:
(212) 946-3084 The Chase Manhattan Bank
Global Trust Services
450 West 33rd Street
15th Floor
New York, NY 10001
Attn: Robert S. Peschler,
Assistant Vice President
</TABLE>
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH
ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF SUCH LETTER OF TRANSMITTAL.
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FEES AND EXPENSES
The Issuer will not make any payment to brokers, dealers, or others
soliciting acceptances of the Exchange Offers.
The estimated cash expenses to be incurred in connection with the Exchange
Offers will be paid by the Issuer and are estimated in the aggregate to be
approximately $100,000.
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to
pay any transfer taxes in connection therewith, except that holders who instruct
the Issuer to register New Notes in the name of, or request that Old Notes not
tendered or not accepted in the Exchange Offers be returned to, a person other
than the registered tendering holder will be responsible for the payment of any
applicable transfer tax thereon.
CONSEQUENCES OF EXCHANGING OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offers will continue to be subject to the provisions in
the Indentures regarding transfer and exchange of the Old Notes and the
restrictions on transfer of such Old Notes as set forth in the legend thereon as
a consequence of the issuance of the Old Notes pursuant to exemptions from, or
in transactions not subject to, the registration requirements of the Securities
Act and applicable state securities laws. In general, the Old Notes may not be
offered or sold unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Issuer does not currently anticipate that
it will register Old Notes under the Securities Act. See "Registration Rights
Agreements for Old Notes." Based on interpretations by the staff of the
Commission, as set forth in no-action letters issued to third parties, the
Issuer believes that New Notes issued pursuant to the Exchange Offers in
exchange for Old Notes may be offered for resale, resold or otherwise
transferred by holders thereof (other than any such holder which is an
"affiliate" of the Issuer within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery provisions
of the Securities Act, provided that such New Notes are acquired in the ordinary
course of such holders' business and such holders have no arrangement or
understanding with any person to participate in the distribution of such New
Notes. However, the Issuer does not intend to request the Commission to
consider, and the Commission has not considered, the Exchange Offers in the
context of a no-action letter and there can be no assurance that the staff of
the Commission would make a similar determination with respect to the Exchange
Offers as in such other circumstances. Each holder, other than a broker-dealer,
must acknowledge that (i) the New Notes received by such holder will be acquired
in the ordinary course of its business, (ii) at the time of the consummation of
the applicable Exchange Offer such holder will not have engaged in, and such
holder does not intend to engage in, a distribution of New Notes and such holder
has no arrangement or understanding to participate in a distribution of New
Notes and (iii) such holder is not an affiliate of the Issuer within the meaning
of Rule 405 of the Securities Act or if it is such an affiliate, that it will
comply with the registration and prospectus delivery requirements of the
Securities Act, to the extent applicable. If any holder is an affiliate of the
Issuer, is engaged in or intends to engage in or has any arrangement or
understanding with respect to the distribution of the New Notes to be acquired
pursuant to the Exchange Offers, such holder (i) could not rely on the
applicable interpretations of the staff of the Commission and (ii) must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction. Each broker-dealer that receives New
Notes for its own account in exchange for Old Notes, where such Old Notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. See "Plan of Distribution." In
addition, to comply with state securities laws, the New Notes may not be offered
or sold in any state unless they have been registered or qualified for sale in
such state or an exemption from registration or qualification is available and
is complied with. The Issuer currently does not intend to register or qualify
the sale of the New Notes in any state where an exemption from registration or
qualification is required and not available.
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DESCRIPTION OF THE NEW NOTES AND THE NEW NOTES GUARANTEES
The New 10 1/2% Notes will be issued under the 10 1/2% Notes Indenture and
the New 12% Notes will be issued under the 12% Notes Indenture. The statements
under this caption relating to the New Notes and the Indentures are summaries
and do not purport to be complete, and are subject to, and are qualified in
their entirety by reference to, all the provisions of the Indentures, including
the definitions of certain terms therein. Each Indenture is by its terms subject
to and governed by the Trust Indenture Act of 1939, as amended. Unless otherwise
indicated, references under this caption to sections, "Section " or articles are
references to the applicable Indenture. Where reference is made to particular
provisions of the Indentures or to defined terms not otherwise defined herein,
such provisions or defined terms are incorporated herein by reference. The
definitions of certain capitalized terms used in the following summary are set
forth below under "--Certain Definitions."
THE NEW 10 1/2% NOTES
GENERAL
The New 10 1/2% Notes will be senior unsecured obligations of the Issuer
and will mature on November 15, 2008. The New 10 1/2% Notes will bear interest
at the rate of 10.5% per annum on the stated principal amount thereof from
December 8, 1998 or from the most recent Interest Payment Date to which interest
has been paid or duly provided for, payable semi-annually on May 15 and November
15 of each year, commencing May 15, 1999, to the Book-Entry Depositary (in the
case of Global Notes) or to the Person in whose name the New 10 1/2% Note (or
any predecessor New 10 1/2% Note) is registered (in the case of Definitive
Registered Notes) at the close of business on the preceding May 1 and November
1, as the case may be. Interest on the New 10 1/2% Notes will be computed on the
basis of a 360-day year of twelve 30-day months (Section Section 301, 307 &
310).
The guarantee by the Guarantor in respect of payments in respect of the New
10 1/2% Notes (the "New 10 1/2% Notes Guarantee") will rank pari passu with the
Guarantor's unsecured unsubordinated obligations, including its obligations
under (1) the Old 10 1/2% Notes and (2) the New 12% Notes and the Old 12% Notes
(collectively, the "12% Notes").
OPTIONAL REDEMPTION
The New 10 1/2% Notes are subject to redemption, at the option of the
Issuer, in whole or in part, at any time on or after November 15, 2003 and prior
to maturity, upon not less than 30 nor more than 60 days' notice mailed to each
holder of New 10 1/2% Notes to be redeemed at such holder's address appearing in
the register for the New 10 1/2% Notes, in principal amounts of $1,000 or an
integral multiple of $1,000, at the following Redemption Prices (expressed as
percentages of the principal amount thereof) plus accrued interest to but
excluding the Redemption Date (subject to the right of holders to receive
interest due on an Interest Payment Date that is on or prior to the Redemption
Date), if redeemed during the 12-month period beginning March 1 of the years
indicated:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ------------------------------------------------------ ----------------
<S> <C>
2003.................................................. 105.25%
2004.................................................. 103.50%
2005.................................................. 101.75%
2006 and thereafter................................... 100.00%
</TABLE>
(Section Section 203, 1101, 1105 & 1107)
In addition, at any time prior to November 15, 2001, in the event the
Guarantor receives net cash proceeds from the public or private sale of its
Common Stock, the Issuer (to the extent it receives such proceeds) may, at its
option, apply an amount equal to any such net cash proceeds or any portion
thereof to redeem, from time to time, New 10 1/2% Notes in a principal amount of
up to an aggregate amount equal to 33 1/3% of the original principal amount of
the New 10 1/2% Notes, provided, however, that New 10 1/2% Notes in an amount
equal to at least 66 2/3% of the aggregate original principal amount of the New
10 1/2% Notes remain outstanding after each redemption. Each redemption must
occur on a Redemption Date within 180 days of the related sale and upon not less
than 30 nor more than 60 days'
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notice mailed to each holder of New 10 1/2% Notes to be redeemed at such
holder's address appearing in the applicable note register, in amounts of $1,000
or an integral multiple of $1,000 at a redemption price equal to 110.50% of the
principal amount of the New 10 1/2% Notes plus accrued interest to but excluding
the Redemption Date.
In the event that (i) the Guarantor or the Issuer has become or would
become obligated to pay any Additional Amounts as a result of (x) certain
changes affecting withholding tax laws or (y) a Listing Failure provided that
the Issuer has used reasonable best efforts to list and maintain a listing of
the New 10 1/2% Notes on a "recognized stock exchange" (within the meaning of
Section 841 of the U.K. Income and Corporation Taxes Act 1988), and (ii) the
Guarantor and the Issuer are unable to avoid the requirement to pay such
Additional Amounts by taking reasonable measures available to them (including,
without limitation, the Guarantor making payments directly to holders under the
New 10 1/2% Notes Guarantee, unless such payment is likely to result in adverse
consequences to the Issuer or the Guarantor), then the Issuer may redeem all,
but not less than all, of the New 10 1/2% Notes at any time at 100% of the
principal amount thereof on the redemption date, together with accrued interest
thereon, if any, to but excluding the redemption date. Prior to the publication
of the notice of redemption in accordance with the foregoing, the Issuer shall
deliver to the Trustee an officer's certificate stating that the Issuer is
entitled to effect such redemption based on a written opinion of independent tax
counsel or accounting firm reasonably satisfactory to the Trustee. See
"--Additional Amounts."
If less than all the New 10 1/2% Notes are to be redeemed, the Trustee
shall select, in such manner as it shall deem fair and appropriate, the
particular New 10 1/2% Notes to be redeemed or any portion thereof that is an
integral multiple of $1,000. (Section 1104)
The New 10 1/2% Notes do not have the benefit of any sinking fund.
Other Applicable Terms
For a description of other terms applicable to the New 10 1/2% Notes and
the New 12% Notes, see "--General Terms of the New Notes," "--Luxembourg Stock
Exchange Listing," "--Ranking," "--Book-Entry; Delivery and Form,"
"--Covenants," "--Certain Definitions," "--Description of Guarantees by RSL
Communications, Ltd.," "--Events of Default," "--Defeasance," "--Modification
and Waiver," "--The Trustee," "--Additional Amounts," "--Consent to Jurisdiction
and Service" and "--Governing Law."
THE NEW 12% NOTES
GENERAL
The New 12% Notes will be senior unsecured obligations of the Issuer and
will mature on November 1, 2008. The New 12% Notes will bear cash interest at
the rate of 12% per annum on the stated principal amount at maturity thereof
from November 9, 1998 or from the most recent Interest Payment Date to which
interest has been paid or duly provided for, payable semiannually on May 1 and
November 1 of each year, commencing May 1, 1999, to the Book-Entry Depositary
(in the case of Global Notes) or to the Person in whose name the New 12% Note
(or any predecessor New 12% Note) is registered (in the case of Definitive
Registered Notes) at the close of business on the preceding April 15 and
October 15, as the case may be. Interest on the New 12% Notes will be computed
on the basis of a 360-day year of twelve 30-day months. (Section Section 301,
307 & 310).
The guarantee by the Guarantor in respect of payments in respect of the New
12% Notes (the "New 12% Notes Guarantee" and, together with the New 10 1/2%
Notes Guarantee, the "New Notes Guarantees") will rank pari passu with the
Guarantor's unsecured unsubordinated obligations, including its obligations
under (1) the Old 12% Notes and (2) the New 10 1/2% Notes and the Old 10 1/2%
Notes (collectively, the "10 1/2% Notes").
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OPTIONAL REDEMPTION
The New 12% Notes are subject to redemption, at the option of the Issuer,
in whole or in part, at any time on or after November 1, 2003 and prior to
maturity, upon not less than 30 nor more than 60 days' notice mailed to each
holder of New 12% Notes to be redeemed at such holder's address appearing in the
applicable register for the New 12% Notes, in principal amounts of $1,000 or an
integral multiple of $1,000, at the following Redemption Prices (expressed as
percentages of the Accreted Value thereof) plus accrued interest to but
excluding the Redemption Date (subject to the right of holders to receive
interest due on an Interest Payment Date that is on or prior to the Redemption
Date), if redeemed during the 12-month period beginning March 1 of the years
indicated:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ------------------------------------------------------ ----------------
<S> <C>
2003.................................................. 106%
2004.................................................. 104%
2005.................................................. 102%
2006 and thereafter................................... 100%
</TABLE>
(Section Section 203, 1101, 1105 & 1107)
In addition, at any time prior to November 1, 2001, in the event that the
Guarantor receives net cash proceeds from the public or private sale of its
Common Stock, the Issuer (to the extent it receives such proceeds) may, at its
option, apply an amount equal to any such net cash proceeds or any portion
thereof to redeem, from time to time, New 12% Notes in a principal amount at
maturity of up to an aggregate amount equal to 33 1/3% of the aggregate original
principal amount at maturity of the New 12% Notes, provided, however, that New
12% Notes in an amount equal to at least 66 2/3% of the aggregate original
principal amount at maturity of the New 12% Notes remain outstanding after each
redemption. Each redemption must occur on a Redemption Date within 180 days of
the related sale and upon not less than 30 nor more than 60 days' notice mailed
to each holder of New 12% Notes to be redeemed at such holder's address
appearing in the applicable register for the New 12% Notes, in amounts of $1,000
or an integral multiple of $1,000 at a redemption price equal to 112% of the
Accreted Value of the New 12% Notes plus accrued interest to but excluding the
Redemption Date.
If less than all the New 12% Notes are to be redeemed, the Trustee shall
select, in such manner as it shall deem fair and appropriate, the particular New
12% Notes to be redeemed or any portion thereof that is an integral multiple of
$1,000. (Section 1104)
In the event that (i) the Guarantor or the Issuer has become or would
become obligated to pay any Additional Amounts (as defined herein) as a result
of (x) certain changes affecting withholding tax laws or (y) a Listing Failure
(as defined herein) provided that the Issuer has used reasonable best efforts to
list and maintain a listing of the New 12% Notes on a "recognized stock
exchange" (within the meaning of Section 841 of the U.K. Income and Corporation
Taxes Act 1988), and (ii) the Guarantor and the Issuer are unable to avoid the
requirement to pay such Additional Amounts by taking reasonable measures
available to them (including, without limitation, the Guarantor making payments
directly to holders under the New 12% Notes Guarantee, unless such payment is
likely to result in adverse consequences to the Issuer or the Guarantor), then
the Issuer may redeem all, but not less than all, of the New 12% Notes at any
time at 100% of the Accreted Value thereof on the redemption date, together with
accrued interest thereon, if any, to but excluding the redemption date. Prior to
the publication of the notice of redemption in accordance with the foregoing,
the Issuer shall deliver to the Trustee an officer's certificate stating that
the Issuer is entitled to effect such redemption based on a written opinion of
independent tax counsel or accounting firm reasonably satisfactory to the
Trustee. See "--Additional Amounts."
The New 12% Notes do not have the benefit of any sinking fund.
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"Accreted Value" is defined to mean, with respect to the 12% Notes, for any
"Specified Date", the amount calculated pursuant to clauses (i), (ii), (iii) or
(iv) below for each $1,000 principal amount at maturity of 12% Notes:
(i) if the Specified Date occurs on one or more of the following dates
(each a "Semiannual Accrual Date"), the Accreted Value will equal the
amount set forth below for such Semiannual Accrual Date:
<TABLE>
<CAPTION>
SEMIANNUAL ACCRETED
ACCRUAL DATE VALUE
- ------------------------------------------------------------ ---------
<S> <C>
May 1, 1999................................................. $ 946.33
November 1, 1999............................................ $ 947.84
May 1, 2000................................................. $ 949.45
November 1, 2000............................................ $ 951.16
May 1, 2001................................................. $ 952.99
November 1, 2001............................................ $ 954.93
May 1, 2002................................................. $ 957.00
November 1, 2002............................................ $ 959.21
May 1, 2003................................................. $ 961.55
November 1, 2003............................................ $ 964.06
May 1, 2004................................................. $ 966.72
November 1, 2004............................................ $ 969.56
May 1, 2005................................................. $ 972.58
November 1, 2005............................................ $ 975.79
May 1, 2006................................................. $ 979.22
November 1, 2006............................................ $ 982.87
May 1, 2007................................................. $ 986.76
November 1, 2007............................................ $ 990.90
May 1, 2008................................................. $ 995.31
November 1, 2008............................................ $1,000.00
</TABLE>
(ii) if the Specified Date occurs before the first Semiannual Accrual
Date, the Accreted Value will equal the sum of (a) $944.89; and (b) an
amount equal to the product of (x) the Accreted Value for the first
Semiannual Accrual Date less $944.89 multiplied by (y) a fraction, the
numerator of which is the number of days from the issue date of the Old 12%
Notes to the Specified Date, using a 360-day year of twelve 30-day months,
and the denominator of which is the number of days elapsed from the issue
date of the Old 12% Notes to the first Semiannual Accrual Date, using a
360-day year of twelve 30-day months;
(iii) if the Specified Date occurs between two Semiannual Accrual
Dates, the Accreted Value will equal the sum of (a) the Accreted Value for
the Semiannual Accrual Date immediately preceding such Specified Date and
(b) an amount equal to the product of (x) the Accreted Value for the
immediately following Semiannual Accrual Date less the Accreted Value for
the immediately preceding Semiannual Accrual Date multiplied by (y) a
fraction, the numerator of which is the number of days from the immediately
preceding Semiannual Accrual Date to the Specified Date, using a 360-day
year of twelve 30-day months, and the denominator of which is 180; or
(iv) if the Specified Date occurs after the last Semiannual Accrual
Date, the Accreted Value will equal $1,000.
Other Applicable Terms
For a description of other terms applicable to the New 12% Notes and the
New 10 1/2% Notes, see "--General Terms of the New Notes," "--Luxembourg Stock
Exchange Listing," "--Ranking," "--Book-Entry; Delivery and Form,"
"--Covenants," "--Certain Definitions," "--Description of Guarantees by RSL
Communications, Ltd.," "--Events of Default," "--Defeasance," "--Modification
and Waiver," "--The Trustee," "--Additional Amounts," "--Consent to Jurisdiction
and Service" and "--Governing Law."
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GENERAL TERMS OF THE NEW NOTES
Principal of and premium, if any, and interest on the New Notes will be
payable, and the New Notes may be presented for registration of transfer and
exchange, at one or more offices or agencies of the Issuer maintained for that
purpose, provided that, at the option of the Issuer, payment of interest on the
New Notes may be made by check mailed to the address of the Person entitled
thereto as it appears in the related Note Register. Until otherwise designated
by the Issuer, such office or agency will be the corporate trust office of the
Trustee, as Paying Agent and Registrar, in the Borough of Manhattan, The City of
New York, or in Luxembourg. (Section Section 301, 305 & 1002)
If the day for any payment of principal, premium, if any, or interest is
not a business day in the location of each paying agent, such payment will be
made on the next following day that is a business day in each such location.
(Section 1.13)
The New Notes will be issued without coupons, in denominations of $1,000
and any integral multiples of $1,000 in excess thereof. (Section 302) No service
charge will be made for any registration of transfer or exchange of New Notes,
but the Issuer may require payment of a sum sufficient to cover any tax or other
governmental charge payable in connection therewith. (Section 305)
LUXEMBOURG STOCK EXCHANGE LISTING
The Issuer intends to list the New Notes on the Luxembourg Stock Exchange.
As long as the New Notes are listed on the Luxembourg Stock Exchange and such
exchange so requires, the Company will maintain a paying agent and transfer
agent in Luxembourg. The name and address of the initial paying agent in
Luxembourg is set forth at the end of this Prospectus. If Definitive Registered
Notes are issued, such paying agent will also act as transfer agent and
registrar with respect to the Definitive Registered Notes. In addition, upon
maturity, such Definitive Registered Notes may be presented for payment at the
offices of such paying agent in Luxembourg. If money for the payment of
principal or interest remains unclaimed for two years, the paying agent will pay
the money back to the Issuer at its request. After that, holders of the New
Notes which are entitled to the money must look to the Issuer for payment,
unless an applicable law designates another person, and all liability of the
paying agent with respect to such money shall cease.
The Indentures do not prevent the Issuer from purchasing New Notes or Old
Notes (collectively, the "Notes") trading on the Luxembourg Stock Exchange. In
the event of such a purchase of Notes by the Issuer, Notes so purchased shall be
disregarded for certain voting purposes consistent with the terms of the
applicable Indenture.
NOTICES
All notices to holders of the New Notes, including any notices with respect
to the redemption of all or a portion of the New Notes by the Issuer or notices
with respect to the Exchange Offer, will be given by publication in a daily
newspaper in Luxembourg, which is expected to be the Luxembourg Wort.
In the event of a Change of Control, the Issuer will provide notice to
holders of the New Notes of an Offer to Purchase all New Notes then outstanding
by publication in a daily newspaper in Luxembourg, which is expected to be the
Luxembourg Wort. See "--Covenants--Change of Control."
RANKING
The New Notes and the New Notes Guarantees will be unsecured obligations of
the Issuer and the Guarantor, respectively, rank pari passu in right of payment
with all existing and future unsecured obligations of the Issuer and the
Guarantor, respectively, and rank senior in right of payment to all future
subordinated obligations of the Issuer and the Guarantor, respectively. Holders
of secured obligations of the Issuer or the Guarantor, however, will have claims
that are prior to the claims of the holders of the New Notes or the New Notes
Guarantees with respect to the assets securing such other obligations.
The Issuer is a direct wholly-owned subsidiary of the Guarantor. The
Guarantor's principal operations are conducted through subsidiaries of the
Issuer and, therefore, the Guarantor and the Issuer are dependent upon the cash
flow of such subsidiaries to meet their respective obligations. The Guarantor's
other subsidiaries have no obligation to guarantee or otherwise pay amounts due
under the
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New Notes. Therefore, the New Notes are effectively subordinated to all
indebtedness and other liabilities and commitments (including trade payables) of
the Guarantor's other subsidiaries. Any right of the Issuer to receive assets of
any of the subsidiaries upon any liquidation or reorganization of such
subsidiary (and the consequent right of holders of the New Notes to participate
in those assets) is effectively subordinated to the claims of the subsidiary's
creditors, except to the extent that the Issuer is itself recognized as a
creditor of the subsidiary. Any recognized claims of the Issuer as a creditor of
the subsidiary would be subordinate to any prior security interest held by any
other creditor of the subsidiary and obligations of the subsidiary that are
senior to those owing to the Issuer.
As of September 30, 1998, on a pro forma basis after giving effect to the
sale of the Old Notes and the 1998 Equity Offering, (i) the total amount of
outstanding liabilities of the Guarantor and the Issuer (excluding their
subsidiaries), including trade payables, would have been approximately
$1,002.5 million and (ii) the total amount of outstanding liabilities of the
subsidiaries of the Guarantor (other than the Issuer), including trade payables,
would have been $439.5 million.
BOOK-ENTRY; DELIVERY AND FORM
GENERAL
The New Notes will initially be represented by one or more global
securities in bearer form without interest coupons which will be issued in
denominations equal to the outstanding principal amount of the Notes represented
thereby (each a "Global Note" and collectively, the "Global Notes"). The Global
Notes will be deposited with the Book-Entry Depositary pursuant to the terms of
one or more Note Deposit Agreements, dated as of December 8, 1998, in the case
of the 10 1/2% Notes (the "10 1/2% Notes Deposit Agreement"), and as of
November 9, 1998, in the case of the 12% Notes (the "12% Notes Deposit
Agreement" and, together with the 10 1/2% Notes Deposit Agreement, the "Deposit
Agreements"), between the Issuer, for the limited purposes set forth therein,
and The Chase Manhattan Bank, as book-entry depositary (the "Book-Entry
Depositary").
The Book-Entry Depositary will issue a certificateless interest for each
Global Note issued with respect to the New Notes (a "New Global Note"),
representing a 100% interest in the respective underlying New Note, to The
Depositary Trust Company ("DTC") by recording such interest in the Book-Entry
Depositary's books and records in the name of Cede & Co., as a nominee of DTC.
Beneficial interests in the Notes (as defined) will be shown on, and transfers
thereof will be effected only through, records maintained in book-entry form by
DTC (with respect to its participants) and its participants. Such beneficial
interests in the Notes are collectively referred to herein as "Book-Entry
Interests."
DEFINITIVE REGISTERED NOTES
Under the terms of the Deposit Agreements and the Indentures, owners of
Book-Entry Interests in the Global Notes will receive definitive Notes in
registered form ("Definitive Registered Notes") (1) if DTC notifies the Issuer
or the Book-Entry Depositary in writing that it (or its nominee) is unwilling or
unable to continue to act as depositary or ceases to be a clearing agency
registered under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and, in either case, a successor depositary registered as a clearing
agency under the Exchange Act is not appointed by the Issuer within 90 days,
(2) at any time if the Issuer determines that the Global Notes (in whole but not
in part) should be exchanged for Definitive Registered Notes, provided that (x)
such exchange is required by (A) any applicable law or (B) any event beyond the
Issuer's control or (y) payments of interest on the Global Note to be exchanged
or any related Book-Entry Interest are, or would become, subject to any
deduction or withholding for taxes, (3) at any time after the consummation of
the Exchange Offers, if the owner of a Book-Entry Interest related to any New
Notes requests such exchange in writing, delivered to DTC and through DTC to the
Book-Entry Depositary and the Trustee, or (4) if the Book-Entry Depositary is at
any time unwilling or unable to continue as Book-Entry Depositary and a
successor Book-Entry Depositary is not appointed by the Issuer within 90 days.
In no event will definitive securities in bearer form be issued. Any
Definitive Registered Notes will be issued in fully registered form in
denominations of $1,000 principal amount and integral multiples
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thereof. Any Definitive Registered Notes will be registered in such name or
names as DTC shall instruct the Trustee, through the Book-Entry Depositary. It
is expected that DTC's instructions will be based upon directions received by
DTC from its participants (including Euroclear System ("Euroclear") and Cedel
Bank ("Cedel")) reflecting the beneficial ownership of Book-Entry Interests. To
the extent permitted by law, the Issuer, the Trustee and any paying agent shall
be entitled to treat the person in whose name any Definitive Registered Note is
registered as the absolute owner thereof. While any Global Note is outstanding,
holders of Definitive Registered Notes may exchange their Definitive Registered
Notes for a corresponding Book-Entry Interest in such Global Note by
surrendering their Definitive Registered Notes to the Trustee (either in New
York or in Luxembourg) and providing the certificates and opinions required by
the applicable Indenture. The Book-Entry Depositary will make the appropriate
adjustments to the Global Note underlying such Book-Entry Interest to reflect
any issue or surrender of Definitive Registered Notes. The Indentures contain
provisions relating to the maintenance by a registrar of a register reflecting
ownership of Definitive Registered Notes, if any, and other provisions customary
for a registered debt security. Payment of principal and interest on each
Definitive Registered Note will be made to the holder appearing on the register
at the close of business on the record date at his address shown on the register
on the record date.
U.S. HOLDERS SHOULD BE AWARE THAT, UNDER CURRENT U.K. LAW, UPON THE
ISSUANCE TO A HOLDER OF DEFINITIVE REGISTERED NOTES, SUCH HOLDER WILL BECOME
SUBJECT TO U.K. INCOME TAX (CURRENTLY 20%) TO BE WITHHELD ON ANY PAYMENTS OF
INTEREST ON THE DEFINITIVE REGISTERED NOTES. A U.S. HOLDER OF DEFINITIVE
REGISTERED NOTES WILL NOT, UNLESS THERE HAS BEEN A CHANGE IN LAW OR A "LISTING
FAILURE" (AS DEFINED HEREIN) AND CERTAIN OTHER CONDITIONS ARE MET, BE ENTITLED
TO RECEIVE ADDITIONAL AMOUNTS WITH RESPECT TO SUCH DEFINITIVE REGISTERED NOTES.
SEE "ADDITIONAL AMOUNTS." HOWEVER, A U.S. HOLDER OF DEFINITIVE REGISTERED NOTES
MAY BE ENTITLED TO RECEIVE A REFUND OF WITHHELD AMOUNTS FROM THE INLAND REVENUE
IN CERTAIN CIRCUMSTANCES.
DESCRIPTION OF BOOK-ENTRY SYSTEM
Upon receipt of the Global Notes, the Book-Entry Depositary will issue a
certificateless interest for each such Global Note, representing a 100% interest
in the respective underlying Global Note, to DTC by recording such interest in
the Book-Entry Depositary's books and records in the name of Cede & Co., as
nominee of DTC. Ownership of Book-Entry Interests will be limited to persons who
have accounts with DTC, including Euroclear and Cedel ("DTC participants"), or
persons who have accounts through DTC participants ("DTC indirect
participants"). Upon such issuance of interests in such Global Notes to DTC, DTC
will credit, on its internal book-entry registration and transfer system, its
participants' accounts with the respective interests owned by such participants.
Ownership of Book-Entry Interests will be shown on, and the transfer of such
ownership will be effected only through, records maintained by DTC or its
nominee (with respect to interests of participants) and the records of
participants (with respect to interests of indirect participants).
The laws of some countries and some states in the United States may require
that certain purchasers of securities take physical delivery of such securities
in definitive form. Such laws may impair the ability to own, transfer or pledge
the Book-Entry Interests in the Global Notes.
So long as the Book-Entry Depositary, or its nominee, is the holder of the
Global Notes, the Book-Entry Depositary or such nominee, as the case may be,
will be considered the sole holder of such Global Notes for all purposes under
the Indentures and the Notes. Except as set forth above, participants or
indirect participants will not be entitled to have Notes or Book-Entry Interests
registered in their names, will not receive or be entitled to receive physical
delivery of Notes or Book-Entry Interests in definitive bearer or registered
form and will not be considered the owners or holders thereof under the
Indentures. Accordingly, each person owning a Book-Entry Interest must rely on
the procedures of the Book-Entry Depositary and DTC, as applicable, and, if such
person is an indirect participant in DTC, on the procedures of the participant
in DTC through which such person owns its interest, to exercise any rights and
remedies of a holder under the applicable Indenture. If any definitive Notes are
issued to DTC participants or DTC indirect participants, they will be issued in
registered form,
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as described above. Unless and until Book-Entry Interests related to the New
Notes are exchanged for Definitive Registered Notes, the certificateless
interest held by DTC may not be transferred except as a whole between DTC and a
nominee of DTC between nominees of DTC, or by DTC or any such nominee to a
successor of DTC or a successor of such nominee.
PAYMENTS ON THE GLOBAL NOTES
Payments of any amounts owing in respect of the Global Notes will be made
through one or more paying agents appointed under the Indentures (which
initially will include The Chase Manhattan Bank, as paying agent for the Notes)
to the Book-Entry Depositary as the holder of the Global Notes. All such amounts
will be payable in U.S. dollars. Upon receipt of any such amounts in respect of
the Global Notes, the Book-Entry Depositary will pay such amounts to DTC, in
proportion to its respective interests, as shown on the Book-Entry Depositary's
records.
The Issuer expects that DTC or its nominee, upon receipt of any payment
made in respect of the Global Notes, will credit its participants' accounts with
such payments in amounts proportionate to their respective interest in the
principal amount of such Global Note as shown on the records of DTC or its
nominee. The Issuer expects that payments by DTC participants to owners of
Book-Entry Interests held through such participants will be governed by standing
customer instructions and customary practices, as is now the case with the
securities held for the account of customers in bearer form or registered in
"street name," and will be the responsibility of such participants.
None of the Issuer, the Book-Entry Depositary or any paying agent will have
any responsibility or liability for any aspect of the records relating to or
payments made on account of Book-Entry Interests or for maintaining, supervising
or reviewing all records relating to such Book-Entry Interests or beneficial
ownership interests.
REDEMPTION OF GLOBAL NOTES
In the event any Global Note (or any portion thereof) is redeemed, the
Book-Entry Depositary will, through DTC, redeem, from the amount received by it
in respect of the redemption of such Global Note, an equal amount of the
Book-Entry Interests in such Global Note. The redemption price payable in
connection with the redemption of such Book-Entry Interests will be equal to the
amount received by the Book-Entry Depositary in connection with the redemption
of such Global Note (or any portion thereof). The Issuer understands that under
existing practices of if fewer than all of the Notes are to be redeemed at any
time, DTC will credit participants' accounts on a proportionate basis (with
adjustments to prevent fractions) or by lot or on such other basis as DTC deems
fair and appropriate; provided that no beneficial interests of less than $1,000
principal amount at maturity may be redeemed in part.
TRANSFERS
Pursuant to the Deposit Agreements, the Global Notes may be transferred
only to the successor to the Book-Entry Depositary.
All transfers of Book-Entry Interests between DTC participants will be
effected by DTC pursuant to customary procedures established by DTC and its
participants. Transfers between participants in Euroclear and Cedel will be
effected in the ordinary way in accordance with their respective rules and
operating procedures.
ACTION BY OWNERS OF BOOK-ENTRY INTERESTS
As soon as practicable after receipt by the Book-Entry Depositary of notice
of any solicitation of consents or request for a waiver of other action by the
holders of the New Notes, or of any offer to purchase the New Notes with Excess
Proceeds or upon a Change of Control (as defined under "--Change of Control" and
"--Certain Definitions," respectively), the Book-Entry Depositary will mail to
DTC a notice containing (a) such information as is contained in the notice
received by the Book-Entry Depositary, (b) a statement that at the close of
business on a specified record date DTC, will be entitled to instruct the
Book-Entry Depositary as to the consent, waiver or other action, if any,
pertaining to such New Notes and (c) a statement as to the manner in which such
instructions may be given. In addition,
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the Book-Entry Depositary will forward to DTC all materials pertaining to any
such solicitation, request, offer or other action. Upon the written request of
DTC the Book-Entry Depositary shall endeavor insofar as practicable to take such
action regarding the requested consent, waiver, offer or other action in respect
of such New Notes in accordance with any instructions set forth in such request.
DTC may grant proxies or otherwise authorize DTC participants or DTC indirect
participants to provide such instructions to the Book-Entry Depositary so that
it may exercise any rights of a holder or take any other actions which a holder
is entitled to take under the applicable Indenture. Under its usual procedures,
DTC would mail an omnibus proxy to the Issuer and the Book-Entry Depositary
assigning Euroclear's and Cedel's consenting or voting rights to those DTC
participants to whose accounts such Book-Entry Interests are credited on a
record date as soon as possible after such record date. Euroclear or Cedel, as
the case may be, will take any action permitted to be taken by a holder under
the applicable Indenture on behalf of a Euroclear participant or Cedel
participant only in accordance with its relevant rules and procedures and
subject to its depositary's ability to effect such actions on its behalf through
DTC. The Book-Entry Depositary will not exercise any discretion in the granting
of consents or waivers or the taking of any other action relating to the
applicable Indenture.
DTC has advised the Issuer that it will take any action permitted to be
taken by a holder of New Notes (including the presentation of New Notes for
exchange as described above) only at the direction of one or more DTC
participants to whose account the DTC interests in the Global Notes are credited
and only in respect of such portion of the aggregate principal amount of New
Notes, as to which such participant or participants has or have given such
direction.
REPORTS
The Book-Entry Depositary will immediately send to DTC a copy of any
notices, reports and other communications received relating to the Issuer, the
New Notes or the Book-Entry Interests.
ACTION BY BOOK-ENTRY DEPOSITARY
Upon the occurrence of a Default with respect to the New Notes, or in
connection with any other right of the holder of a Global Note under the
Indentures, if requested in writing by DTC, the Book-Entry Depositary will take
any such action as shall be requested in such notice; provided that the
Book-Entry Depositary has been offered reasonable security or indemnity against
the costs, expenses and liabilities that might be incurred by it in compliance
with such request by the owners of Book-Entry Interests.
RESIGNATION OF BOOK-ENTRY DEPOSITARY
The Book-Entry Depositary may at any time resign as Book-Entry Depositary
by written notice to the Issuer and DTC, such resignation to become effective
upon the appointment of a successor book-entry depositary, in which case the
Global Notes shall be delivered to that successor. If no such successor has been
so appointed by the Issuer within 90 days, the Book-Entry Depositary may request
the Issuer to issue Definitive Registered Notes as described above.
If at any time DTC is unwilling or unable to continue as a depositary for
the Book-Entry Interests and a successor depositary is not appointed by the
Issuer within 90 days, DTC may request that the Issuer issue Definitive
Registered Notes in exchange therefor.
EXPENSES OF BOOK-ENTRY DEPOSITARY
The Issuer has agreed to indemnify the Book-Entry Depositary against
certain liabilities incurred by it and pay the charges of the Book-Entry
Depositary as agreed between the Issuer and the Book-Entry Depositary.
AMENDMENT AND TERMINATION OF THE DEPOSIT AGREEMENTS
The Deposit Agreements may be amended by the Issuer and the Book-Entry
Depositary without notice to or consent of DTC, or any owner of a Book-Entry
Interest: (a) to cure any ambiguity, defect or inconsistency, provided that such
amendment or supplement does not adversely affect the rights of DTC or any
holder of Book-Entry Interests, (b) to evidence the succession of another person
to the Issuer (when a similar amendment with respect to the Indenture is being
executed) and the assumption
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by any such successor of the covenants of the Issuer therein, (c) to evidence or
provide for a successor Book-Entry Depositary, (d) to make any amendment, change
or supplement that does not adversely affect DTC or any owner of Book-Entry
Interests, (e) to add to the covenants of the Issuer or the Book-Entry
Depositary, (f) to add a guarantor when a guarantor is made a party to an
Indenture pursuant to such Indenture or (g) to comply with the United States
federal and U.K. securities laws. Except as provided in the Deposit Agreements,
no amendment that adversely affects DTC may be made without the consent of DTC
and no amendment that adversely affects the holders of Book-Entry Interests may
be made without the consent of a majority of the aggregate principal amount of
Book-Entry Interests outstanding. Upon the issuance of Definitive Registered
Notes in exchange for Book-Entry Interests constituting the entire principal
amount of the 10 1/2% Notes or the 12% Notes, the applicable Deposit Agreement
will terminate. Each Deposit Agreement may be terminated upon the resignation of
the Book-Entry Depositary with respect thereto if no successor has been
appointed within 90 days as set forth above.
INFORMATION CONCERNING DTC, EUROCLEAR AND CEDEL
The Issuer understands as follows with respect to DTC, Euroclear and Cedel:
DTC is a limited purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
was created to hold securities of its participants and to facilitate the
clearance and settlement of transactions among its participants in such
securities through electronic book-entry changes in accounts of the
participants, thereby eliminating the need for physical movement of securities
certificates. DTC participants include securities brokers and dealers, banks,
trust companies, clearing corporations and certain other organizations, some of
whom (and/or their representatives) own DTC. Access to the DTC book-entry system
is also available to others, such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a participant,
either directly or indirectly.
Because DTC can only act on behalf of participants, who in turn act on
behalf of indirect participants and certain banks, the ability of an owner of a
Book-Entry Interest to pledge such interest to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
interest, may be limited by the lack of a definitive certificate for such
interest. The laws of some states require that certain persons take physical
delivery of securities in definitive form. Consequently, the ability to transfer
Book-Entry Interests to such persons may be limited. In addition, beneficial
owners of Book-Entry Interests through the DTC system will receive distributions
attributable to the Global Notes only through DTC participants.
Euroclear and Cedel hold securities for participating organizations and
facilitate the clearance and settlement of securities transactions between their
respective participants through electronic book-entry changes in accounts of
such participants. Euroclear and Cedel provide to their participants, among
other things, services for safekeeping, administration, clearance and settlement
of internationally traded securities and securities lending and borrowing.
Euroclear and Cedel interface with domestic securities markets. Euroclear and
Cedel participants are financial institutions such as underwriters, securities
brokers and dealers, banks, trust companies and certain other organizations.
Indirect access to Euroclear or Cedel is also available to others such as banks,
brokers, dealers and trust companies that clear through or maintain a custodian
relationship with a Euroclear or Cedel participant, either directly or
indirectly.
GLOBAL CLEARANCE AND SETTLEMENT UNDER BOOK-ENTRY SYSTEM
Initial Settlement. Investors electing to own their Book-Entry Interest
related to New Notes through DTC (other than through accounts at Euroclear or
Cedel) will follow the settlement practices applicable to U.S. corporate debt
obligations. The securities custody accounts of investors will be created with
their holdings against payment in same-day funds on the settlement date.
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Book-Entry Interests owned through Euroclear or Cedel accounts will follow
the settlement procedures applicable to conventional eurobonds in registered
form. Book-Entry Interests will be credited to the securities custody accounts
of Euroclear and Cedel holders on the business day following the settlement date
against payment for value on the settlement date.
Secondary Market Trading. The Book-Entry Interests related to New Notes
will trade in DTC's Same-Day Funds Settlement System, and secondary market
trading activity in such Book-Entry Interests will therefore settle in same-day
funds.
Since the purchaser determines the place of delivery, it is important to
establish at the time of trading of any Book-Entry Interests where both the
purchaser's and seller's accounts are located to ensure that settlement can be
made on the desired value date.
COVENANTS
The Indentures contain, among others, the following covenants:
LIMITATION ON CONSOLIDATED DEBT
The Guarantor may not, and may not permit any Restricted Subsidiary of the
Guarantor to, incur on or after the respective dates of the applicable
Indentures any Debt, other than the Old Notes issued on the respective dates of
the Indentures and the guarantees in respect thereof (the "Old Notes Guarantees"
and, collectively with the New Notes Guarantees, the "Notes Guarantees") unless
the ratio of (i) the aggregate consolidated principal amount of Debt (which is
defined in the Indentures to include the accreted value of any Debt issued at a
discount) of the Guarantor outstanding as of the most recent available quarterly
or annual balance sheet, after giving pro forma effect to the Incurrence of such
Debt and any other Debt Incurred since such balance sheet date and the receipt
and application of the proceeds thereof, to (ii) four (4) times the Consolidated
Cash Flow Available for Fixed Charges for the most recent fiscal quarter next
preceding the Incurrence of such Debt for which consolidated financial
statements are available, determined on a pro forma basis as if any such Debt
had been Incurred and the proceeds thereof had been applied at the beginning of
such recent fiscal quarter, would be less than 7.0 to 1.0 for such period.
Notwithstanding the foregoing limitation, the Guarantor and any Restricted
Subsidiary may Incur the following: (i) Debt under Credit Facilities in an
aggregate principal amount at any one time not to exceed $200 million, and any
renewal, extension, refinancing or refunding thereof in an amount which,
together with any principal amount remaining outstanding under all Credit
Facilities, does not exceed the aggregate principal amount outstanding under all
Credit Facilities immediately prior to such renewal, extension, refinancing or
refunding; (ii) Debt owed by the Guarantor to any Restricted Subsidiary of the
Guarantor or Debt owed by a Restricted Subsidiary of the Guarantor to the
Guarantor or a Restricted Subsidiary of the Guarantor; provided, however, that
upon either (x) the transfer or other disposition by such Restricted Subsidiary
or the Guarantor of any Debt so permitted to a Person other than the Guarantor
or another Restricted Subsidiary of the Guarantor or (y) such Restricted
Subsidiary ceasing to be a Restricted Subsidiary, the provisions of this
clause (ii) shall no longer be applicable to such Debt and such Debt shall be
deemed to have been Incurred at the time of such transfer or other disposition;
(iii) Debt Incurred to renew, extend, refinance or refund (each, a
"refinancing") (x) Debt outstanding at the respective dates of the applicable
Indentures (after giving effect to the Equity Clawback) or (y) Incurred pursuant
to the first paragraph of this "Limitation on Consolidated Debt", or
clause (vi) or (viii) of this paragraph or (z) the Notes originally issued on
the respective dates of the applicable Indentures or Notes exchanged therefore,
in each case, in an aggregate principal amount not to exceed the aggregate
principal amount of and accrued interest on the Debt so refinanced plus the
amount of any premium required to be paid in connection with such refinancing
pursuant to the terms of the Debt so refinanced or the amount of any premium
reasonably determined by the Guarantor as necessary to accomplish such
refinancing by means of a tender offer or privately negotiated repurchase, plus
the expenses of the Guarantor or the Restricted Subsidiary effecting such
refinancing incurred in connection with such refinancing; provided, however,
that Debt the proceeds of which are used to refinance the Notes or Debt which is
pari passu to the Notes and the Notes Guarantees or Debt which is
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subordinate in right of payment to the Notes and the Notes Guarantees, shall
only be permitted if (A) in the case of any refinancing of the Notes or Debt
which is pari passu to the Notes and the Notes Guarantees, the refinancing Debt
is made pari passu or subordinated to the Notes and the Notes Guarantees and, in
the case of any refinancing of Subordinated Debt, the refinancing Debt
constitutes Subordinated Debt and (B) in any case, the refinancing Debt by its
terms, or by the terms of any agreement or instrument pursuant to which such
Debt is issued, does not have a final stated maturity prior to the final stated
maturity of the Debt being refinanced, and the Average Life of such new Debt is
at least equal to the remaining Average Life of the Debt being refinanced
(assuming that such Debt being refinanced had a final stated maturity three
months later than its actual final stated maturity); (iv) Debt in an aggregate
principal amount not in excess of (A) two (2) times the aggregate amount of the
Guarantor's Incremental Paid-in Capital minus (B) $165 million; (v) Debt in an
aggregate principal amount not in excess of 80% of the aggregate amount of
accounts receivable set forth on the most recent unaudited quarterly or audited
annual financial statements of the Guarantor and its consolidated subsidiaries
filed with the Commission; (vi) Purchase Money Debt, which is incurred for the
construction, acquisition and improvement of Telecommunications Assets, provided
that the amount of such Purchase Money Debt does not exceed the cost of the
construction, acquisition or improvement of the applicable Telecommunications
Assets; (vii) Debt consisting of Permitted Interest Rate and Currency Protection
Agreements; and (viii) Debt not otherwise permitted to be Incurred pursuant to
clauses (i) through (vii) above, which, together with any other outstanding Debt
Incurred pursuant to this clause (viii), has an aggregate principal amount not
in excess of $50 million at any time outstanding.
For purposes of determining compliance with this "Limitation on
Consolidated Debt" covenant, with respect to any item of Debt (x) in the event
that an item of Debt meets the criteria of more than one of the types of Debt
the Guarantor or a Restricted Subsidiary is permitted to Incur pursuant to the
foregoing clauses (i) through (viii), the Guarantor shall have the right, in its
sole discretion, to classify such item of Debt and shall only be required to
include the amount and type of such Debt under the clause permitting the Debt as
so classified and (y) any other obligation of the obligor on such Debt (or of
any other Person who could have Incurred such Debt under this covenant) arising
under any Guarantee, Lien or letter of credit supporting such Debt shall be
disregarded to the extent that such Guarantee, Lien or letter of credit secures
the principal amount of such Debt. In the case of each class of New Notes, the
limitations on the incurrence of additional Debt is effective from and after the
dates of the related Indenture.
For purposes of determining compliance with the foregoing restriction on
the Incurrence of Debt with respect to Debt denominated in a foreign currency,
the Dollar-equivalent principal amount of such foreign-currency-denominated Debt
shall be calculated based on the relevant currency exchange rate in effect on
the date that such foreign-currency-denominated Debt was Incurred, in the case
of term debt, or first committed, in the case of revolving credit debt, provided
that (x) the Dollar-equivalent principal amount of any such Debt outstanding on
the Closing Date shall be calculated based on the relevant currency exchange
rate in effect on the Closing Date and (y) if such Debt is Incurred to refinance
other Debt denominated in a foreign currency, and such refinancing would cause
the applicable Dollar-denominated restriction to be exceeded if calculated at
the relevant currency exchange rate in effect on the date of such refinancing,
such Dollar-denominated restriction shall be deemed not to have been exceeded so
long as the principal amount of such refinancing Debt does not exceed the
principal amount of such Debt being refinanced. The principal amount of any Debt
Incurred to refinance other Debt, if Incurred in a different currency from the
Debt being refinanced, shall be calculated based on the currency exchange rate
applicable to the currencies in which such respective Debt is denominated that
is in effect on the date of such refinancing.
Limitation on Restricted Payments
The Guarantor (i) may not, and will not permit any Restricted Subsidiary,
directly or indirectly, to declare or pay any dividend, or make any
distribution, in respect of its Capital Stock or to the holders thereof,
excluding (x) any dividends or distributions payable solely in shares of its
Capital Stock (other than Disqualified Stock) or in options, warrants or other
rights to acquire its Capital Stock (other than Disqualified Stock), (y) any
dividends paid to the Guarantor or a Restricted Subsidiary or (z) pro rata
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dividends paid on shares of Common Stock of Restricted Subsidiaries, (ii) may
not, and may not permit any Restricted Subsidiary to, purchase, redeem, or
otherwise retire or acquire for value (a) any Capital Stock of the Guarantor or
any Related Person of the Guarantor (other than a permitted refinancing) or
(b) any options, warrants or rights to purchase or acquire shares of Capital
Stock of the Guarantor or any Related Person of the Guarantor or any securities
convertible or exchangeable into shares of Capital Stock of the Guarantor or any
Related Person of the Guarantor (other than a permitted refinancing), (iii) may
not make, or permit any Restricted Subsidiary to make, any Investment, except
for Permitted Investments, and (iv) may not, and may not permit any Restricted
Subsidiary to, redeem, defease, repurchase, retire or otherwise acquire or
retire for value, prior to any scheduled maturity, repayment or sinking fund
payment, Debt of the Guarantor or the Issuer which is subordinate in right of
payment to the Notes or the Notes Guarantees (each of clauses (i) through (iv)
being a "Restricted Payment") if: (1) an Event of Default, or an event that with
the passing of time or the giving of notice, or both, would constitute an Event
of Default, shall have occurred and be continuing, or (2) except with respect to
Investments, upon giving effect to such Restricted Payment, the Guarantor could
not Incur at least $1.00 of additional Debt pursuant to the terms of the
Indentures described in the first paragraph of "Limitation on Consolidated Debt"
above, or (3) upon giving effect to such Restricted Payment, the aggregate of
all Restricted Payments from the dates of the Indentures exceeds the sum of:
(a) (x) Consolidated Cash Flow Available for Fixed Charges since the end of the
last full fiscal quarter prior to the dates of the Indentures through the last
day of the last full fiscal quarter ending immediately preceding the date of
such Restricted Payment (the "Calculation Period") minus (y) 1.5 times
Consolidated Interest Expense for the Calculation Period plus (b) an amount
equal to the net reduction in Investments (other than reductions in Permitted
Investments) in any Person resulting from payments of interest on Debt,
dividends, repayments of loans or advances, or other transfers of assets, in
each case to the Guarantor or any Restricted Subsidiary or from the Net Cash
Proceeds from the sale of any such Investment (except, in each case, to the
extent any such payment or proceeds are included in the calculation of
Consolidated Cash Flow Available for Fixed Charges for the Calculation Period,
or from redesignations of Unrestricted Subsidiaries as Restricted Subsidiaries
(valued in each case as provided in the definition of "Investments"), not to
exceed, in each case, the amount of Investments previously made by the Guarantor
or any Restricted Subsidiary in such Person or Unrestricted Subsidiary plus
(c) an amount equal to the aggregate net proceeds received after the date of the
Indentures, including the fair market value of property other than cash
(determined in good faith by the Board of Directors as evidenced by a resolution
of the Board of Directors filed with the Trustee), as capital contributions to
the Guarantor or from the issuance (other than to a Subsidiary) of Capital Stock
(other than Disqualified Stock) of the Guarantor and warrants, rights or options
on Capital Stock (other than Disqualified Stock) of the Guarantor and the
principal amount at maturity of Debt of the Guarantor or any Restricted
Subsidiary that has been converted into Capital Stock (other than Disqualified
Stock and other than by a Subsidiary) of the Guarantor after the date of the
Indentures plus (d) $30 million. Notwithstanding the foregoing, (i) the
Guarantor may pay any dividend on Capital Stock of any class of the Guarantor
within 60 days after the declaration thereof if, on the date when the dividend
was declared, the Guarantor could have paid such dividend in accordance with the
foregoing provisions; (ii) the Guarantor may make acquisitions of a minority
equity interest in entities engaged in the Telecommunications Business; provided
that (A) the acquisition of a majority equity interest in such entities is not
then permitted or practicable under applicable law without regulatory consent or
change of law, (B) the Board of Directors of the Guarantor determines in good
faith that there is a substantial probability that such approval or change of
law will be obtained, (C) the Guarantor or one of its Restricted Subsidiaries
has the right to acquire Capital Stock representing a majority of the voting
power of the Voting Stock of such entity upon receipt of regulatory consent or
change of law and does acquire such Voting Stock reasonably promptly upon
receipt of such consent or change of law and (D) in the event that such consent
or change of law has not been obtained within 18 months of funding such
Investment, the Guarantor or one of its Restricted Subsidiaries has the right to
sell such minority equity interest to the Person from whom it acquired such
interest, for consideration consisting of the consideration originally paid by
the Guarantor and its Restricted Subsidiaries for such minority equity interest;
(iii) the Guarantor may repurchase any shares of its Common Stock or options to
acquire its Common Stock from Persons who were formerly directors, officers or
employees of the Guarantor or any of its Subsidiaries, provided that the
aggregate
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amount of all such repurchases made pursuant to this clause (iii) shall not
exceed $6 million, plus the aggregate cash proceeds received by the Guarantor
since the date of the Indentures from issuances of its Common Stock or options
to acquire its Common Stock to directors, officers and employees of the
Guarantor or any of its Restricted Subsidiaries; (iv) the Guarantor or a
Restricted Subsidiary may redeem, defease, repurchase, retire or otherwise
acquire or retire for value Debt of the Guarantor or the Issuer which is
subordinated in right of payment to the Notes or the Notes Guarantees, as the
case may be, in exchange for, or out of the proceeds of a substantially
concurrent sale (other than to a Subsidiary) of, Capital Stock (other than
Disqualified Stock of the Guarantor) or in a refinancing that satisfies the
requirements of clause (iii) of the second paragraph under "Limitation on
Consolidated Debt"; and (v) the Guarantor and its Restricted Subsidiaries may
retire or repurchase any Capital Stock of the Guarantor or of any Subsidiary of
the Guarantor in exchange for, or out of the proceeds of the substantially
concurrent sale (other than to a Subsidiary of the Guarantor) of, Capital Stock
(other than Disqualified Stock) of the Guarantor or such Restricted Subsidiary.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries
The Guarantor may not, and may not permit any Restricted Subsidiary to,
directly or indirectly, create or otherwise cause or suffer to exist or become
effective any consensual encumbrance or restriction on the ability of any
Restricted Subsidiary of the Guarantor (i) to pay dividends (in cash or
otherwise) or make any other distributions in respect of its Capital Stock owned
by the Guarantor or any other Restricted Subsidiary of the Guarantor or pay any
Debt or other obligation owed to the Guarantor or any other Restricted
Subsidiary; (ii) to make loans or advances to the Guarantor or any other
Restricted Subsidiary; or (iii) to transfer any of its property or assets to the
Guarantor or any other Restricted Subsidiary. Notwithstanding the foregoing, the
Guarantor may, and may permit any Restricted Subsidiary to, suffer to exist any
such encumbrance or restriction (a) pursuant to any agreement in effect on the
date of the Indentures; (b) pursuant to an agreement relating to any Acquired
Debt, which encumbrance or restriction is not applicable to any Person, or the
properties or assets of any Person, other than the Person so acquired and was
not Incurred in anticipation of such Person being acquired; (c) pursuant to an
agreement effecting a renewal, refunding or extension of Debt Incurred pursuant
to an agreement referred to in clause (a) or (b) above, provided, however, that
the provisions contained in such renewal, refunding or extension agreement
relating to such encumbrance or restriction are no more restrictive in any
material respect than the provisions contained in the agreement the subject
thereof; (d) in the case of clause (iii) above, contained in any security
agreement (including a Capital Lease Obligation) securing Debt of the Guarantor
or a Restricted Subsidiary otherwise permitted under the Indentures, but only to
the extent such restrictions restrict the transfer of the property subject to
such security agreement; (e) in the case of clause (iii) above, with respect to
customary nonassignment provisions entered into in the ordinary course of
business in leases and other agreements; (f) with respect to a Restricted
Subsidiary of the Guarantor imposed pursuant to an agreement which has been
entered into for the sale or disposition of all or substantially all of the
Capital Stock or assets of such Restricted Subsidiary, provided that (x) the
consummation of such transaction would not result in an Event of Default or an
event that, with the passing of time or the giving of notice or both, would
constitute an Event of Default, (y) such restriction terminates if such
transaction is not consummated and (z) the consummation or abandonment of such
transaction occurs within one year of the date such agreement was entered into;
(g) pursuant to applicable law or required by any regulatory authority having
jurisdiction over the Guarantor or any Restricted Subsidiary; (h) pursuant to
the Indentures and the Notes; (i) constituting a Lien otherwise permitted
pursuant to "Limitations on Liens"; and (j) other encumbrances or restrictions
that are not materially more restrictive than customary provisions in comparable
financings provided that the Issuer and the Guarantor provides an Officer's
Certificate to the Trustee to the effect that in the opinion of the signers of
such certificate such encumbrances or restrictions will not materially impact
the Issuer's and Guarantor's ability to make scheduled payments of interest and
principal under the Notes.
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Limitation on Issuance of Guarantees of Debt by Restricted Subsidiaries
The Guarantor will not permit any Restricted Subsidiary, directly or
indirectly, to incur any Guarantee of any Debt of the Guarantor or the Issuer
(other than the Notes) unless such Restricted Subsidiary simultaneously executes
and delivers a supplemental indenture providing for a Guarantee by such
Subsidiary of the Notes; any Subsidiary Guarantee by such Subsidiary of the
Notes (x) will be senior in right of payment to any Guarantee of Subordinated
Debt of the Guarantor or the Issuer and (y) will be pari passu with or senior to
any Guarantee of any other Debt of the Guarantor or the Issuer.
Notwithstanding the foregoing, any Subsidiary Guarantee may provide by its
terms that it shall be automatically and unconditionally released and discharged
upon (i) any sale, exchange or transfer, to any Person not an Affiliate of the
Guarantor, of all of the Guarantor's and each Restricted Subsidiary's Capital
Stock in, or all or substantially all the assets of, such Restricted Subsidiary
(which sale, exchange or transfer is not prohibited by the Indentures) or
(ii) the release or discharge of the Guarantee which resulted in the creation of
such Subsidiary Guarantee, except a discharge or release by or as a result of
payment under such Guarantee.
Limitation on Liens
The Guarantor may not, and may not permit any Restricted Subsidiary of the
Guarantor to, Incur or suffer to exist any Lien on or with respect to any
property or assets now owned or hereafter acquired to secure any Debt without
making, or causing such Restricted Subsidiary to make, effective provision for
securing the Notes (x) equally and ratably with such Debt as to such property
for so long as such Debt will be so secured or (y) in the event such Debt is
Debt of the Guarantor which is subordinate in right of payment to the Notes,
prior to such Debt as to such property for so long as such Debt will be so
secured.
The foregoing restrictions shall not apply to: (i) Liens existing on the
date of the Indentures and securing Debt outstanding on the date of the
Indentures; (ii) Liens securing Debt outstanding or available under all Credit
Facilities to the extent such Debt is permitted under clause (i) of the
"Limitation in Consolidated Debt"; (iii) Liens in favor of the Guarantor or any
Restricted Subsidiary of the Guarantor; (iv) Liens on real or personal property
of the Guarantor or a Restricted Subsidiary of the Guarantor acquired,
constructed or constituting improvements made after the date of original
issuance of the Notes to secure Purchase Money Debt which is Incurred for the
construction, acquisition and improvement of Telecommunications Assets and is
otherwise permitted under the Indentures, provided, however, that (a) the
principal amount of any Debt secured by such a Lien does not exceed 100% of such
purchase price or cost of construction or improvement of the property subject to
such Liens, (b) such Lien attaches to such property prior to, at the time of or
within 180 days after the acquisition, completion of construction or
commencement of operation of such property and (c) such Lien does not extend to
or cover any property other than the specific item of property (or portion
thereof) acquired, constructed or constituting the improvements made with the
proceeds of such Purchase Money Debt; (v) Liens to secure Acquired Debt,
provided, however, that (a) such Lien attaches to the acquired asset prior to
the time of the acquisition of such asset and (b) such Lien does not extend to
or cover any other asset; (vi) Liens to secure Debt Incurred to extend, renew,
refinance or refund (or successive extensions, renewals, refinancings or
refundings), in whole or in part, Debt secured by any Lien referred to in the
foregoing clauses (i), (ii), (iv) and (v) so long as the principal amount of
Debt so secured is not increased except as otherwise permitted under clause
(iii) of "--Limitation on Consolidated Debt" and, in the case of Liens to secure
Debt incurred to extend, renew, refinance or refund Debt secured by a Lien
referred to in the foregoing clause (i), (iv) or (v), such Liens do not extend
to any other property; and (vii) Permitted Liens.
Limitation on Asset Dispositions
The Guarantor may not, and may not permit any Restricted Subsidiary of the
Guarantor to, make any Asset Disposition in one or more related transactions
unless: (i) the Guarantor or the Restricted Subsidiary, as the case may be,
receives consideration for such disposition at least equal to the fair market
value for the assets sold or disposed of as determined by the Board of Directors
in good faith
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and, in the case of an Asset Disposition in an amount greater than $5 million,
evidenced by a resolution of the Board of Directors filed with the Trustee; and
(ii) at least 75% of the consideration for such disposition consists of
(1) cash or readily marketable cash equivalents or the assumption of Debt of the
Guarantor or the Issuer (other than Debt that is subordinated to the Notes and
the Notes Guarantees) or of a Restricted Subsidiary and release from all
liability on the Debt assumed, or (2) Telecommunications Assets. In the event
and to the extent that the Net Available Proceeds received by the Guarantor or
any of its Restricted Subsidiaries from one or more Asset Dispositions occurring
on or after the Closing Date in any period of 12 consecutive months exceed 10%
of Consolidated Tangible Assets (determined as of the date closest to the
commencement of such 12-month period for which a consolidated balance sheet of
the Guarantor and its subsidiaries have been filed with the Commission), then
the Guarantor or the Issuer shall or shall cause the relevant Restricted
Subsidiary to (i) within twelve months after the date Net Available Proceeds so
received exceed 10% of Consolidated Tangible Assets (A) apply an amount equal to
such excess Net Available Proceeds to permanently repay unsubordinated Debt of
the Guarantor or any Restricted Subsidiary providing a Subsidiary Guarantee
pursuant to the "Limitation on Issuances of Guarantees by Restricted
Subsidiaries" covenant or Debt of any other Restricted Subsidiary, in each case
owing to a Person other than the Guarantor or any of its Restricted Subsidiaries
or (B) invest an equal amount, or the amount not so applied pursuant to clause
(A) (or enter into a definitive agreement committing to so invest within twelve
months after the date of such agreement), in Telecommunications Assets and
(ii) apply (no later than the end of the twelve-month period referred to in
clause (i) ) such excess Net Available Proceeds (to the extent not applied
pursuant to clause (i) ) as provided in the following paragraph of this
"Limitation on Asset Dispositions" covenant. The amount of such excess Net
Available Proceeds required to be applied (or to be committed to be applied)
during such twelve-month period as set forth in clause (i) of the preceding
sentence and not applied as so required by the end of such period shall
constitute "Excess Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this
"Limitation on Asset Dispositions" covenant totals at least $10 million, the
Issuer shall repay any Debt of the Guarantor or any Restricted Subsidiary to the
extent the terms of such Debt require repayment prior to an Offer to Purchase
being made hereunder (including by way of an offer to purchase to the holders of
such Debt, if so required). To the extent there are Excess Proceeds after such
repayment (or offer to purchase), the Issuer must commence, not later than the
fifteenth Business Day of such month (or if later, the fifteenth Business Day
after the expiration of any such required offer to purchase), and consummate an
Offer to Purchase from the holders of the Notes on a pro rata basis an aggregate
principal amount (or with respect to the 12% Notes, the Accreted Value of such
12% Notes) of Notes on the relevant Payment Date equal to the Excess Proceeds on
such date not applied or to be applied pursuant to the first sentence of this
paragraph (b), at a purchase price equal to 100% of the principal amount (or
with respect to the 12% Notes, the Accreted Value of such 12% Notes) of the
Notes, plus, in each case, accrued interest (if any) to but excluding the
Payment Date and, to the extent required by the terms thereof, any other Debt of
the Guarantor that is pari passu with the Notes at a price no greater than 100%
of the principal amount (or 100% of the accreted value in the case of original
issue discount Debt) thereof plus accrued interest to but excluding the date of
purchase. To the extent there are any remaining Excess Proceeds following the
completion of the Offer to Purchase, the Issuer must repay such other Debt of
the Guarantor or Debt of a Restricted Subsidiary of the Guarantor, to the extent
permitted under the terms thereof and, to the extent there are any remaining
Excess Proceeds after such repayment, the Issuer shall apply such amount to any
other use as determined by the Issuer which is not otherwise prohibited by the
Indentures.
Limitation on Issuances and Sales of Capital Stock of Restricted Subsidiaries
The Guarantor may not, and may not permit any Restricted Subsidiary of the
Guarantor to, issue, transfer, convey, sell or otherwise dispose of any shares
of Capital Stock of a Restricted Subsidiary of the Guarantor or securities
convertible or exchangeable into, or options, warrants, rights or any other
interest with respect to, Capital Stock of a Restricted Subsidiary of the
Guarantor to any Person other than the Guarantor or a Wholly-Owned Restricted
Subsidiary of the Guarantor except (i) a sale of all of
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the Capital Stock of such Restricted Subsidiary owned by the Guarantor and any
Restricted Subsidiary of the Guarantor that complies with the provisions
described under "Limitation on Asset Dispositions" above to the extent such
provisions apply, (ii) if required, the issuance, transfer, conveyance, sale or
other disposition of directors' qualifying shares, (iii) Disqualified Stock
issued in exchange for, or upon conversion of, or the proceeds of the issuance
of which are used to redeem, refinance, replace or refund shares of Disqualified
Stock of such Restricted Subsidiary, provided that the amounts of the redemption
obligations of such Disqualified Stock shall not exceed the amounts of the
redemption obligations of, and such Disqualified Stock shall have redemption
obligations no earlier than those required by, the Disqualified Stock being
exchanged, converted, redeemed, refinanced, replaced or refunded and
(iv) issuances of not more than 49% of the Voting Stock and equity interest in a
Restricted Subsidiary engaged in the Telecommunications Business (1) in
connection with the acquisition of such Restricted Subsidiary or of
Telecommunications Assets acquired by such Restricted Subsidiary or (2) to a
Strategic Investor, provided that the Guarantor complies with the provisions
described under "Limitation on Asset Dispositions" above to the extent such
provisions apply.
Limitation on Transactions With Affiliates and Related Persons
The Guarantor will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into, renew or extend any transaction (including,
without limitation, the purchase, sale, lease or exchange of property or assets,
or the rendering of any service) with any Related Person or with any Affiliate
of the Guarantor or any Restricted Subsidiary, except upon fair and reasonable
terms no less favorable to the Guarantor or such Restricted Subsidiary than
could be obtained, at the time of such transaction or, if such transaction is
pursuant to a written agreement, at the time of the execution of the agreement
providing therefor, in a comparable arm's-length transaction with a Person that
is not a Related Person or an Affiliate.
The foregoing limitation does not limit, and shall not apply to (i)
transactions (A) approved by a majority of the disinterested members of the
Board of Directors or (B) for which the Guarantor or a Restricted Subsidiary
delivers to the Trustee a written opinion of a nationally recognized investment
banking firm (or a subsidiary or affiliate thereof) in the United States stating
that the transaction is fair to the Guarantor or such Restricted Subsidiary from
a financial point of view; (ii) any transaction solely between the Guarantor and
any of its Wholly Owned Restricted Subsidiaries or solely between Wholly Owned
Restricted Subsidiaries; and (iii) any payments or other transactions pursuant
to any tax-sharing agreement between the Guarantor and any other Person with
which the Guarantor files a consolidated tax return or with which the Guarantor
is part of a consolidated group for tax purposes. Notwithstanding the foregoing,
any transaction covered by the first paragraph of this "Limitation on
Transactions with Affiliates and Related Persons" covenant and not covered by
clauses (ii) through (iii) of this paragraph must be approved or determined to
be fair in the manner provided for in clause (i)(A) or (B) above, unless the
aggregate amount of such transaction is less than $5 million in value.
Change of Control
Unless the Issuer has theretofore exercised its right to redeem all of the
Notes in accordance with the Indentures, within 30 days of the occurrence of a
Change of Control, the Issuer will be required to make an Offer to Purchase all
outstanding Notes at a purchase price equal to 101% of their principal amount
(or with respect to the 12% Notes, the Accreted Value of such 12% Notes) plus
accrued interest to but excluding the date of purchase. A "Change of Control"
will be deemed to have occurred at such time as either (i) a "person" or "group"
(within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) becomes
the ultimate "beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act) of more than 35% of the total voting power of the Voting Stock of the
Guarantor on a fully diluted basis and such ownership is greater than the amount
of voting power of the Voting Stock of the Guarantor, on a fully diluted basis,
held by the Existing Stockholders and their Affiliates on such date; (ii)
individuals who on the Closing Date constitute the Board of Directors (together
with any new directors whose election by the Board of Directors or whose
nomination for election by the Guarantor's stockholders was approved by a vote
of at least two-thirds of the members of the Board of Directors then in office
who either were members of the Board of Directors on the Closing Date or whose
election
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or nomination for election was previously so approved) cease for any reason to
constitute a majority of the members of the Board of Directors then in office;
or (iii) all of the Common Stock of the Issuer is not beneficially owned by the
Guarantor (other than directors' qualifying shares). (Section 1017)
In the event that the Issuer makes an Offer to Purchase the Notes, the
Issuer and the Guarantor intend to comply with any applicable securities laws
and regulations, including any applicable requirements of Section 14(e) of, and
Rule 14e-1 under, the Exchange Act.
Reports
The Guarantor and the Issuer have agreed that, for so long as any Notes
remain outstanding, each will furnish to the holders of the Notes and to
securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act. In addition, the Guarantor and the Issuer will file with the
Trustee within 15 days after it files them with the Commission copies of the
annual and quarterly reports and the information, documents, and other reports
that the Guarantor or the Issuer is required to file with the Commission
pursuant to Section 13(a) or 15(d) of the Exchange Act ("SEC Reports"). In the
event the Guarantor or the Issuer shall cease to be required to file SEC Reports
pursuant to the Exchange Act, the Guarantor and the Issuer will nevertheless
continue to file such reports with the Commission (unless the Commission will
not accept such a filing) and the Trustee. The Guarantor and the Issuer will
furnish copies of the SEC Reports to the holders of Notes at the time the
Guarantor or the Issuer is required to file the same with the Trustee and will
make such information available to investors who request it in writing.
(Section 1018)
Mergers, Consolidations and Certain Sales of Assets
Neither the Guarantor nor the Issuer may, in a single transaction or a
series of related transactions, (i) consolidate with or merge into any other
Person or permit any other Person to consolidate with or merge into the
Guarantor or the Issuer, or (ii) directly or indirectly, transfer, sell, lease
or otherwise dispose of all or substantially all of its assets to any other
Person, unless: (1) in a transaction in which the Guarantor or the Issuer, as
applicable does not survive or in which the Guarantor or the Issuer sells,
leases or otherwise disposes of all or substantially all of its assets to any
other Person (other than, in any such case, the Guarantor or the Issuer), the
successor entity to the Guarantor or the Issuer is organized under the laws of
the United States of America or any State thereof or the District of Columbia,
the British Virgin Islands, Cayman Islands, The Netherlands, Ireland or Jersey
and shall expressly assume, by a supplemental indenture executed and delivered
to the Trustee in form satisfactory to the Trustee, all of the Guarantor's or
the Issuer's obligations under the Indentures; (2) immediately before and after
giving effect to such transaction and treating any Debt which becomes an
obligation of the Guarantor or a Subsidiary as a result of such transaction as
having been Incurred by the Guarantor or such Subsidiary at the time of the
transaction, no Event of Default or event that with the passing of time or the
giving of notice, or both, would constitute an Event of Default shall have
occurred and be continuing; (3) immediately after giving effect to such
transaction, the Consolidated Net Worth of the Guarantor (or other successor
entity to the Guarantor) is equal to or greater than that of the Guarantor
immediately prior to the transaction; (4) if, as a result of any such
transaction, property or assets of the Guarantor or any Subsidiary would become
subject to a Lien prohibited by the provisions of the Indenture described under
"Limitation on Liens" above, the Guarantor or the successor entity to the
Guarantor shall have secured the Notes as required by said covenant; (5) in the
event that the continuing Person is incorporated in a jurisdiction other than
the United States or the jurisdiction in which such Person was incorporated
immediately prior to such transaction, (A) the Issuer delivers to the Trustee an
Opinion of Counsel stating that the obligations of the continuing Person under
the Indenture are enforceable under the laws of the new jurisdiction of its
incorporation to the same extent as the obligations of the Issuer or the
Guarantor, as the case may be, under the Indenture immediately prior to such
transaction; (B) the continuing Person agrees in writing to submit to
jurisdiction and appoints an agent for the service of process, each under terms
substantially similar to the terms contained in the Indenture with respect to
the Issuer or the Guarantor, as the case may be; (C) the continuing Person
agrees in writing to pay "additional amounts" as provided under the Indenture
with respect to the Issuer or the Guarantor, as the case may be, except that
such "additional amounts" shall relate to any
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withholding tax whatsoever regardless of any change of law (subject to
exceptions substantially similar to those contained in the Indenture and
described under "--Additional Amounts"); (D) the Board of Directors of the
Guarantor determines in good faith that such transaction will have no material
adverse effect on any holder of the Notes and a Board Resolution to that effect
is delivered to the Trustee; and (E) the principal purpose of the continuing
Person being incorporated in such jurisdiction is to obtain tax benefits for the
Guarantor, the Issuer, their direct and indirect stockholders or the holders of
the Notes and (6) certain other conditions are met.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indentures. Reference is made to the Indentures for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided. (Section 101)
"Acquired Debt" means, with respect to any specified Person, (i) Debt of
any other Person existing at the time such Person merges with or into or
consolidates with or becomes a Subsidiary of such specified Person and
(ii) Debt secured by a Lien encumbering any asset acquired by such specified
Person, which Debt was not Incurred in anticipation of, and was outstanding
prior to, such merger, consolidation or acquisition.
"Affiliate" of any Person means any other Person directly or indirectly
controlling or controlled by or under direct or indirect common control with
such Person. For the purposes of this definition, "control" when used with
respect to any Person means the power to direct the management and policies of
such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Asset Disposition" by any Person means any transfer, conveyance, sale,
lease or other disposition by such Person or any of its Subsidiaries (including
a consolidation or merger or other sale of any such Subsidiary with, into or to
another Person in a transaction in which such Subsidiary ceases to be a
Subsidiary of the specified Person, but excluding a disposition by a Subsidiary
of such Person to such Person or a Wholly-Owned Subsidiary of such Person or by
such Person to a Wholly-Owned Subsidiary of such Person or by a Restricted
Subsidiary to the Guarantor or a Restricted Subsidiary or by the Guarantor to a
Restricted Subsidiary) of (i) shares of Capital Stock or other ownership
interests of a Subsidiary of such Person, (ii) substantially all of the assets
of such Person or any of its Subsidiaries representing a division or line of
business (other than as part of a Permitted Investment) or (iii) other assets or
rights of such Person or any of its Subsidiaries outside of the ordinary course
of business, provided in the case of each of the preceding clauses (i), (ii) and
(iii), that the aggregate consideration for such transfer, conveyance, sale,
lease or other disposition is equal to $2.0 million or more in any 12-month
period.
"Average Life" means, at any date of determination with respect to any
Debt, the quotient obtained by dividing (i) the sum of the products of (a) the
number of years from such date of determination to the dates of each successive
scheduled principal payment of such Debt and (b) the amount of such principal
payment by (ii) the sum of all such principal payments.
"Capital Lease Obligation" of any Person means the obligation to pay rent
or other payment amounts under a lease of (or other Debt arrangements conveying
the right to use) real or personal property of such Person which is required to
be classified and accounted for as a capital lease or a liability on the face of
a balance sheet of such Person in accordance with generally accepted accounting
principles (a "Capital Lease"). The stated maturity of such obligation shall be
the date of the last payment of rent or any other amount due under such lease
prior to the first date upon which such lease may be terminated by the lessee
without payment of a penalty. The principal amount of such obligation shall be
the capitalized amount thereof that would appear on the face of a balance sheet
of such Person in accordance with generally accepted accounting principles.
"Capital Stock" of any Person means any and all shares, interests,
participations or other equivalents (however designated) of corporate stock or
other equity participations, including partnership interests, whether general or
limited, of such Person.
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"Common Stock" of any Person means Capital Stock of such Person that does
not rank prior, as to the payment of dividends or as to the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding up
of such Person, to shares of Capital Stock of any other class of such Person.
"Consolidated Cash Flow Available for Fixed Charges" for any period means
the Consolidated Net Income of the Guarantor and its Restricted Subsidiaries for
such period increased by the sum of (i) Consolidated Interest Expense of the
Guarantor and its Restricted Subsidiaries for such period, plus
(ii) Consolidated Income Tax Expense of the Guarantor and its Restricted
Subsidiaries for such period, plus (iii) the consolidated depreciation and
amortization expense included in the income statement of the Guarantor and its
Restricted Subsidiaries for such period, plus (iv) any non-cash expense related
to the issuance to employees of the Guarantor or any Restricted Subsidiary of
the Guarantor of options to purchase Capital Stock of the Guarantor or such
Restricted Subsidiary, plus (v) any charge related to any premium or penalty
paid in connection with redeeming or retiring any Debt prior to its stated
maturity; provided, however, that there shall be excluded therefrom the
Consolidated Cash Flow Available for Fixed Charges (if positive) of any
Restricted Subsidiary of the Guarantor (calculated separately for such
Restricted Subsidiary in the same manner as provided above for the Guarantor)
that is subject to a restriction which prevents the payment of dividends or the
making of distributions to the Guarantor or another Restricted Subsidiary of the
Guarantor to the extent of such restriction.
"Consolidated Income Tax Expense" for any period means the aggregate
amounts of the provisions for income taxes of the Guarantor and its Restricted
Subsidiaries for such period calculated on a consolidated basis in accordance
with generally accepted accounting principles.
"Consolidated Interest Expense" means for any period the interest expense
included in a consolidated income statement (excluding interest income) of the
Guarantor and its Restricted Subsidiaries for such period in accordance with
generally accepted accounting principles, including without limitation or
duplication (or, to the extent not so included, with the addition of), (i) the
amortization of Debt discounts; (ii) any payments or fees with respect to
letters of credit, bankers' acceptances or similar facilities; (iii) fees with
respect to interest rate swap or similar agreements or foreign currency hedge,
exchange or similar agreements; (iv) Preferred Stock dividends of the Guarantor
and its Restricted Subsidiaries (other than dividends paid in shares of
Preferred Stock that is not Disqualified Stock) declared and paid or payable;
(v) accrued Disqualified Stock dividends of the Guarantor and its Restricted
Subsidiaries, whether or not declared or paid; (vi) interest on Debt guaranteed
by the Guarantor and its Restricted Subsidiaries (but only to the extent such
interest is actually paid by the Guarantor or a Restricted Subsidiary); and
(vii) the portion of any Capital Lease Obligation paid during such period that
is allocable to interest expense; excluding, however, any premiums, fees and
expenses (and any amortization thereof) payable in connection with the offerings
of the Notes, all of the foregoing as determined on a consolidated basis
(without taking into account Unrestricted Subsidiaries) in conformity with
generally accepted accounting principles.
"Consolidated Net Income" for any period means the net income (or loss) of
the Guarantor and its Restricted Subsidiaries for such period determined on a
consolidated basis in accordance with generally accepted accounting principles;
provided that there shall be excluded therefrom (a) the net income (or loss) of
any Person acquired by the Guarantor or a Restricted Subsidiary of the Guarantor
in a pooling-of-interests transaction for any period prior to the date of such
transaction, (b) the net income (or loss) of any Person that is not a Restricted
Subsidiary of the Guarantor except to the extent of the amount of dividends or
other distributions actually paid to the Guarantor or a Restricted Subsidiary of
the Guarantor by such Person during such period, (c) gains or losses on Asset
Dispositions by the Guarantor or its Restricted Subsidiaries, (d) all
extraordinary gains and extraordinary losses, determined in accordance with
generally accepted accounting principles, (e) the cumulative effect of changes
in accounting principles, (f) non-cash gains or losses resulting from
fluctuations in currency exchange rates and (g) the tax effect of any of the
items described in clauses (a) through (f) above.
"Consolidated Net Worth" of any Person means the stockholders' equity of
such Person, determined on a consolidated basis in accordance with generally
accepted accounting principles, less amounts attributable to Disqualified Stock
of such Person.
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"Consolidated Tangible Assets" of any Person means the total amount of
assets (less applicable reserves and other properly deductible items) which
under generally accepted accounting principles would be included on a
consolidated balance sheet of such Person and its Subsidiaries after deducting
therefrom all goodwill, trade names, trademarks, patents, unamortized debt
discount and expense and other like intangibles, which in each case under
generally accepted accounting principles would be included on such consolidated
balance sheet.
"Credit Facility" means credit agreements, vendor financings or other
facilities or arrangements made available from time to time to the Guarantor and
its Restricted Subsidiaries by banks, other financial institutions and/or
equipment manufacturers for the Incurrence of Debt, including the private or
public issuance of debt securities or the provision of letters of credit and any
related notes, Guarantees, collateral documents, instruments and agreements
executed in connection therewith, as the same may be amended, supplemented,
modified or restated from time to time.
"Debt" means (without duplication), with respect to any Person, whether
recourse is to all or a portion of the assets of such Person and whether or not
contingent, the amount of (i) every obligation of such Person for money
borrowed, (ii) every obligation of such Person evidenced by bonds, debentures,
notes or other similar instruments, including obligations Incurred in connection
with the acquisition of property, assets or businesses, (iii) every
reimbursement obligation of such Person with respect to letters of credit,
bankers' acceptances or similar facilities issued for the account of such
Person, (iv) every obligation of such Person issued or assumed as the deferred
purchase price of property or services (including securities repurchase
agreements but excluding trade accounts payable or accrued liabilities arising
in the ordinary course of business which are not overdue or which are being
contested in good faith), (v) every Capital Lease Obligation of such Person,
(vi) all Receivables Sales of such Person, together with any obligation of such
Person to pay any discount, interest, fees, indemnities, penalties, recourse,
expenses or other amounts in connection therewith, (vii) all obligations to
redeem Disqualified Stock issued by such Person, (viii) every obligation under
Interest Rate and Currency Protection Agreements of such Person and (ix) every
obligation of the type referred to in clauses (i) through (viii) of another
Person and all dividends of another Person the payment of which, in either case,
such Person has Guaranteed to the extent the same is Guaranteed by such Person.
The "amount" or "principal amount" of Debt at any time of determination as used
herein represented by (a) any Debt issued at a price that is less than the
principal amount at maturity thereof, shall be the amount of the liability in
respect thereof determined in accordance with generally accepted accounting
principles, (b) any Receivables Sale shall be the amount of the unrecovered
capital or principal investment of the purchaser (other than the Guarantor or a
Restricted Subsidiary of the Guarantor) thereof to the extent such Person is
liable therefore, excluding amounts representative of yield or interest earned
on such investment or (c) any Disqualified Stock shall be the maximum fixed
redemption or repurchase price in respect thereof.
"Disqualified Stock" of any Person means any Capital Stock of such Person
which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is redeemable at the option of such Person, any
Subsidiary of such Person or the holder thereof, in whole or in part, on or
prior to the final stated maturity of the Notes, provided, however, that any
Preferred Stock which would not constitute Disqualified Stock but for provisions
thereof giving holders thereof the right to require such Person to repurchase or
redeem such Preferred Stock upon the occurrence of a Change of Control occurring
prior to the final maturity of the Notes shall not constitute Disqualified Stock
if the change of control provisions applicable to such Preferred Stock are no
more favorable to the holders of such Preferred Stock than the provisions
applicable to the Notes contained in the covenant described under "Change of
Control" and such Preferred Stock specifically provides that such Person will
not repurchase or redeem any such stock pursuant to such provisions prior to
such Person's repurchase of such Notes as are required to be repurchased
pursuant to the covenant described under "Change of Control."
"Eligible Institution" means a commercial banking institution that has
combined capital and surplus of not less than $500 million or its equivalent in
foreign currency, whose debt is rated "A" (or higher)
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according to Standard & Poor's Ratings Service or Moody's Investors Service,
Inc. at the time as of which any investment or rollover therein is made.
"Event of Default" has the meaning set forth under "Events of Default"
below.
"Exchange Act" means the Securities Exchange Act of 1934, as amended (or
any successor act) and the rules and regulations thereunder.
"Existing Stockholders" means (A) R.S. Lauder, Gaspar & Co., L.P.,
("RSLAG"), (B) partners in RSLAG and Lauder Gaspar Ventures LLC and their
Affiliates, in each case as of the Closing Date, (C) Itzhak Fisher, Ronald S.
Lauder, Leonard A. Lauder, Jacob Z. Schuster, Nir Tarlovsky, Nesim N. Bildirici,
Andrew Gaspar and Eugene Sekulow, (D) family members of any of the foregoing,
(E) trusts, the only beneficiaries of which are persons or entities described in
clauses (A) through (D) above and (F) partnerships which are controlled by the
persons or entities described in clauses (A) through (D) above.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States is pledged and
which have a remaining weighted average life to maturity of not less than one
year from the date of Investment therein.
"Guarantee" by any Person means any obligation, contingent or otherwise, of
such Person guaranteeing, or having the economic effect of guaranteeing, any
Debt of any other Person (the "primary obligor") in any manner, whether directly
or indirectly, and including, without limitation, any obligation of such Person,
(i) to purchase or pay (or advance or supply funds for the purchase or payment
of) such Debt or to purchase (or to advance or supply funds for the purchase of)
any security for the payment of such Debt, (ii) to purchase property, securities
or services for the purpose of assuring the holder of such Debt of the payment
of such Debt, or (iii) to maintain working capital, equity capital or other
financial statement condition or liquidity of the primary obligor so as to
enable the primary obligor to pay such Debt (and "Guaranteed" and "Guaranteeing"
shall have meanings correlative to the foregoing); provided, however, that the
Guarantee by any Person shall not include endorsements by such Person for
collection or deposit, in either case, in the ordinary course of business.
"Incremental Paid-in Capital" means as of any date the cumulative aggregate
amount of the increase in paid-in capital (determined in accordance with
generally accepted accounting principles applied on a consistent basis) since
September 30, 1997, as determined based on the most recent unaudited quarterly
or audited annual financial statements of the Guarantor and its consolidated
subsidiaries filed with the SEC, as compared with the Guarantor's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997.
"Incur" means, with respect to any Debt or other obligation of any Person,
to create, issue, incur (by conversion, exchange or otherwise), assume, enter
into a Guarantee in respect of or otherwise become liable in respect of such
Debt or other obligation including by acquisition of Subsidiaries or the
recording, as required pursuant to generally accepted accounting principles or
otherwise, of any such Debt or other obligation on the balance sheet of such
Person (and "Incurrence", "Incurred", "Incurrable" and "Incurring" shall have
meanings correlative to the foregoing); provided, however, that a change in
generally accepted accounting principles that results in an obligation of such
Person that exists at such time becoming Debt shall not be deemed an Incurrence
of such Debt and that neither the accrual of interest nor the accretion of
original issue discount shall be deemed an Incurrence of Debt.
"Interest Rate or Currency Protection Agreement" of any Person means any
forward contract, futures contract, swap, option or other financial agreement or
arrangement (including, without limitation, caps, floors, collars and similar
agreements) relating to, or the value of which is dependent upon, interest rates
or currency exchange rates or indices.
"Investment" by any Person means any direct or indirect loan, advance or
other extension of credit or capital contribution (by means of transfers of cash
or other property to others or payments for property or services for the account
or use of others, or otherwise), to, or purchase or acquisition of Capital
Stock, bonds, notes, debentures or other securities or evidence of Debt issued
by, any other Person, including any payment on a Guarantee of any obligation of
such other Person, but excluding
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any loan, advance or extension of credit to an employee of the Guarantor or any
of its Subsidiaries in the ordinary course of business and commercially
reasonable extensions of trade credit. Without limiting the foregoing, the term
"Investment" shall include (i) the designation of a Restricted Subsidiary as an
Unrestricted Subsidiary and (ii) the fair market value of the Capital Stock (or
any other Investment), held by the Guarantor or any of its Restricted
Subsidiaries, of (or in) any Person that has ceased to be a Restricted
Subsidiary. For purposes of the definition of "Unrestricted Subsidiary" and the
"Limitation on Restricted Payments" covenant, (i) "Investment" shall include the
fair market value of the assets (net of liabilities (other than liabilities to
the Guarantor or any of its Restricted Subsidiaries)) of any Restricted
Subsidiary at the time that such Restricted Subsidiary is designated an
Unrestricted Subsidiary, (ii) the fair market value of the assets (net of
liabilities (other than liabilities to the Guarantor or any of its Restricted
Subsidiaries)) of any Unrestricted Subsidiary at the time that such Unrestricted
Subsidiary is designated a Restricted Subsidiary shall be considered a reduction
in outstanding Investments and (iii) any property transferred to or from an
Unrestricted Subsidiary shall be valued at its fair market value at the time of
such transfer. Notwithstanding the foregoing, an acquisition of assets
(including, without limitation, Capital Stock or rights to acquire Capital
Stock) by the Guarantor or any of its Restricted Subsidiaries shall be deemed
not to be an Investment to the extent that the consideration therefor consists
of Common Stock of the Guarantor.
"Lien" means, with respect to any property or assets, any mortgage or deed
of trust, pledge, hypothecation, assignment, Receivables Sale, deposit
arrangement, security interest, lien, charge, easement (other than any easement
not materially impairing usefulness), encumbrance, preference, priority or other
security agreement or preferential arrangement of any kind or nature whatsoever
on or with respect to such property or assets (including, without limitation,
any conditional sale or other title retention agreement having substantially the
same economic effect as any of the foregoing).
"Marketable Securities" means: (i) Government Securities; (ii) any
certificate of deposit maturing not more than 270 days after the date of
acquisition issued by, or time deposit of, an Eligible Institution; (iii)
commercial paper maturing not more than 270 days after the date of acquisition
issued by a corporation (other than an Affiliate of the Guarantor) with a
rating, at the time as of which any investment therein is made, of "A-1" (or
higher) according to Standard & Poor's Ratings Service or "P-1" (or higher)
according to Moody's Investor Service, Inc.; (iv) any banker's acceptances or
money market deposit accounts issued or offered by an Eligible Institution;
(v) time deposits, certificates of deposit, bank promissory notes and bankers'
acceptances maturing not more than 180 days after the acquisition thereof and
guaranteed or issued by any of the ten largest banks (based on assets as of the
immediately preceding December 31), organized under the laws of any jurisdiction
in which one of the Restricted Subsidiaries does business or any foreign country
recognized by the United States and which are not under intervention, bankruptcy
or similar proceeding, not to exceed $10 million outstanding at any one term and
(vi) any fund investing exclusively in investments of the types described in
clauses (i) through (iv) above.
"Net Available Proceeds" from any Asset Disposition by any Person means
cash or readily marketable cash equivalents received (including amounts received
by way of sale or discounting of any note, installment receivable or other
receivable, but excluding any other consideration received in the form of
assumption by the acquiror of Debt or other obligations relating to such
properties or assets) therefrom by such Person, net of (i) all legal, title and
recording tax expenses, commissions and other fees and expenses Incurred and all
federal, state, provincial, foreign and local taxes required to be accrued as a
liability as a consequence of such Asset Disposition, (ii) all payments made by
such Person or its Subsidiaries on any Debt which is secured by such assets in
accordance with the terms of any Lien upon or with respect to such assets or
which must by the terms of such Lien, or in order to obtain a necessary consent
to such Asset Disposition or by applicable law, be repaid out of the proceeds
from such Asset Disposition, (iii) all distributions and other payments made to
minority interest holders in Subsidiaries of such Person as a result of such
Asset Disposition and (iv) appropriate amounts to be provided by such Person or
any Subsidiary thereof, as the case may be, as a reserve in accordance with
generally accepted accounting principles against any liabilities associated with
such assets and retained by such Person or any Subsidiary thereof, as the case
may be, after such Asset Disposition, including, without limitation, liabilities
under any indemnification obligations and severance
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and other employee termination costs associated with such Asset Disposition, in
each case as determined by the board of directors of such Person, in its
reasonable good faith judgment; provided, however, that any reduction in such
reserve within twelve months following the consummation of such Asset
Disposition will be treated for all purposes of each Indenture and the Notes as
a new Asset Disposition at the time of such reduction with Net Available
Proceeds equal to the amount of such reduction.
"Offer to Purchase" means a written offer (the "Offer") sent by or on
behalf of the Issuer by first class mail, postage prepaid, to each holder of
Notes at his address appearing in the related note register on the date of the
Offer offering to purchase up to the principal amount (or Accreted Value) of
Notes specified in such Offer at the purchase price specified in such Offer (as
determined pursuant to the related Indenture). Unless otherwise required by
applicable law, the Offer shall specify an expiration date (the "Expiration
Date") of the Offer to Purchase which shall be, subject to any contrary
requirements of applicable law, not less than 30 days or more than 60 days after
the date of such Offer and a settlement date (the "Purchase Date") for purchase
of Notes within five Business Days after the Expiration Date. The Issuer shall
notify the Trustee at least 15 Business Days (or such shorter period as is
acceptable to the Trustee) prior to the mailing of the Offer of the Issuer's
obligation to make an Offer to Purchase, and the Offer shall be mailed by the
Issuer or, at the Issuer's request, by the Trustee in the name and at the
expense of the Issuer. The Offer shall contain information concerning the
business of the Guarantor and its Subsidiaries which the Guarantor and Issuer in
good faith believe will enable such holders to make an informed decision with
respect to the Offer to Purchase (which at a minimum will include (i) the most
recent annual and quarterly financial statements and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" contained in the
documents required to be filed with the Trustee pursuant to the Indentures
(which requirements may be satisfied by delivery of such documents together with
the Offer), (ii) a description of material developments in the Guarantor's
business subsequent to the date of the latest of such financial statements
referred to in clause (i) (including a description of the events requiring the
Issuer to make the Offer to Purchase), (iii) if applicable, appropriate pro
forma financial information concerning the Offer to Purchase and the events
requiring the Issuer to make the Offer to Purchase and (iv) any other
information required by applicable law to be included therein). The Offer shall
contain all instructions and materials necessary to enable such holders to
tender Notes pursuant to the Offer to Purchase. The Offer shall also state:
a. the Section of the applicable Indenture pursuant to which the Offer
to Purchase is being made;
b. the Expiration Date and the Purchase Date;
c. the aggregate principal amount at maturity of the outstanding Notes
offered to be purchased by the Issuer pursuant to the Offer to Purchase
(including, if less than 100%, the manner by which such has been determined
pursuant to the Section of the applicable Indenture requiring the Offer to
Purchase) (the "Purchase Amount");
d. the purchase price to be paid by the Issuer for each $1,000
aggregate principal amount at maturity of Notes accepted for payment (as
specified pursuant to the Indenture) (the "Purchase Price");
e. that the holder may tender all or any portion of the Notes
registered in the name of such holder and that any portion of a Note
tendered must be tendered in an integral multiple of $1,000 principal
amount at maturity;
f. the place or places where Notes are to be surrendered for tender
pursuant to the Offer to Purchase;
g. that interest on any Note not tendered or tendered but not
purchased by the Issuer pursuant to the Offer to Purchase will continue to
accrue;
h. that on the Purchase Date the Purchase Price will become due and
payable upon each Note being accepted for payment pursuant to the Offer to
Purchase and that interest thereon shall cease to accrue on and after the
Purchase Date;
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i. that each holder electing to tender a Note pursuant to the Offer to
Purchase will be required to surrender such Note at the place or places
specified in the Offer prior to the close of business on the Expiration
Date (such Note being, if the Issuer or the Trustee so requires, duly
endorsed by, or accompanied by a written instrument of transfer in form
satisfactory to the Issuer and the Trustee duly executed by, the holder
thereof or his attorney duly authorized in writing);
j. that holders will be entitled to withdraw all or any portion of
Notes tendered if the Issuer (or their Paying Agent) receives, not later
than the close of business on the Expiration Date, a telegram, telex,
facsimile transmission or letter setting forth the name of the holder, the
principal amount of the Note the holder tendered, the certificate number of
the Note the holder tendered and a statement that such holder is
withdrawing all or a portion of his tender;
k. that (a) if Notes in an aggregate principal amount at maturity less
than or equal to the Purchase Amount are duly tendered and not withdrawn
pursuant to the Offer to Purchase, the Issuer shall purchase all such Notes
and (b) if Notes in an aggregate principal amount at maturity in excess of
the Purchase Amount are tendered and not withdrawn pursuant to the Offer to
Purchase, the Issuer shall purchase Notes having an aggregate principal
amount at maturity equal to the Purchase Amount on a pro rata basis (with
such adjustments as may be deemed appropriate so that only Notes in
denominations of $1,000 or integral multiples thereof shall be purchased);
and
l. that in the case of any holder whose Note is purchased only in
part, the Issuer shall execute, and the Trustee shall authenticate and
deliver to the holder of such Note without service charge, a new Note or
Notes, of any authorized denomination as requested by such holder, in an
aggregate principal amount at maturity equal to and in exchange for the
unpurchased portion of the Note so tendered.
Any Offer to Purchase shall be governed by and effected in accordance with the
Offer for such Offer to Purchase.
"Permitted Interest Rate or Currency Protection Agreement" of any Person
means any Interest Rate or Currency Protection Agreement entered into with one
or more financial institutions in the ordinary course of business that is
designed to protect such Person against fluctuations in interest rates or
currency exchange rates with respect to Debt Incurred and which shall have a
notional amount no greater than the payments due with respect to the Debt being
hedged thereby and not for purposes of speculation.
"Permitted Investment" means (i) any Investment in the Guarantor or a
Restricted Subsidiary, (ii) any Investment in any Person as a result of which
such Person becomes a Restricted Subsidiary of the Guarantor or upon the making
of which such Person will be merged or consolidated with or into or transfer all
or substantially all of its assets to the Guarantor or a Restricted Subsidiary,
(iii) any Investment in Marketable Securities, (iv) securities or other
Investments received in settlement of debts created in the ordinary course of
business and owing to the Guarantor or any Restricted Subsidiary, or as a result
of foreclosure, perfection or enforcement of any Lien, or in satisfaction of
judgments, including in connection with any bankruptcy proceeding or other
reorganization of another Person, (v) securities or other Investments received
as consideration in sales or other dispositions of property or assets, including
Asset Dispositions made in compliance with the "Limitation on Asset Sales"
covenant and (vi) other Investments not in excess of $50 million in the
aggregate at any time outstanding.
"Permitted Liens" means (a) Liens for taxes, assessments, governmental
charges or claims which are not yet delinquent or which are being contested in
good faith by appropriate proceedings, if a reserve or other appropriate
provision, if any, as shall be required in conformity with generally accepted
accounting principles shall have been made therefor; (b) other Liens incidental
to the conduct of the Guarantor's and its Restricted Subsidiaries' business or
the ownership of its property and assets not securing any Debt, and which do not
in the aggregate materially detract from the value of the Guarantor's and its
Subsidiaries' property or assets when taken as a whole, or materially impair the
use of such assets and property in the operation of its business; (c) Liens with
respect to assets of a Subsidiary granted by such Subsidiary to the Guarantor to
secure Debt owing to the Guarantor; (d) pledges and deposits made in the
ordinary course of business in connection with workers' compensation,
unemployment insurance and other types of statutory obligations; (e) deposits
made to
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secure the performance of tenders, bids, leases, and other obligations of like
nature incurred in the ordinary course of business (exclusive of obligations for
the payment of borrowed money); (f) zoning restrictions, servitudes, easements,
rights-of-way, restrictions and other similar charges or encumbrances incurred
in the ordinary course of business which, in the aggregate, do not materially
detract from the value of the property subject thereto or interfere with the
ordinary conduct of the business of the Guarantor or its Restricted
Subsidiaries; (g) Liens on Capital Stock of Restricted Subsidiaries securing
obligations not exceeding $75 million at any time outstanding of the Guarantor
or any Restricted Subsidiary to repurchase or redeem shares of Capital Stock of
such Restricted Subsidiary held by Persons who are not Affiliates or Related
Persons of the Guarantor; (h) Liens arising out of judgments or awards against
the Guarantor or any Restricted Subsidiary with respect to which the Guarantor
or such Restricted Subsidiary is prosecuting an appeal or proceeding for review
and the Guarantor or such Restricted Subsidiary is maintaining adequate reserves
in accordance with generally accepted accounting principles; and (i) any
interest or title of a lessor in the property subject to any lease other than a
Capital Lease.
"Person" means any individual, corporation, partnership, joint venture,
association, joint stock company, trust, unincorporated organization, government
or agency or political subdivision thereof or any other entity.
"Purchase Money Debt" means Debt of the Guarantor (including Acquired Debt
and Debt represented by Capital Lease Obligations, mortgage financings and
purchase money obligations) Incurred for the purpose of financing all or any
part of the cost of construction, acquisition or improvement by the Guarantor or
any Restricted Subsidiary of the Guarantor of any Telecommunications Assets of
the Guarantor or any Restricted Subsidiary of the Guarantor, and including any
related notes, Guarantees, collateral documents, instruments and agreements
executed in connection therewith, as the same may be amended, supplemented,
modified or restated from time to time.
"Receivables" means receivables, chattel paper, instruments, documents or
intangibles evidencing or relating to the right to payment of money.
"Receivables Sale" of any Person means any sale of Receivables of such
Person (pursuant to a purchase facility or otherwise), other than in connection
with a disposition of the business operations of such Person relating thereto or
a disposition of defaulted Receivables for purpose of collection and not as a
financing arrangement.
"Related Person" of any Person means any other Person directly or
indirectly owning (a) 5% or more of the outstanding Common Stock of such Person
(or, in the case of a Person that is not a corporation, 5% or more of the
outstanding equity interest in such Person) or (b) 5% or more of the combined
outstanding voting power of the Voting Stock of such Person, except that, for
purposes of the covenant entitled "Transactions with Affiliates and Related
Persons," Related Person means any other Person directly or indirectly owning
10% or more of the combined outstanding voting power of the Voting Stock of such
Person (or, in the case of a Person that is not a corporation, 10% or more of
the outstanding equity interest in such Person).
"Restricted Subsidiary" means any Subsidiary of the Guarantor other than an
Unrestricted Subsidiary.
"Significant Subsidiary" means, at any date of determination, any
Restricted Subsidiary that, together with its Subsidiaries, (i) for the most
recent fiscal year of the Guarantor, accounted for more than 10% of the
consolidated revenues of the Guarantor and its Restricted Subsidiaries or (ii)
as of the end of such fiscal year, was the owner of more than 10% of the
consolidated assets of the Guarantor and its Restricted Subsidiaries, all as set
forth on the most recently available consolidated financial statements of the
Guarantor for such fiscal year.
"Strategic Investor" means a corporation, partnership or other entity
engaged in the Telecommunications Business that has, or 80% or more of the
Voting Stock of which is owned by a Person that has, an equity market
capitalization or paid in capital, at the time of any Investment by such
corporation, partnership or other entity in a Restricted Subsidiary pursuant to
(iv)(2) of "Limitation on Issuances and Sales of Capital Stock of Restricted
Subsidiaries", in excess of $100 million.
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"Subordinated Debt" means Debt of the Guarantor or its Restricted
Subsidiaries as to which the payment of principal of (and premium, if any) and
interest and other payment obligations in respect of such Debt shall be
subordinate to the prior payment in full of the Notes to at least the following
extent: (i) no payments of principal of (or premium, if any) or interest on or
otherwise due in respect of such Debt may be permitted for so long as any
default in the payment of principal (or premium, if any) or interest on the
Notes exists; (ii) in the event that any other default that with the passing of
time or the giving of notice, or both, would constitute an event of default
exists with respect to the Notes, upon notice by 25% or more in principal amount
of the Notes to the Trustee, the Trustee shall have the right to give notice to
the Guarantor or such Restricted Subsidiary and the holders of such Debt (or
trustees or agents therefor) of a payment blockage, and thereafter no payments
of principal of (or premium, if any) or interest on or otherwise due in respect
of such Debt may be made for a period of 179 days from the date of such notice;
and (iii) such Debt may not (x) provide for payments of principal of such Debt
at the stated maturity thereof or by way of a sinking fund applicable thereto or
by way of any mandatory redemption, defeasance, retirement or repurchase thereof
by the Guarantor or such Restricted Subsidiary (including any redemption,
retirement or repurchase which is contingent upon events or circumstances, but
excluding any retirement required by virtue of acceleration of such Debt upon an
event of default thereunder), in each case prior to the final stated maturity of
the Notes or (y) permit redemption or other retirement (including pursuant to an
offer to purchase made by the Guarantor or such Restricted Subsidiary) of such
other Debt at the option of the holder thereof prior to the final stated
maturity of the Notes, other than a redemption or other retirement at the option
of the holder of such Debt (including pursuant to an offer to purchase made by
the Guarantor or such Restricted Subsidiary) which is conditioned upon a change
of control of the Guarantor pursuant to provisions substantially similar to
those described under "Change of Control" (and which shall provide that such
Debt will not be repurchased pursuant to such provisions prior to the
Guarantor's or such Subsidiary's repurchase of the Notes required to be
repurchased by the Guarantor pursuant to the provisions described under "Change
of Control").
"Subsidiary" of any Person means (i) a corporation more than 50% of the
combined voting power of the outstanding Voting Stock, of which is owned,
directly or indirectly, by such Person or by one or more other Subsidiaries of
such Person or by such Person and one or more Subsidiaries thereof or (ii) any
other Person (other than a corporation) in which such Person, or one or more
other Subsidiaries of such Person or such Person and one or more other
Subsidiaries thereof, directly or indirectly, has at least a majority ownership
and power to direct the policies, management and affairs thereof.
"Subsidiary Guarantor" means a Subsidiary of the Guarantor that has
unconditionally guaranteed, by supplemental indenture substantially in the form
attached to the Indentures and satisfactory to the Trustee, the payment in full
of the principal of (and premium, if any) and interest on the Notes.
"Telecommunications Assets" means all assets, rights (contractual or
otherwise) and properties, whether tangible or intangible, used or intended for
use in connection with a Telecommunications Business, including a majority of
the Voting Stock of a Person engaged in the Telecommunications Business.
"Telecommunications Business" means the business of (i) transmitting, or
providing services relating to the transmission of, voice, video or data through
owned or leased transmission facilities, (ii) creating, developing or marketing
communications related network equipment, software and other devices for use in
a Telecommunications Business or (iii) evaluating, participating or pursuing any
other activity or opportunity that is primarily related to those identified in
(i) or (ii) above; provided that the determination of what constitutes a
Telecommunications Business shall be made in good faith by the Board of
Directors of the Guarantor.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Guarantor that at
the time of determination shall be designated an Unrestricted Subsidiary of the
Guarantor by the Board of Directors in the manner provided below and (ii) any
Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate
any Restricted Subsidiary (including any newly acquired or newly formed
Subsidiary of the Guarantor) to be an Unrestricted Subsidiary unless such
Subsidiary owns any Capital Stock of, or owns or holds any Lien on any property
of, the Guarantor or any Restricted Subsidiary;
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provided that (A) any Guarantee by the Guarantor or any Restricted Subsidiary of
any Debt of the Subsidiary being so designated shall be deemed an "Incurrence"
of such Debt and an "Investment" by the Guarantor or such Restricted Subsidiary
(or both, if applicable) at the time of such designation, in each case, to the
extent such Debt is so Guaranteed by the Guarantor or such Restricted
Subsidiary; (B) either (I) the Subsidiary to be so designated has total assets
of $1,000 or less or (II) if such Subsidiary has assets greater than $1,000,
such designation would be permitted under the "Limitation on Restricted
Payments" covenant described herein and (C) if applicable, the Incurrence of
Debt and the Investment referred to in clause (A) of this proviso would be
permitted under the "Limitation on Consolidated Debt" and "Limitation on
Restricted Payments" covenants described herein. The Board of Directors may
designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided
that immediately after giving effect to such designation (x) the Guarantor could
Incur $1.00 of additional Debt under the first paragraph of the "Limitation on
Debt" covenant described below and (y) no Default or Event of Default shall have
occurred and be continuing. Any such designation by the Board of directors shall
be evidenced to the Trustee by promptly filing with the Trustee a copy of the
Board Resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing provisions.
"Voting Stock" of any Person means Capital Stock of such Person which
ordinarily has voting power for the election of directors (or persons performing
similar functions) of such Person, whether at all times or only so long as no
senior class of securities has such voting power by reason of any contingency.
"Wholly-Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Voting Stock or other ownership interests (other than
directors' qualifying shares) of which shall at the time be owned by such Person
or by one or more Wholly-Owned Subsidiaries of such Person or by such Person and
one or more Wholly-Owned Subsidiaries of such Person.
DESCRIPTION OF GUARANTEES BY RSL COMMUNICATIONS, LTD.
The Guarantor has unconditionally and irrevocably guaranteed the due and
punctual payment of the principal of and interest on and other amounts payable
under the New 10 1/2% Notes and the New 12% Notes, when and as the same shall
become due and payable, whether at the stated maturity, by declaration of
acceleration, upon redemption or otherwise. The obligations of the Guarantor
under the New 10 1/2% Notes Guarantee and the New 12% Notes Guarantee, as
applicable, will be direct, unsecured and unsubordinated obligations of the
Guarantor and will rank pari passu with other existing and future direct,
unsecured and unsubordinated obligations of the Guarantor. The New 10 1/2% Notes
Guarantee and the New 12% Notes Guarantee, as applicable, will effectively rank
junior to any secured indebtedness of the Guarantor to the extent of the assets
securing such indebtedness.
EVENTS OF DEFAULT
The following events are defined as Events of Default with respect to the
10 1/2% Notes or 12% Notes, as the case may be, under each of the Indentures:
(a) failure to pay principal of (or premium, if any, on) any Note when due;
(b) failure to pay any interest on any Note when due, continued for 30 days;
(c) default in the payment of principal and interest on Notes required to be
purchased pursuant to an Offer to Purchase as described under "Change of
Control" when due and payable; (d) failure to perform or comply with the
provisions described under "Merger, Consolidation and Sales of Assets" and
"Limitation on Certain Asset Dispositions"; (e) failure to perform any other
covenant or agreement of the Issuer or Guarantor under the Indenture or the
Notes continued for 60 days after written notice to the Issuer by the Trustee or
holders of at least 25% in aggregate principal amount at maturity of outstanding
Notes; (f) default under the terms of any instrument evidencing or securing Debt
of the Guarantor, the Issuer or any Subsidiary having an outstanding principal
amount of $10.0 million individually or in the aggregate which default results
in the acceleration of the payment of such indebtedness or constitutes the
failure to pay such indebtedness when due; (g) the rendering of a final judgment
or judgments (not subject to appeal) against the Guarantor, the Issuer or any
Subsidiary an amount in excess of $10.0 million (net of indemnities and funds
actually received or to be received within 90 days of such judgement) which
remains undischarged or unstayed for a period of 60 days after
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the date on which the right to appeal has expired; and (h) certain events of
bankruptcy, insolvency or reorganization affecting the Guarantor, the Issuer or
any Significant Subsidiary. (Section 501) Subject to the provisions of the
Indentures relating to the duties of the Trustee in case an Event of Default (as
defined) shall occur and be continuing, the Trustee will be under no obligation
to exercise any of its rights or powers under such Indenture at the request or
direction of any of the holders of Notes, unless such holders shall have offered
to the Trustee reasonable indemnity. (Section 603) Subject to such provisions
for the indemnification of the Trustee, the holders of a majority in aggregate
principal amount at maturity of the outstanding Notes will have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee. (Section 512)
If an Event of Default (other than an Event of Default described in clause
(h) above) shall occur and be continuing, either the Trustee or the holders of
at least 25% in aggregate principal amount at maturity of the outstanding
10 1/2% Notes or 12% Notes, as applicable, may accelerate the principal amount
of the 10 1/2% Notes or the Accreted Value of the 12% Notes, as applicable;
provided, however, that after such acceleration, but before a judgment or decree
based on acceleration, the holders of a majority in aggregate principal amount
at maturity of such outstanding Notes may, under certain circumstances, rescind
and annul such acceleration if all Events of Default, other than the non-payment
of accelerated principal (or Accreted Value, as applicable) have been cured or
waived as provided in the applicable Indenture. If an Event of Default specified
in clause (h) above occurs, the outstanding 10 1/2% Notes or 12% Notes, as
applicable, will ipso facto become immediately due and payable without any
declaration or other act on the part of the Trustee or any holder. (Section 502)
For information as to waiver of defaults, see "Modification and Waiver".
No holder of any Note will have any right to institute any proceeding with
respect to the applicable Indenture or for any remedy thereunder, unless such
holder shall have previously given to the Trustee written notice of a continuing
Event of Default (as defined) and unless also the holders of at least 25% in
aggregate principal amount at maturity of the outstanding 10 1/2% Notes or 12%
Notes, as applicable, shall have made written request, and offered reasonable
indemnity, to the Trustee to institute such proceeding as trustee, and the
Trustee shall not have received from the holders of a majority in aggregate
principal amount at maturity of the outstanding 10 1/2% Notes or 12% Notes, as
applicable, a direction inconsistent with such request and shall have failed to
institute such proceeding within 60 days. (Section 507) However, such
limitations do not apply to a suit instituted by a holder of a Note for
enforcement of payment of the principal (or Accreted Value, in the case of 12%
Notes) of and premium, if any, or interest on such Note on or after the
respective due dates expressed in such Note. (Section 508)
The Guarantor and the Issuer will be required to furnish to the Trustee
quarterly a statement as to the performance by the Guarantor and the Issuer of
certain of their obligations under the Indentures and as to any default in such
performance. (Section 1019)
DEFEASANCE
Defeasance and Discharge. The Indentures provide that the Issuer will be
deemed to have paid and will be discharged from any and all obligations in
respect of the Notes on the 123rd day after the deposit referred to below, and
the provisions of the Indentures will no longer be in effect with respect to the
Notes (except for, among other matters, certain obligations to register the
transfer or exchange of the Notes, to replace stolen, lost or mutilated Notes,
to maintain paying agencies and to hold monies for payment in trust) if, among
other things, (A) the Issuer has irrevocably deposited or caused to be
irrevocably deposited with the Trustee, in trust, money and/or U.S. Government
Obligations that through the payment of interest, premium, if any, and principal
in respect thereof in accordance with their terms will provide money in an
amount sufficient, in the opinion of a nationally recognized firm of independent
public accountants expressed in a written certification thereof delivered to the
Trustee, to pay and discharge, without consideration of the reinvestment of such
interest and after payment of all state and local taxes or other charges and
assessments in respect thereof payable by the Trustee, the principal (or
Accreted Value) of, premium, if any, and accrued interest on the Notes on the
stated maturity of such principal or interest or upon earlier redemption in
accordance with the terms of the Indenture and the Notes, (B) the Issuer has
delivered to the Trustee either (i) a ruling based on relevant law and practice
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at the time directed to the Trustee from the Inland Revenue or other relevant
tax authority to the effect that the holders will not recognize income, gain or
loss for U.K. income tax as a result of the Issuer's exercise, disregarding U.K.
income tax on any amounts that would have been received but for such exercise of
its option under this "Defeasance" provision and will be subject to U.K. income
tax on the same amount and in the same manner and at the same time as would have
been the case if such option had not been exercised or (ii) an Opinion of
Counsel to the same effect as the ruling described in clause (i) above, (C) the
Issuer has delivered to the Trustee (i) either (x) an Opinion of Counsel to the
effect that holders will not recognize income, gain or loss for U.S. federal
income tax as a result of the Issuer's exercise of its option under this
"Defeasance" provision and will be subject to U.S. federal income tax on the
same amount and in the same manner and at the same time as would have been the
case if such option had not been exercised, which Opinion of Counsel must be
based upon (and accompanied by a copy of) a ruling published by the Internal
Revenue Service to the same effect unless there has been a change in relevant
U.S. federal income tax law after the Closing Date or (y) a ruling directed to
the Trustee received from the Internal Revenue Service to the same effect as the
aforementioned Opinion of Counsel and (ii) an Opinion of Counsel to the effect
that the creation of the defeasance trust does not violate the Investment
Company Act of 1940 and after the passage of 123 days following the deposit, the
trust fund will not be subject to the effect of Section 547 of the United States
Bankruptcy Code or Section 15 of the New York Debtor and Creditor Law,
(D) immediately after giving effect to such deposit on a pro forma basis, no
Default or Event of Default, or event that after the giving of notice or lapse
of time or both would become a Default or an Event of Default, shall have
occurred and be continuing on the date of such deposit or during the period
ending on the 123rd day after the date of such deposit, and such deposit shall
not result in a breach or violation of, or constitute a default under, any other
agreement or instrument to which the Issuer or any of its Subsidiaries is a
party or by which the Issuer or any of its Subsidiaries is bound, (E) if at such
time the Notes are listed on a national securities exchange, the Issuer has
delivered to the Trustee an Opinion of Counsel to the effect that the Notes will
not be delisted as a result of the Issuer's exercise of its option under this
"Defeasance" provision, and (F) the Issuer shall have delivered to the Trustee
an Officer's Certificate and an Opinion of Counsel, in each case stating that
all the above conditions precedent have been complied with.
Defeasance of Certain Covenants and Certain Events of Default. The
Indentures further provide that the provisions of the Indentures will no longer
be in effect with respect to clauses (3) and (4) under "Merger, Consolidation
and Certain Sale of Assets" and all the covenants described herein under
"Covenants" (other than "Merger, Consolidation and Certain Sales of Assets"),
clauses (c), (f) and (g) under "Events of Default" with respect to such clauses
(3) and (4) under "Merger, Consolidation and Sale of Assets" and such covenants
and clauses (c), (f) and (g) under "Events of Default" shall be deemed not to be
Events of Default, upon, among other things, the deposit with the Trustee, in
trust, of money and/or U.S. Government Obligations that through the payment of
interest and principal in respect thereof in accordance with their terms will
provide money in an amount sufficient to pay the principal of, premium, if any,
and accrued interest on the Notes on the stated maturity of such payments in
accordance with the terms of the Indentures and the Notes, the satisfaction of
the provisions described in clauses (C)(ii) and (D) of the preceding paragraph
and the delivery by the Issuer to the Trustee of an Opinion of Counsel to the
effect that, among other things, the holders will not recognize any income, gain
or loss for U.S. federal income tax purposes as a result of such deposit and
defeasance of certain covenants and Events of Default and will be subject to
U.S. federal income tax on the same amount and in the same manner and at the
same times as would have been the case if such deposit and defeasance had not
occurred.
Defeasance and Certain Other Events of Default. In the event the Issuer
exercises its option to omit compliance with certain covenants and provisions of
the Indentures with respect to the Notes as described in the immediately
preceding paragraph and the Notes are declared due and payable because of the
occurrence of an Event of Default that remains applicable, the amount of money
and/or U.S. Government Obligations on deposit with the Trustee will be
sufficient to pay amounts due on the Notes at the time of their stated maturity
but may not be sufficient to pay amounts due on the Notes at the time of the
acceleration resulting from such Event of Default. However, the Issuer will
remain liable for such payments and the Notes Guarantee with respect to such
payments will remain in effect.
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MODIFICATION AND WAIVER
Modifications and amendments of the Indentures may be made by the Issuer,
the Guarantor and the Trustee with the consent of the holders of a majority in
aggregate principal amount at maturity of the outstanding 10 1/2% Notes or 12%
Notes, as applicable; provided, however, that no such modification or amendment
may, without the consent of the holder of each outstanding 10 1/2% or 12% Note
affected thereby, (a) change the due date of any installment of principal or
interest on any 10 1/2% Notes or 12% Notes, as applicable, (b) reduce the
principal amount (or Accreted Value with respect to the 12% Notes) of, or the
premium or interest on, any 10 1/2% Notes or 12% Notes, as applicable,
(c) change the currency of payment of principal of, or premium or interest on,
any 10 1/2% Notes or 12% Notes, as applicable, (d) impair the right to institute
suit for the enforcement of any payment on or with respect to any 10 1/2% Notes
or 12% Notes, as applicable, (e) reduce the above-stated percentage of
outstanding 10 1/2% Notes or 12% Notes, as applicable, necessary to modify or
amend the applicable Indenture, (f) reduce the percentage of aggregate principal
amount of outstanding Notes necessary for waiver of compliance with certain
provisions of the applicable Indenture or for waiver of certain defaults,
(g) modify any provisions of the applicable Indenture relating to the
modification and amendment of the applicable Indenture or the waiver of past
defaults or covenants, except as otherwise specified, or (h) following the
mailing of any Offer to Purchase, modify any Offer to Purchase for the 10 1/2%
Notes or 12% Notes, as applicable, required under the "Limitation on Asset
Dispositions" and the "Change of Control" covenants contained in the applicable
Indenture in a manner materially adverse to the holders thereof. (Section 902)
The holders of a majority in aggregate principal amount at maturity of the
outstanding 10 1/2% Notes or 12% Notes, as applicable, on behalf of all holders
of 10 1/2% Notes or 12% Notes, as applicable, may waive compliance by the
Guarantor with certain restrictive provisions of the related Indenture.
(Section 1020) Subject to certain rights of the Trustee, as provided in the
Indentures, the holders of a majority in aggregate principal amount at maturity
of the outstanding 10 1/2% Notes or 12% Notes, as applicable, on behalf of all
holders of 10 1/2% Notes or 12% Notes, as applicable, may waive any past default
under the related Indenture, except a default in the payment of principal,
premium or interest or a default arising from failure to purchase any 10 1/2%
Notes or 12% Notes, as applicable, tendered pursuant to an Offer to Purchase.
(Section 513)
Notwithstanding the foregoing, without the consent of any holder of Notes,
the Guarantor and the Trustee may amend or supplement the Indentures and the
Notes:
(a) to cure any ambiguity, defect or inconsistency;
(b) to provide for uncertificated Notes in addition to or in place of
certificated Notes;
(c) to provide for the assumption of the Issuer's obligations to
holders of the Notes in the case of a merger or consolidation or to secure
the Notes;
(d) to make any change that would provide any additional rights or
benefits to the holders of the Notes or that does not adversely affect the
legal rights under the Indenture of any such holder; or
(e) to comply with requirements of the Commission in order to effect
or maintain the qualification of the Indenture under the Trust Indenture
Act. (Section 901).
THE TRUSTEE
The Indentures provide that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indentures. During the existence of an Event of Default, the Trustee will
exercise such rights and powers vested in it under such Indenture and use the
same degree of care and skill in its exercise as a prudent person would exercise
under the circumstances in the conduct of such person's own affairs. (Section
601)
The Indentures and provisions of the Trust Indenture Act incorporated by
reference therein contain limitations on the rights of the Trustee, should it
become a creditor of the Issuer or Guarantor, to obtain payment of claims in
certain cases or to realize on certain property received by it in respect of any
such claim as security or otherwise. The Trustee is permitted to engage in other
transactions with the Issuer,
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<PAGE>
the Guarantor or any Affiliate, provided, however, that if it acquires any
conflicting interest (as defined in the Indentures or in the Trust Indenture
Act), it must eliminate such conflict or resign. (Section Section 608, 613)
ADDITIONAL AMOUNTS
Payments made by the Issuer or the Guarantor pursuant to the Notes or the
Notes Guarantees will be made without withholding or deduction for taxes unless
required by law. In the event of (i) any change that becomes effective after the
date hereof in the laws of the U.K. or Bermuda or of any political subdivision
or taxing authority thereof or therein or any change in the interpretation or
administration thereof or (ii) a failure by the Issuer to list or maintain a
listing of the Notes on a "recognized stock exchange" (within the meaning of
Section 841 of the U.K. Income and Corporation Taxes Act 1988) (a "Listing
Failure"), the effect of which, in each case, is to require the withholding or
deduction by the Issuer or the Guarantor pursuant to the Notes or the Notes
Guarantees, respectively, of any amount for taxes that would not have been
required to be withheld or deducted absent such event, the Issuer or the
Guarantor will pay, to the extent it may then lawfully do so, such additional
amounts ("Additional Amounts") as may be necessary in order that every net
payment of the principal of and interest on the Notes, after deduction for
withholding for or on account of any future tax, assessment or other
governmental charge will not be less than the amount provided for in the Notes
to be then due and payable; provided, however, that the foregoing obligation to
pay Additional Amounts shall not apply in respect of:
(a) any tax, withholding, assessment or other governmental charge
which would not have been imposed but for (i) the existence of any present
or former connection between such holder (or between a fiduciary, settlor,
beneficiary, member or shareholder of, or possessor of a power over, such
holder, if such holder is an estate, trust, partnership or corporation) and
the U.K. or Bermuda or any political subdivision or taxing authority
thereof including, without limitation, such holder (or such fiduciary,
settlor, beneficiary, member, shareholder or possessor) being or having
been a citizen or resident thereof or being or having been present or
engaged in trade or business therein or having or having had a permanent
establishment therein or (ii) the presentation of a Note or a Note
Guarantee (where presentation is required) for payment on a date more than
30 days after the date on which such payment became due and payable or the
date on which payment thereof is duly provided for, whichever occurs later,
except for Additional Amounts with respect to taxes that would have been
imposed had the holder presented the Note for payment within such 30-day
period;
(b) any estate, inheritance, gift, sale, transfer or personal property
tax;
(c) any tax, assessment or other governmental charge that is withheld
by reason of the failure to timely comply by the holder or the beneficial
owner of the Note with a request in writing of the Issuer or the Guarantor
(which request shall be furnished to the Trustee) (i) to provide
information concerning the nationality, residence or identity of the holder
or such beneficial owner or (ii) to make any declaration or other similar
claim or satisfy any information or reporting requirement, which, in the
case of (i) or (ii), is required or imposed by a statute, treaty,
regulation or administrative practice of the taxing or domicile
jurisdiction as a precondition to exemption from or reduction of all or
part of such tax, assessment or other governmental charge; provided,
however, that this clause (c) shall not apply to limit the Issuer's or
Guarantor's obligation to pay Additional Amounts if the completing and
filing of the information described in subclause (i) or the declaration or
other claim described in subclause (ii) would be materially more onerous in
form, in procedure or in substance of information disclosed, in comparison
to the information reporting requirements imposed under U.S. tax law with
respect to Forms 1001, W-8 and W-9; or
(d) any tax, withholding, assessment or other governmental charge
resulting from a Listing Failure with respect to any Note issued in the
form of a Definitive Registered Note pursuant to the terms of the Deposit
Agreement and the relevant Indenture; or
(e) any combination of items (a), (b), (c) and (d) above; nor shall
Additional Amounts be paid with respect to any payment of the principal of,
or any interest on, any Note or Notes Guarantee to any holder who is not
the sole beneficial owner of such Note or Notes Guarantee or is a fiduciary
or partnership, but only to the extent that a beneficial owner, a
beneficiary or a settlor with respect to a
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<PAGE>
fiduciary or a member of the partnership would not have been entitled to
the payment of the Additional Amount had the beneficial owner, beneficiary,
settlor or member of such partnership received directly its beneficial or
distributive share of the payment.
At least 30 days prior to each date on which any payment under or with
respect to the Notes is due and payable, if the Issuer or the Guarantor will be
obligated to pay Additional Amounts with respect to such payment, the Issuer or
the Guarantor will deliver to the Trustee an Officer's Certificate stating the
fact that such Additional Amounts will be payable and the amounts so payable and
will set forth such other information necessary to enable the Trustee to pay
such Additional Amounts to Holders on the payment date. Whenever in the
Indenture or in this Prospectus there is mentioned, in any context, the payment
of principal (and premium, if any), redemption price, interest or any other
amount payable under or with respect to any Note, such mention shall be deemed
to include mention of the payment of Additional Amounts to the extent that, in
such context, Additional Amounts are, were or would be payable in respect
thereof. See "--Optional Redemption."
The Issuer or the Guarantor, as the case may be, will also (i) make (or
cause to be made) such withholding or deduction and (ii) remit (or cause to be
remitted) the full amount deducted or withheld to the relevant authority in
accordance with applicable law. The Issuer or the Guarantor, as the case may be,
will make reasonable efforts to obtain certified copies of tax receipts
evidencing the payment of any taxes so deducted or withheld from each taxing
authority imposing such taxes. The Issuer or the Guarantor, as the case may be,
will furnish to the Trustee as promptly as practicable after the payment of any
taxes so deducted or withheld is due pursuant to applicable law, either
certified copies of tax receipts evidencing such payment or, if the receipts are
not obtainable, other evidence of such payments by the Issuer or the Guarantor.
CONSENT TO JURISDICTION AND SERVICE
Each of the Guarantor and the Issuer will appoint RSL Communications N.
America, Inc. as its agent for service of process in any suit, action or
proceeding with respect to the Indentures or the Notes or the Notes Guarantees
and for actions brought under federal or state securities laws brought in any
federal or state court located in the City of New York and will agree to submit
to such jurisdiction.
GOVERNING LAW
The Indentures, the New Notes and the New Notes Guarantees are governed by,
and construed in accordance with, the laws of the State of New York.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following summary describes the material U.S. federal income tax
consequences of the exchange of Old Notes for New Notes as of the date hereof.
Such opinion is not binding on any taxing authority or the courts, and no U.S.
tax ruling has been or will be sought. The discussion below is based upon the
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), and
regulations, rulings and judicial decisions as of the date hereof, and such
authorities may be repealed, revoked or modified so as to result in U.S. federal
income tax consequences different from those discussed below. Certain Holders
(including insurance companies, tax-exempt organizations, financial
institutions, broker-dealers, foreign corporations and persons who are not
citizens or residents of the United States) may be subject to special rules not
discussed below.
The exchange of an Old Note for a corresponding New Note pursuant to the
applicable Exchange Offer will not be a taxable event for U.S. federal income
tax purposes because such New Note will not be considered to differ materially
in kind or extent from the corresponding Old Note. As a result, there should be
no material U.S. federal income tax consequences to a holder exchanging an Old
Note for a corresponding New Note pursuant to the applicable Exchange Offer.
EACH HOLDER OF OLD NOTES SHOULD CONSULT HIS, HER OR ITS OWN TAX ADVISOR AS
TO THE PARTICULAR TAX CONSEQUENCES OF EXCHANGING OLD NOTES FOR NEW NOTES,
INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
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<PAGE>
CERTAIN UNITED KINGDOM TAX CONSIDERATIONS
The following summary describes the material U.K. income tax consequences
expected to result to holders whose Old Notes are exchanged for New Notes in the
Exchange Offers. This summary is based on current U.K. law and U.K. Inland
Revenue practice which may change prospectively or retrospectively. There can be
no assurance that the U.K. Inland Revenue would not take a contrary view and no
ruling from the U.K. Inland Revenue has been or will be sought.
For U.K. tax purposes, the exchange of the Old Notes for the New Notes will
have no U.K. tax consequences for a U.S. holder who is neither resident nor
ordinarily resident in the U.K., nor carries on a trade, profession or vocation
in the U.K. through a branch or agency to which the Notes are attributable.
PLAN OF DISTRIBUTION
A broker-dealer that is the holder of Old Notes that were acquired for the
account of such broker-dealer as a result of market-making or other trading
activities (other than Old Notes acquired directly from the Issuer or any
affiliate of the Issuer) may exchange such Old Notes for New Notes pursuant to
the Exchange Offers, provided, that each broker-dealer that receives New Notes
for its own account pursuant to the Exchange Offers must acknowledge that it
will deliver a prospectus in connection with any resale of such New Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of New Notes received in exchange
for Old Notes where such Old Notes were acquired as a result of market-making
activities or other trading activities. The Issuer has agreed to keep the
Registration Statement effective for a period of 90 days following the closing
of the Exchange Offers.
The Issuer will not receive any proceeds from any sale of New Notes by
broker-dealers or any holder of New Notes. New Notes received by broker-dealers
for their own account pursuant to the Exchange Offers may be sold from time to
time in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the New Notes or a combination
of such methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from any
such broker-dealer and/or the purchasers of any New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offers and any broker or dealer that participates in a distribution
of such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be an
underwriting compensation under the Securities Act. The Letters of Transmittal
state that by acknowledging that it will deliver and by delivering a prospectus,
a broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act.
The Issuer has agreed to pay all expenses incident to the Exchange Offers
and to the Issuer's performance of, or compliance with, the Registration Rights
Agreements (other than commissions or concessions of any brokers or dealers) and
will indemnify the holders of the Notes (including any broker-dealers) against
any liabilities under the Securities Act.
Following consummation of the Exchange Offers, the Issuer may, in its sole
discretion, commence one or more additional exchange offers to holders of Old
Notes who did not exchange their Old Notes for New Notes in the Exchange Offers
on terms which may differ from those contained in the Registration Rights
Agreements. This Prospectus, as it may be amended or supplemented from time to
time, may be used by the Issuer in connection with any such additional exchange
offers. Such additional exchange offers will take place from time to time until
all outstanding Old Notes have been exchanged for New Notes pursuant to the
terms and conditions contained herein.
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<PAGE>
LEGAL MATTERS
Certain matters relating to the New Notes are being passed upon for the
Company by Debevoise & Plimpton, New York, New York and by Levinson Gray,
London, United Kingdom.
Certain matters relating to the New Notes and the New Notes Guarantees are
being passed upon for the Company by Conyers, Dill & Pearman, Hamilton, Bermuda.
GENERAL INFORMATION
1. The Issuer, a wholly-owned subsidiary of the Company, was incorporated
under the laws of the United Kingdom on July 25, 1996. The Issuer's primary
purpose is to carry on business as a holding company. The purposes of the Issuer
are set forth in paragraph 4 of the Issuer's Memorandum of Association. For
certain summary financial information regarding the Issuer, see Note 17 of the
Notes to the Consolidated Financial Statements of the Guarantor included
elsewhere in this Prospectus.
2. The directors of the Issuer are Ronald S. Lauder, Itzhak Fisher, Jacob
Z. Schuster, Nir Tarlovsky, Nesim Bildirici and Eugene Sekulow. The executive
officers are: Mr. Fisher, President and Chief Executive Officer; Messrs.
Tarlovsky and Bildirici, Vice Presidents; Mr. Schuster, co-Secretary; and Mr.
Hirschhorn, Global Controller and co-Secretary.
3. The Guarantor was incorporated under the laws of Bermuda on March 14,
1996. The Guarantor is the successor in interest to RSL Communications Inc., a
British Virgin Islands corporation ("RSL BVI"), which was amalgamated into the
Company on July 23, 1996. RSL BVI is the successor in interest to RSL
Communications Inc., a Delaware corporation ("RSL Delaware"), which was merged
into RSL BVI on August 4, 1995. RSL Delaware and RSL BVI were incorporated on
July 26, 1994 and February 27, 1995, respectively.
4. The issuance of the New Notes was authorized by unanimous written
consent of the Board of Directors of the Issuer dated December 1, 1998, in the
case of the New 10 1/2% Notes, and dated November 2, 1998, in the case of the
New 12% Notes. The Notes Guarantees were authorized by unanimous written consent
of the Executive Committee of the Board of Directors of the Guarantor dated
December 1, 1998, in the case of the New 10 1/2% Notes Guarantee, and dated
November 2, 1998 in the case of the New 12% Notes Guarantee.
5. Application will be made to list the New Notes on the Luxembourg Stock
Exchange. This Prospectus has been prepared for, among other things, the purpose
of listing the New Notes on the Luxembourg Stock Exchange. A legal notice
relating to the issue and the Memorandum of Association of each of the Issuer
and the Guarantor will be registered with the Greffier en Chef du Tribunal
D'Arrondissement de et a Luxembourg, where such documents may be examined and
copies obtained.
6. Copies of the Memorandum of Association of the Issuer and the Guarantor
and copies of the Purchase Agreement, Registration Rights Agreement and the
Indenture (which includes the terms and conditions of the Notes Guarantee) with
respect to each of the New 10 1/2% Notes and the New 12% Notes will, so long as
such New Notes are listed on the Luxembourg Stock Exchange, be available for
inspection during normal business hours on any weekday (except Saturdays and
public holidays) at the office of the paying agent in Luxembourg.
7. The purchasers of the New Notes will not be subject to any stamp duty
under the laws of the United Kingdom but, save as aforesaid, purchasers of the
New Notes may be required to pay stamp duties and other charges in accordance
with the laws and practices of the country of purchase.
8. Save as disclosed herein, the Company (which includes the Issuer and the
Guarantor) is not involved in and, to the knowledge of the Company, has not been
threatened with any litigation, arbitration or other administrative or other
legal proceeding (whether as defendant or otherwise) the result of which would
have a material adverse effect on the financial position of the Company.
9. Save as disclosed herein, there has been no adverse change in the
financial position of the Company or the Company's consolidated subsidiaries
since December 31, 1997 (the date of the latest
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<PAGE>
audited consolidated financial statements of the Company and the date as of
which the consolidated cash position and capitalization of the Company is
presented under "Capitalization") which is material in the context of the issue
of the New Notes. Save as disclosed herein, there has been no adverse change in
the financial position of the Issuer since December 31, 1996 (the date of the
latest audited consolidated financial statements of the Issuer) which is
material in the context of the issue of the New Notes.
10. So long as the New Notes are listed on the Luxembourg Stock Exchange,
the Company will make available its quarterly unaudited financial statements and
copies of its annual audited consolidated financial statements, in each case
prepared in accordance with generally accepted accounting principles in the
United States of America, or its Annual Reports including financial statements,
at the offices of the Trustee and the paying agent.
11. So long as the New Notes are listed on the Luxembourg Stock Exchange,
the Issuer will make available copies of any financial statements prepared by
it, whether required by law or otherwise, at the offices of the Trustee and the
paying agent. The audited consolidated financial statements of the Issuer for
each calendar year will generally be available on or prior to October 31 of the
succeeding year in accordance with the laws of the United Kingdom. Such
financial statements will be made available for the holders of the New Notes at
the offices of the Trustee and the paying agent as soon as reasonably
practicable after their date of issuance. Deloitte & Touche, which has been
retained by the Issuer as its auditor, maintains an office in the United Kingdom
at Hill House, 1 Little New Street, London EC4A 3TR, England. The Issuer is not
required by law and does not intend to issue interim financial statements.
12. The Issuer and the Guarantor have taken all reasonable care to confirm
that the information contained in the Prospectus in relation to the Company and
the New Notes is true and the accurate in all material respects. This Prospectus
does not omit to state a material fact necessary in order to make the statements
contained herein, in light of the circumstances in which they are made, not
misleading. No person has been authorized by either the Issuer or the Guarantor
to provide any information other than as contained in this Prospectus. Neither
the delivery of this Prospectus nor any sale of the New Notes shall under any
circumstances create any implication that there has not been any change in the
affairs of the Company since the date hereof or that the information contained
herein is correct as of any time subsequent to the date of such information.
EXPERTS
The Consolidated Financial Statements of RSL Communications, Ltd. as of
December 31, 1996 and 1997 and for each of the three years in the period ended
December 31, 1997, and International Telecommunications Group, Ltd. as of and
for the nine months ended September 30, 1995, included in this Prospectus and
the related financial statement schedules of RSL Communications, Ltd. included
in the Registration Statement, have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing herein and are
included in reliance upon the reports of such firm given upon their authority as
experts in accounting and auditing.
SERVICE OF PROCESS AND ENFORCEMENT OF LIABILITIES
The Company is a Bermuda corporation and the Issuer is a United Kingdom
corporation. Certain of their directors and officers, and certain of the experts
named herein, are not residents of the United States. All or a substantial
portion of the assets of such persons are or may be located outside the United
States. As a result, it may not be possible for investors to effect service of
process within the United States upon such persons or to enforce against them
judgments obtained in the United States courts. The Company has been advised by
its legal counsel in Bermuda, Conyers, Dill & Pearman, that there is doubt as to
the enforcement in Bermuda, in original actions or in actions for enforcement of
judgments of United States courts, of liabilities predicated upon U.S. Federal
securities laws, although Bermuda courts will enforce foreign judgments for
liquidated amounts in civil matters, subject to certain conditions and
exceptions. The Issuer has been advised by its legal counsel in the United
Kingdom that
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there is doubt as to the enforceability of certain civil liabilities under U.S.
Federal securities laws in original actions of English courts, but that, subject
to certain exceptions and time limitations, English courts may treat a final and
conclusive judgment of a U.S. court for a liquidated amount as a debt
enforceable by fresh proceedings in the English courts. Such counsel has
expressed no opinion, however, as to whether an enforcement by an English court
of any judgment would be in pounds sterling or as of which date, if any, the
determination of the applicable exchange rate from U.S. dollars to pounds
sterling may be made.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
RSL COMMUNICATIONS, LTD.
Independent Auditors' Report.............................................................................. F-2
Consolidated Balance Sheets as of December 31, 1996 and December 31, 1997................................. F-3
Consolidated Statements of Operations for the Years Ended December 31, 1995, December 31, 1996 and
December 31, 1997....................................................................................... F-4
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1995, December 31, 1996
and December 31, 1997................................................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, December 31, 1996 and
December 31, 1997....................................................................................... F-6
Notes to Consolidated Financial Statements................................................................ F-7
Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 1997 and
September 30, 1998 (unaudited).......................................................................... F-27
Condensed Consolidated Statements of Operations for the Nine Months Ended September 30, 1997 (unaudited)
and September 30, 1998 (unaudited)...................................................................... F-28
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1997 (unaudited)
and September 30, 1998 (unaudited)...................................................................... F-29
Notes to Condensed Consolidated Financial Statements...................................................... F-30
INTERNATIONAL TELECOMMUNICATIONS GROUP LTD. AND SUBSIDIARIES
Independent Auditors' Report.............................................................................. F-35
Consolidated Statement of Operations and Accumulated Deficit for the Nine Months Ended September 30,
1995.................................................................................................... F-36
Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 1995......................... F-37
Notes to Consolidated Financial Statements................................................................ F-38
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
RSL Communications, Ltd.
We have audited the accompanying consolidated balance sheets of RSL
Communications, Ltd., a Bermuda corporation, and its subsidiaries (together, the
"Company"), as of December 31, 1997 and 1996, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. Our audits also included the
consolidated financial statement schedules listed in the Index as Item 21(b) in
Part II. These consolidated financial statements and the consolidated financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and the consolidated financial statement schedules based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of the Company and
its subsidiaries at December 31, 1997 and 1996, and the results of their
operations and their cash flows for the three years ended December 31, 1997 in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such consolidated financial statement schedules,
when considered in relation to the basic consolidated financial statements taken
as a whole, present fairly, in all material respects, the information set forth
therein.
DELOITTE & TOUCHE LLP
New York, New York
February 18, 1998
F-2
<PAGE>
RSL COMMUNICATIONS, LTD.
CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents....................................................... $104,068 $144,894
Accounts receivable............................................................. 26,479 70,610
Marketable securities--available for sale....................................... 67,828 13,858
Prepaid expenses and other current assets....................................... 3,969 16,073
-------- --------
Total current assets.............................................................. 202,344 245,435
-------- --------
Restricted Marketable Securities--held to maturity................................ 104,370 68,836
-------- --------
Property and Equipment:
Telecommunications equipment.................................................... 29,925 63,998
Furniture, fixtures and other................................................... 5,926 21,583
-------- --------
35,851 85,581
Less accumulated depreciation................................................... (3,513) (13,804)
-------- --------
Property and equipment--net..................................................... 32,338 71,777
-------- --------
Goodwill and other intangible assets--net of accumulated amortization............. 87,605 214,983
-------- --------
Deposits and Other Assets......................................................... 1,312 4,633
-------- --------
Total Assets...................................................................... $427,969 $605,664
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................................................ $ 49,370 $ 94,149
Accrued expenses................................................................ 12,701 49,965
Notes payable................................................................... 6,538 4,604
Deferred revenue................................................................ 3,570 5,368
Other liabilities............................................................... 5,236 8,271
-------- --------
Total current liabilities......................................................... 77,415 162,357
-------- --------
Other Liabilities--noncurrent..................................................... 15,286 --
-------- --------
Long-term Debt--less current portion.............................................. 6,032 --
-------- --------
Senior Notes, 12 1/4% due 2006, net............................................... 296,000 296,500
-------- --------
Capital Lease Obligations--less current portion................................... 12,393 20,108
-------- --------
Total Liabilities................................................................. 407,126 478,965
-------- --------
Commitments and Contingencies
Shareholders' Equity
Common stock, Class A--par value $0.00457; 0 and 10,872,568 issued
and outstanding at December 31, 1996 and 1997, respectively.................. -- 49
Common stock, Class B--par value $0.00457; 10,528,887 and 30,760,726, issued and
outstanding at December 31, 1996 and 1997, respectively...................... 48 141
Common stock Class C--par value $0.00457; no shares issued...................... -- --
Preferred stock par value $0.00457; 65,700,000 shares authorized, 9,243,866 and
0 shares issued and outstanding at December 31, 1996 and 1997,
respectively................................................................. 93 --
Warrants--Common Stock, exercise price of $0.00457.............................. 5,544 5,544
Additional paid-in capital...................................................... 65,064 274,192
Accumulated deficit............................................................. (47,740) (147,939)
Foreign currency translation adjustment......................................... (622) (5,288)
Deferred financing costs........................................................ (1,544) --
-------- --------
Total shareholders' equity........................................................ 20,843 126,699
-------- --------
Total Liabilities and Shareholders' Equity........................................ $427,969 $605,664
-------- --------
-------- --------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
RSL COMMUNICATIONS, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
($ AND SHARES IN THOUSANDS, EXCEPT LOSS PER SHARE)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues.......................................................... $ 18,617 $ 113,257 $ 300,796
Operating costs and expenses
Cost of services (exclusive of depreciation and amortization
shown separately below)...................................... 17,510 98,461 265,321
Selling, general and administrative expenses.................... 9,639 38,893 94,712
Depreciation and amortization................................... 849 6,655 21,819
-------- ---------- ----------
27,998 144,009 381,852
-------- ---------- ----------
Loss from operations.............................................. (9,381) (30,752) (81,056)
Interest income................................................... 173 3,976 13,826
Interest expense.................................................. (194) (11,359) (39,373)
Other income...................................................... -- 470 6,595
Minority interest................................................. -- (180) 210
Income taxes...................................................... -- (395) (401)
-------- ---------- ----------
Net loss.......................................................... $ (9,402) $ (38,240) $ (100,199)
-------- ---------- ----------
-------- ---------- ----------
Loss per share.................................................... $ (1.67) $ (5.13) $ (5.27)
Weighted average number of shares of common stock outstanding..... 5,641 7,448 19,008
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
RSL COMMUNICATIONS, LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
($ AND SHARES IN THOUSANDS)
<TABLE>
<CAPTION>
CLASS A CLASS B PREFERRED COMMON STOCK
COMMON STOCK COMMON STOCK STOCK WARRANTS ADDITIONAL
-------------- -------------- -------------- -------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
------ ------ ------ ------ ------ ------ ------ ------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
January 1, 1995..... -- $ -- -- $ -- -- $ -- -- $ -- $ -- $ (98)
Issuance of Preferred
Stock............... -- -- -- -- 9,244 93 -- -- 13,261 --
Issuance of Common
Stock............... -- -- 6,411 29 -- -- -- -- 1,822 --
Net loss............. -- -- -- -- -- -- -- -- -- (9,402)
------ ---- ------ ---- ------ ---- ------ ------ -------- ---------
BALANCE,
December 31, 1995... -- -- 6,411 29 9,244 93 -- -- 15,083 (9,500)
Issuance of warrants
in connection with
Notes Offering...... -- -- -- -- -- -- 657 4,000 -- --
Issuance of warrants
in connection with
shareholder standby
facility and
revolving credit
facility............ -- -- -- -- -- -- 460 1,544 -- --
Issuance of Common
Stock............... -- -- 4,118 19 -- -- -- -- 49,981 --
Foreign Currency
Translation
Adjustment.......... -- -- -- -- -- -- -- -- -- --
Net loss............. -- -- -- -- -- -- -- -- -- (38,240)
------ ---- ------ ---- ------ ---- ------ ------ -------- ---------
BALANCE,
December 31, 1996... -- -- 10,529 48 9,244 93 1,117 5,544 65,064 (47,740)
Issuance of Class A
Common Stock........ 10,873 49 -- -- -- -- -- -- 209,128 --
Conversion of
Preferred Stock In
Exchange for
Class B Common
Stock............... -- -- 20,232 93 (9,244) (93) -- -- -- --
Foreign Currency
Translation
Adjustment.......... -- -- -- -- -- -- -- -- -- --
Amortization of
deferred financing
costs............... -- -- -- -- -- -- -- -- -- --
Net loss............. -- -- -- -- -- -- -- -- -- (100,199)
------ ---- ------ ---- ------ ---- ------ ------ -------- ---------
BALANCE
December 31, 1997... 10,873 $ 49 30,761 $141 -- $ -- 1,117 $5,544 $274,192 $(147,939)
------ ---- ------ ---- ------ ---- ------ ------ -------- ---------
------ ---- ------ ---- ------ ---- ------ ------ -------- ---------
<CAPTION>
FOREIGN
CURRENCY DEFERRED
TRANSLATION FINANCING
ADJUSTMENT COSTS TOTAL
------------ --------- ---------
<S> <C> <C> <C>
BALANCE,
January 1, 1995..... $ -- $ -- $ (98)
Issuance of Preferred
Stock............... -- -- 13,354
Issuance of Common
Stock............... -- -- 1,851
Net loss............. -- -- (9,402)
------------ ------- ---------
BALANCE,
December 31, 1995... -- -- 5,705
Issuance of warrants
in connection with
Notes Offering...... -- -- 4,000
Issuance of warrants
in connection with
shareholder standby
facility and
revolving credit
facility............ -- (1,544) --
Issuance of Common
Stock............... -- -- 50,000
Foreign Currency
Translation
Adjustment.......... (622) -- (622)
Net loss............. -- -- (38,240)
------------ ------- ---------
BALANCE,
December 31, 1996... (622) (1,544) 20,843
Issuance of Class A
Common Stock........ -- -- 209,177
Conversion of
Preferred Stock In
Exchange for
Class B Common
Stock............... -- -- --
Foreign Currency
Translation
Adjustment.......... (4,666) -- (4,666)
Amortization of
deferred financing
costs............... -- 1,544 1,544
Net loss............. -- -- (100,199)
------------ ------- ---------
BALANCE
December 31, 1997... $ (5,288) $ -- $ 126,699
------------ ------- ---------
------------ ------- ---------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
RSL COMMUNICATIONS, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net loss.......................................................... $ (9,402) $ (38,240) $ (100,199)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities, net of effects of purchase of
subsidiaries:
Accretion of interest receivable on restricted marketable
securities.................................................. -- (1,562) (5,504)
Depreciation and amortization................................. 848 6,655 21,819
Foreign currency transaction (gain)........................... -- (788) --
Loss on disposal of fixed assets.............................. -- 368 --
Provision for losses on accounts receivable................... 149 2,830 10,908
Reversal of accrued liabilities............................... -- -- (7,000)
Changes in assets and liabilities:
Increase in accounts receivable............................... (2,453) (17,034) (45,069)
Decrease (increase) in deposits and other assets.............. 366 (3,249) (2,929)
Decrease (increase) in prepaid expenses and other current
assets...................................................... 297 (925) (13,196)
Increase in accounts payable and accrued expenses............. 3,511 44,243 56,354
Increase (decrease) in deferred revenue and other current
liabilities................................................. 1,501 4,279 (2,155)
Increase (decrease) in other liabilities...................... 8,737 (7,052) (4,841)
---------- ---------- ----------
Net cash provided by (used in) operating activities............... 3,554 (10,475) (91,812)
---------- ---------- ----------
Cash flows used in investing activities:
Acquisition of subsidiaries..................................... (15,413) (38,552) (77,813)
Purchase of marketable securities............................... -- (82,529) --
Proceeds from marketable securities............................. -- 14,701 54,167
Purchase of restricted marketable securities.................... -- (102,808) --
Proceeds from maturities of restricted marketable securities.... -- -- 41,038
Purchase of property and equipment.............................. (1,124) (15,983) (36,357)
Proceeds from sale of equipment................................. -- 171 144
---------- ---------- ----------
Net cash used in investing activities............................. (16,537) (225,000) (18,821)
---------- ---------- ----------
Cash flows provided by financing activities:
Proceeds from issuance of common and preferred stock and
warrants...................................................... 15,205 50,000 182,160
Underwriting fees and expenses.................................. -- -- (14,618)
Proceeds from notes payable..................................... 3,000 -- --
Payment of notes payable........................................ -- (3,000) (3,348)
Proceeds from issuance of 12 1/4% Senior Notes and warrants..... -- 300,000 --
Payments of offering costs...................................... -- (10,989) --
Proceeds from long-term debt.................................... -- 44,000 --
Payments of long-term debt...................................... -- (44,598) (9,402)
Principal payments under capital lease obligations.............. (62) (382) (2,757)
---------- ---------- ----------
Net cash provided by financing activities......................... 18,143 335,031 152,035
---------- ---------- ----------
Increase in cash and cash equivalents............................. 5,160 99,556 41,402
Effects of foreign currency exchange rates on cash................ -- (651) (576)
Cash and cash equivalents at beginning of period.................. 3 5,163 104,068
---------- ---------- ----------
Cash and cash equivalents at end of period........................ $ 5,163 $ 104,068 $ 144,894
---------- ---------- ----------
---------- ---------- ----------
Supplemental disclosure of cash flows information:
Cash paid for:
Interest...................................................... $ 31 $ 1,639 $ 41,285
---------- ---------- ----------
---------- ---------- ----------
Supplemental schedule of noncash investing and financing
activities--
Assets acquired under capital lease obligations................. $ 4,950 $ 7,897 $ 13,060
---------- ---------- ----------
---------- ---------- ----------
Issuance of notes to acquire stock.............................. $ -- $ 9,328 $ --
---------- ---------- ----------
---------- ---------- ----------
Issuance of warrants for shareholder standby facility........... $ -- $ 1,544 $ --
---------- ---------- ----------
---------- ---------- ----------
Issuance of Class A Common Stock................................ $ -- $ -- $ 41,635
---------- ---------- ----------
---------- ---------- ----------
Acquisition cost included in current liabilities.................. $ -- $ -- $ 17,929
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
1. BUSINESS DESCRIPTION
RSL Communications, Ltd. ("RSL"), a Bermuda corporation, is the successor
in interest to RSL Communications Inc., a British Virgin Islands corporation,
which is the successor in interest to RSL Communications, Inc., a Delaware
corporation. RSL, together with its direct and indirect subsidiaries are
referred to herein as the "Company." The Company is a multinational
telecommunications company which provides an array of international and domestic
telephone services. The Company focuses on providing international long distance
voice services to small and medium-sized businesses in key markets. The Company
currently has revenue producing operations and provides services in the United
States, the United Kingdom, France, Belgium, Germany, the Netherlands, Sweden,
Finland, Australia, Venezuela, Italy, Switzerland and Denmark. In 1996,
approximately 60% of the world's international long distance telecommunications
minutes originated in these markets.
2. ACQUISITIONS
1997 Acquisitions/New Operations
Delta Three, Inc.
During 1997, the Company acquired a majority interest in Delta Three, Inc.
("Delta Three"). The Company paid approximately $8.8 million for approximately
72% ownership of the Company and agreed to acquire an additional 26% interest
during 1998. In connection with this transaction, the Company recorded
approximately $3.8 million in goodwill.
Maxitel
In April 1997, RSL Com Europe Ltd ("RSL Europe") acquired a 30.4% interest
in Maxitel, a Portuguese international telecommunications carrier, and has since
increased its ownership interest in Maxitel to 39%. The total investment in
Maxitel is approximately $2.1 million.
Pacific Star Communications Limited
In April 1997, the Company acquired substantially all of the commercial
customer contracts of Pacific Star Communications Limited, an Australian based
company. The Company paid approximately $1.5 million in cash and recorded this
amount as a customer base.
Newtelco
In August 1997, RSL Europe purchased 90% of the stock of Newtelco Telekom
AG ("RSL Austria"), an Austrian start-up telecommunications company for an
$800,000 investment in the company.
RSL Com Italia S.r.l
In August 1997, RSL Europe acquired 85% of the stock in RSL Italy ("RSL
Italy"), an Italian telecommunications reseller. The Company paid approximately
$1.7 million for its investment in RSL Italy.
F-7
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
2. ACQUISITIONS--(CONTINUED)
EZI Phonecard Holdings Pty. Limited
In October 1997, RSL Com Australia Holdings Pty. Ltd. ("RSL Australia")
acquired 85% of EZI Phonecard Holdings Pty. Limited for approximately $200,000
in cash and the assumption of net liabilities of $1.3 million. In connection
with this purchase, RSL Australia recorded approximately $1.5 million of
goodwill.
Call Australia Group
In October 1997, the Company through its wholly-owned subsidiary, RSL
Australia acquired 100% of the issued capital of each of Call Australia Pty.
Ltd., Associated Service Providers Pty. Limited, Digiplus Pty. Limited, Power
Serve Communications Consultants Pty. Limited, Talk 2000 Networks Pty. Limited
and Telephone Bill Pty. Limited (collectively the "Call Australia Group"),
leading Australian switchless resellers, for approximately $24.5 million. In
connection with this purchase, RSL Australia recorded approximately $24.5
million of goodwill.
LDM Systems, Inc.
In October 1997, the Company acquired 100% of the outstanding common stock
of LDM Systems, Inc. ("LDM"). The total purchase price was $14.9 million. In
connection with this acquisition, the Company recorded an equal amount of
goodwill.
Callcom AG fur TeleKommunikation
In December 1997, RSL Europe acquired a 78.5% interest in Callcom AG fur
TeleKommunikation ("RSL Switzerland"). The Company invested approximately $2.1
million in cash in RSL Switzerland for common shares.
European Telecom S.A./N.V.
In December 1997, RSL Europe acquired 90% of European Telecom S.A./N.V.
("RSL Belgium") which in turn owns 100% of European Telecom SARL (RSL
Luxemburg). The Company paid approximately $18.6 million for this acquisition
and recorded an equal amount of goodwill.
1996 Acquisitions/New Operations
Certain Assets of Sprint in France and Germany
In May 1996, the Company acquired the net assets, principally
telecommunications equipment and facilities, constituting the international long
distance voice businesses of Sprint in France and Germany through its
wholly-owned subsidiaries RSL COM France S.A., a French corporation ("RSL
France"), and RSL COM Deutschland GmbH, a German limited liability company ("RSL
Germany"). Pursuant to the applicable asset purchase agreements, the Company can
not disclose the purchase price of the net assets. In connection with this
transaction, the Company recorded approximately $7.9 million of goodwill.
Belnet Nederland B.V.
In October 1996, the Company acquired 38,710 shares of Belnet Nederland
B.V. ("Belnet/RSL"), representing 75% of the outstanding stock for
$10.0 million and the assumption of liabilities of $500,000. In 1997, the
Company acquired the remaining shares for approximately $7.3 million. In
F-8
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
2. ACQUISITIONS--(CONTINUED)
connection with the purchase of Belnet/RSL, the Company recorded approximately
$15.6 million of goodwill.
Incom (UK) Limited
In August 1996, the Company acquired the assets and assumed certain limited
liabilities of Incom (UK) Limited ("Incom"), a United Kingdom reseller, for
$500,000 plus 3,954 non-voting shares of RSL COM North America, Inc. (formerly
known as International Telecommunications Group, Ltd.) ("RSL North America")
(the "Purchased Shares"). In addition, 3,333 voting shares of RSL North America
currently held by Incom were exchanged for an equal number of non-voting shares.
In connection with this acquisition, the Company recorded approximately $3.8
million of goodwill.
1995 Acquisitions/New Operations
On March 10, 1995, the Company entered into a stock purchase agreement (the
"Agreement") with RSL North America and RSL COM U.S.A., Inc. (formerly known as
International Telecommunications Corporation) ("RSL USA"), pursuant to which the
Company initially purchased from RSL North America 66,667 shares of RSL North
America's Series A convertible preferred stock (which represented 25% of RSL
North America's then outstanding stock, including common and preferred shares)
for $4.8 million. The Company subsequently purchased additional shares of RSL
North America's common stock at various times during 1995, 1996 and 1997 for a
total purchase price of cash, secured notes, issuance of shares and the
assumption of net liabilities aggregating $12.9 million at December 31, 1995,
cumulatively aggregating (inclusive of an aggregate $12.9 million at
December 31, 1995) $25.0 million at December 31, 1996, and cumulatively
aggregating (inclusive of an aggregate $25.0 million at December 31, 1996)
$87.3 million at December 31, 1997, resulting in recorded goodwill in the
aggregate of $85.5 million at December 31, 1997. At December 31, 1995, 1996 and
1997, the Company's ownership interest in RSL North America was 50.1%, 87% and
100%, respectively.
Effective September 1, 1995, RSL North America's subsidiary RSL USA,
purchased 51% of the capital stock of Cyberlink, Inc. ("Cyberlink"). During the
period August 1996 through December 1996, RSL USA purchased 1,023,807 shares of
the capital stock of Cyberlink for approximately $7.2 million. In addition,
through March 1997, the Company acquired the remaining outstanding shares.
The total purchase price consisted of approximately $9.5 million, and
assumption of net liabilities of $21.1 million. In connection with the purchase
of Cyberlink, the Company recorded approximately $30.6 million of goodwill.
In November 1995, the Company, through its wholly-owned subsidiary RSL COM
Europe, Ltd. ("RSL COM Europe") completed the acquisition of 51% of Cyberlink
Communications Europe Ltd. ("Cyberlink Europe"). Cyberlink Europe is a holding
company which owned 100% of the shares of RSL COM Sweden AB, Cyberlink
International Telesystems Germany GmbH and RSL COM Finland OY.
During the period August 1996 through March 1997, RSL COM Europe purchased
the remaining 49% of the Cyberlink Europe shares for approximately $2.1 million
and the assumption of liabilities. The total cash paid was approximately $3.7
million. In connection with the purchase of Cyberlink Europe, the Company
recorded approximately $5.4 million of goodwill.
F-9
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
2. ACQUISITIONS--(CONTINUED)
Accounting Treatment
For all years, the acquisitions, unless otherwise stated, have been
accounted for by the purchase method of accounting and, accordingly, the
purchase prices have been allocated to the assets acquired, primarily fixed
assets and accounts receivable, and liabilities assumed based on their estimated
fair values at the dates of acquisition. The excess of the purchase price over
the estimated fair values of the net assets acquired has been recorded as
goodwill, which is amortized over fifteen years. The valuation of all of the
Company's acquired assets and liabilities from inception through December 31,
1997 is final except for the final valuation to be made of litigation reserves
and carrier liabilities in connection with the LDM acquisition.
The following presents the unaudited pro forma consolidated statements of
operations data of the Company for the years ended December 31, 1996 and 1997 as
though the acquisitions of RSL COM France, RSL COM Germany, Belnet/RSL, LDM,
Call Australia Group, and EZI had occurred on January 1, 1996. All other
acquisitions had insignificant operations prior to the date of acquisition. The
consolidated statements do not necessarily represent what the Company's results
of operations would have been had such acquisitions actually occurred on such
date.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997
----------------- -----------------
(UNAUDITED)
($ IN THOUSANDS, EXCEPT LOSS PER
SHARE)
<S> <C> <C>
Revenues...................................................... $ 203,075 $ 371,757
--------- ---------
--------- ---------
Net loss...................................................... $ (40,916) $(103,697)
--------- ---------
--------- ---------
Net loss per share............................................ $ (5.49) $ (5.46)
--------- ---------
--------- ---------
</TABLE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation--The consolidated
financial statements include the accounts of RSL Communications, Ltd. and its
majority-owned subsidiaries from the date of acquisition or commencement of
operations.
For the years ended December 31, 1995 and 1996 the Company has, since the
Company's acquisition or startup of its subsidiaries, included 100% of all of
such subsidiaries' operating losses, because the minority investments in each of
those entities have been reduced to zero as of the relevant year-end dates. For
the year ended December 31, 1997 the Company has included 100% of its wholly
owned subsidiaries' operating losses and the Company recorded minority interest,
an asset representing the Company's minority shareholder's proportionate share
of operating losses for RSL COM Italia, S.r.l., RSL COM Venezuela C.A., RSL COM
Austria A.G., RSL COM Spain S.A., and RSL COM Schweiz AG. In the event
additional capital in any such subsidiary is required to fund operating losses,
the minority shareholders of such subsidiary are contractually obligated to
invest, to the extent necessary to fund the operations, based on their pro rata
ownership of the total outstanding stock of such subsidiary. If a shareholder
does not invest its pro rata amount, then such shareholder's equity interest
will be diluted and the contributing shareholders' equity in such subsidiary
will be increased. The Company believes that all of its minority shareholders
have the financial wherewithal to meet its obligations to the Company with
respect to its proportionate share of operating losses. Each of the Company's
other subsidiaries' operating losses have been recorded in full.
The Company has majority ownership of all of its subsidiaries.
F-10
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
The Company accounts for its 39% investment in Maxitel Servicios e Gestao
de Telecomunicaciones, SA ("Maxitel") using the equity method. During 1997, the
Company formed a joint venture with entities controlled by the Cisneros Group of
Companies to pursue the Company's Latin American expansion. The Company owns 51%
of this joint venture and has, since the joint venture's formation, consolidated
100% of this joint venture and recognized minority interest for 49% of the
operating losses of the joint venture. The receivable for the minority
shareholder's share of the joint venture loss is included in other current
assets.
Management Assumptions--The preparation of the consolidated financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities and the reported amounts of revenues and expenses. Such
estimates primarily relate to reserves recorded for doubtful accounts and
accruals for other claims. Actual results could differ from these estimates.
Foreign Currency Translation--Assets and liabilities of foreign entities
have been translated into United States dollars using the exchange rates in
effect at the balance sheet dates. Results of operations of foreign entities are
translated using the average exchange rates prevailing throughout the period.
Local currencies are considered the functional currencies of the Company's
foreign operating entities. The Company utilizes a net settlement process with
its correspondents comprised of special drawing rights ("SDRs"). SDRs are the
established method of settlements among international telecommunications
carriers. The SDRs are valued based upon the values of a basket of foreign
currencies. Translation effects are accumulated as part of the cumulative
foreign currency translation adjustment in equity. Gains and losses from foreign
currency transactions are included in the consolidated statements of operations
for each respective period, and were not significant in the periods presented.
Cash and Cash Equivalents--The Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents.
Accounts Receivable--Accounts receivable are stated net of the allowance
for doubtful accounts of $3,900,000 and $12,000,000 at December 31, 1996 and
1997, respectively. The Company recorded bad debt expense of $149,000,
$2,830,000 and $10,900,000 for the years ended December 31, 1995, 1996 and 1997,
respectively.
Accrued Expenses--Accrued expenses for the years ended December 31, 1996
and 1997 consist primarily of accrued interest, accrued acquisition costs and
accrued transmission costs. Accrued interest as of December 31, 1996 was
$9,447,000. Accrued interest as of December 31, 1997 was not significant.
Marketable Securities--Marketable securities consist principally of U.S.
Treasury bills, commercial paper and corporate notes with a maturity date
greater than three months when purchased. Available for sale securities are
stated at market and the held to maturity securities are stated at amortized
costs. Gains and losses, both realized and unrealized, are measured using the
specific identification method. Market value is determined by the most recently
traded price of the security at the balance sheet date. Marketable securities
are defined as either available for sale or held to maturity securities under
the provisions of SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," depending on the security.
Property and Equipment and Related Depreciation--Property and equipment are
stated at cost or fair values at the date of acquisition, and in the case of
equipment under capital leases, the present value of the future minimum lease
payments, less accumulated depreciation. Depreciation is calculated
F-11
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
using the straight-line method over the estimated useful lives of the
depreciable assets, which range from five to fifteen years. Improvements are
capitalized, while repair and maintenance costs are charged to operations as
incurred. Depreciation expense was $302,000, $3,462,000 and $9,794,000 for the
years ended December 31, 1995, 1996 and 1997, respectively.
Impairment of Assets--The Company's long-lived assets and identifiable
intangibles are reviewed for impairment whenever events or changes in
circumstances indicate that the net carrying amount may not be recoverable. When
such events occur, the Company measures impairment by comparing the carrying
value of the long-lived asset to the estimated undiscounted future cash flows
expected to result from use of the assets and their eventual disposition. If the
sum of the expected undiscounted future cash flows is less than the carrying
amount of the assets, the Company would recognize an impairment loss. The
impairment loss, if determined to be necessary, would be measured as the amount
by which the carrying amount of the asset exceeds the fair value of the asset.
The Company determined that, as of December 31, 1997 and 1996, there had been no
impairment in the carrying value of the long-lived assets.
Goodwill and Related Amortization--Goodwill represents the excess of cost
over the fair value of the net assets of acquired entities, and is being
amortized using the straight-line method over fifteen years. The Company
periodically reviews the value of its goodwill to determine if an impairment has
occurred. The Company measures the potential impairment of recorded goodwill by
the undiscounted value of expected future cash flows in relation to its net
capital investment in the subsidiary. Based on its review, the Company does not
believe that an impairment of its goodwill has occurred.
Deferred Financing Costs--The deferred financing costs incurred in
connection with the Senior Notes are being amortized on a straight line basis
over ten years.
Other Intangibles--Other Intangible assets acquired through purchase
acquisitions represent licenses which are being amortized using the
straight-line method over five years.
Deposits and Other Assets--Deposits consist principally of amounts paid to
the Company's carrier vendors.
Revenue Recognition and Deferred Revenue--The Company records revenue based
on minutes (or fractions thereof) of customer usage. The Company records
payments received in advance for prepaid calling card services and services to
be supplied under contractual agreements as deferred revenues until such related
services are provided.
Cost of Services--Cost of services is comprised primarily of transmission
costs.
Selling Expenses--Selling costs such as commissions, marketing costs, and
other customer acquisition costs are treated as period costs. Such costs are
recorded in selling, general and administrative expenses in the Company's
consolidated statement of operations.
Income Taxes--The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes". SFAS No. 109 establishes financial accounting and reporting
standards for the effect of income taxes that result from activities during the
current and preceding years. SFAS No. 109 requires an asset and liability
approach for financial reporting for income taxes. The Company's foreign
subsidiaries file separate income tax returns in the jurisdiction of their
operations. The Company's United States subsidiaries file stand-alone United
States income tax returns.
Loss per Common Share--In accordance with the Company's adoption of SFAS
No. 128, "Earnings Per Share", the loss per common share is calculated by
dividing the loss attributable to
F-12
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
common shares by the weighted average number of shares outstanding. Outstanding
common stock options and warrants are not included in the loss per common share
calculation as their effect is anti-dilutive. The adoption of SFAS No. 128,
"Earnings Per Share" did not affect the Company's method of computing the loss
per common share.
EFFECTS OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement is effective for financial statements issued for periods
beginning after December 15, 1997. Management has evaluated the effect on its
financial reporting from the adoption of this statement and has found the
majority of required disclosures to be not applicable and the remainder to be
not significant.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information." SFAS No. 131 requires the reporting of
profit and loss, specific revenue and expense items, and assets for reportable
segments. It also requires the reconciliation of total segment revenues, total
segment profit or loss, total segment assets, and other amounts disclosed for
segments to the corresponding amounts in the general purpose financial
statements. SFAS No. 131 is effective for fiscal years beginning after December
15, 1997. The Company uses data at the subsidiary level to manage the operations
and the Company will expand its current footnote disclosure to meet this
criteria.
4. CONCENTRATION OF CREDIT RISK
The Company is subject to significant concentrations of credit risk which
consist principally of trade accounts receivable, cash and cash equivalents, and
marketable securities. The Company's U.S. subsidiaries sell a significant
portion of their services to other carriers and, as a result, maintains
significant receivable balances with certain carriers. If the financial
condition and operations of these customers deteriorate below critical levels,
the Company's operating results could be adversely affected.
The Company maintains its cash with high quality credit institutions, and
its cash equivalents and marketable securities are in high quality securities.
5. MARKETABLE SECURITIES
A summary of the Company's available for sale marketable securities at
December 31, 1996 and December 31, 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1997
-------------------- --------------------
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Corporate notes........................................ $40,728 $40,678 $ 2,500 $ 2,500
Medium term notes...................................... 10,951 10,938 -- --
Commercial paper....................................... 10,261 10,257 4,390 4,388
Federal agency notes................................... 5,888 5,884 6,968 6,973
------- ------- ------- -------
$67,828 $67,757 $13,858 $13,861
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
The Company has recorded its available for sale marketable securities at
amortized cost as the difference between amortized cost and market value is
immaterial to the consolidated financial statements.
F-13
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
5. MARKETABLE SECURITIES--(CONTINUED)
The carrying value of the available for sale marketable securities by
maturity date as of December 31, 1996 and December 31, 1997 is as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
Matures in one year........................................... $57,548 $11,856
Matures after one year through three years.................... 10,280 2,002
------- -------
Total......................................................... $67,828 $13,858
------- -------
------- -------
</TABLE>
Proceeds from the sale of available for sale marketable securities for the
years ended December 31, 1996 and 1997 were $14,701,000 and $27,675,000,
respectively. Gross gains (losses) of $56,000 and ($2,000) were realized on
these sales for the years ended December 31, 1996 and 1997.
Securities classified as held to maturity, which are comprised of Federal
agency notes, are stated at amortized cost. Such securities are restricted in
order to make the first six scheduled interest payments on the 12 1/4% Senior
Notes (see Note 7). The held to maturity securities at December 31, 1996 and
1997 are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1997
--------------------- --------------------
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
--------- -------- --------- -------
<S> <C> <C> <C> <C>
Matures in one year.................................. $ 39,692 $ 39,738 $35,455 $35,522
Matures after one year through three years........... 64,678 65,002 33,381 33,377
--------- -------- ------- -------
Total................................................ $ 104,370 $104,740 $68,836 $68,899
--------- -------- ------- -------
--------- -------- ------- -------
</TABLE>
6. INCOME TAXES
The Company has incurred losses since inception for both book and tax
purposes. The Company's Netherlands subsidiary recorded income tax expense of
approximately $395,000 for the year ended December 31, 1996 and $401,000 for the
year ended December 31, 1997. As of December 31, 1996 and December 31, 1997, the
Company had net operating loss carryforwards generated primarily in the United
States of approximately $47,000,000 and $147,000,000, respectively. The net
operating loss carryforwards will expire at various dates beginning in 2009
through 2013 if not utilized. The utilization of the net operating loss
carryforwards is subject to certain limitations.
In accordance with SFAS No. 109, the Company has computed the components of
deferred income taxes as of December 31, 1996 and 1997, as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
------------ --------
<S> <C> <C>
Deferred tax assets.............................................. $ 18,800 $ 59,000
Less valuation allowance......................................... (18,800) (59,000)
-------- --------
Net deferred tax assets.......................................... $ -- $ --
-------- --------
-------- --------
</TABLE>
The Company's net operating losses generated the deferred tax assets. At
December 31, 1996 and 1997, a valuation allowance of $18,800,000 and
$59,000,000, respectively, is provided as the realization of the deferred tax
assets are not likely.
F-14
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
7. NOTES PAYABLE AND LONG-TERM DEBT
Senior Notes
On October 3, 1996, RSL Communications PLC ("RSL PLC"), a wholly-owned
subsidiary of RSL, issued (the "Debt Offering") 300,000 Units, each consisting
of an aggregate of one $1,000 Senior Note (collectively, the "Notes") due 2006
bearing interest at the rate of 12 1/4% and one warrant to purchase 3.975 Class
A common shares which expire in ten years (collectively, the "Warrants"). The
exercise price of such Warrants is $.00457.
The value ascribed to the Warrants was $4,000,000. The unamortized discount
is recorded as a reduction against the face value of the Notes, and is amortized
over the life of the Notes. Such discount was $4,000,000 and $3,500,000 at
December 31, 1996 and December 31, 1997, respectively.
The Notes, which are guaranteed by RSL, are redeemable, at RSL PLC's
option, subsequent to November 15, 2001, initially at 106.1250% of their
principal amount, declining to 103.0625% of their principal amount for the
calendar year subsequent to November 15, 2002, and at 100% of the principal
amount subsequent to November 15, 2003. The Notes, or a portion thereof, may
also be redeemed upon the consummation of a public equity offering which yields
proceeds in excess of a specified amount.
In connection with the issuance of the Notes, the Company is required to
maintain restricted marketable securities in order to make the first six
scheduled interest payments on the Notes. Such restricted marketable securities
amounted to $104,370,000 and $68,836,000 at December 31, 1996 and December 31,
1997, respectively.
The indenture pursuant to which the Notes were issued contains certain
restrictive covenants which impose limitations on RSL and certain of its
subsidiaries ability to, among other things: (i) incur additional indebtedness,
(ii) pay dividends or make certain other distributions, (iii) issue capital
stock of certain subsidiaries, (iv) guarantee debt, (v) enter into transactions
with shareholders and affiliates, (vi) create liens, (vii) enter into
sale-leaseback transactions, and (viii) sell assets. Notwithstanding the
foregoing, these indentures do not impose restrictions on RSL's ability to
obtain funds by dividends or loans from its subsidiaries.
At December 31, 1996 and 1997, the Company is in compliance with the above
restrictive covenants.
Credit Facilities
At December 31, 1996 and 1997, the Company had a $7,500,000 revolving
credit facility with a bank (the "Revolving Credit Facility"), guaranteed by the
Company's Chairman, all of which was available. At December 31, 1996, the
Company also had a $35,000,000 shareholder standby facility with the Company's
Chairman.
The shareholder standby facility bears interest at the rate of 11% per
annum. In connection with this facility and the Company's Chairman's personal
guarantee of the Revolving Credit Facility, the Company's Chairman received
warrants, which vested over one year, to purchase 459,900 Class B common shares
of the Company (the "Class B Common Stock"). The Company recorded $1,544,000 as
the value of the warrants at the time of their issuance. The Revolving Credit
Facility bears interest at the rate of LIBOR plus 1%. The Shareholder Standby
Facility, in accordance with the contractual agreement, expired upon receipt of
the net cash proceeds from the initial public offering.
The warrants became exercisable on October 3, 1997 at an exercise price of
$.00457 per share and expire in October 2006.
F-15
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
7. NOTES PAYABLE AND LONG-TERM DEBT--(CONTINUED)
During August 1996, the Company obtained a $50,000,000 revolving credit
facility with a bank, guaranteed by the Company's Chairman, and utilized this
facility to repay the bank for all amounts due under the previously outstanding
Revolving Loan Facility provided by the bank and guaranteed by the Company's
Chairman, which was $44,000,000 at the time of repayment. Immediately prior to
the Debt Offering, the Company repaid $35,000,000 of the $44,000,000 borrowed
under the Revolving Credit Facility with the proceeds of the Subordinated
Shareholder Loan (see Note 11) and reduced the outstanding commitment under the
Revolving Credit Facility to $7,500,000.
The Company has a credit agreement which provides for up to $5,000,000 in
committed credit lines to finance its accounts receivable. Interest is payable
at 2 1/4% over the prime rate of interest (prime being 8 1/4% and 8 1/2% at
December 31, 1996 and 1997, respectively). A second credit line provides for up
to $2,000,000 in capital expenditure financing. Interest on this line is payable
at 2 1/2% over the prime rate of interest. During the year ended December 31,
1997, the lines of credit were reduced to $570,000 and $-0-, respectively. The
total amounts outstanding at December 31, 1996 from the above credit lines were
$680,000 and $606,000, respectively, and at December 31, 1997 was $475,000 and
$0-, respectively. The remaining credit line terminates on August 31, 1998.
Borrowings under both of these credit lines are collateralized by a letter of
credit.
The Company, through LDM, has a $10.0 million revolving credit facility.
There was $3.6 million outstanding under this facility at December 31, 1997.
This facility is payable in full on September 30, 2000 and accrues interest at
prime rate plus 2.5% per annum.
Other Financing
In connection with the September 1996 purchase of additional shares of RSL
North America's common stock, the Company issued secured notes totaling
approximately $9,328,000. Such notes and interest were secured by the common
stock acquired, and were payable in annual and quarterly installments,
respectively, and bore interest at the rate of 6%. In 1997, the Company
satisfied the remaining loan obligations with such minority shareholders.
Vendor Financing
At December 31, 1996 and 1997, RSL USA has a series of current notes
payable to different vendors in the amount of $4,282,000 and $976,000,
respectively, which bear interest at the rates from 8% to 14.5%.
One of the Company's primary equipment vendors has provided to certain of
the Company's subsidiaries an aggregate of approximately $50 million in vendor
financing commitments to fund the purchase of additional capital equipment. At
December 31, 1996 and 1997, approximately $39.0 million and $15.8 million was
available, respectively. Borrowings under this agreement are recorded as capital
lease obligations.
F-16
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
7. NOTES PAYABLE AND LONG-TERM DEBT--(CONTINUED)
Long-term debt maturities at December 31, 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED
- ---------------------------------------------------------------------------------
<S> <C>
1998............................................................................. $ 4,604
1999............................................................................. --
2000............................................................................. --
2001............................................................................. --
2002............................................................................. --
2003 and thereafter.............................................................. 300,000
--------
Total............................................................................ 304,604
Less current maturities.......................................................... (4,604)
--------
Long Term Debt and 12 1/4% Senior Notes.......................................... $300,000
--------
--------
</TABLE>
RSL's notes payable had fair values that approximated their carrying
amounts at December 31, 1996. At December 31, 1997, the Senior Notes had a fair
value of approximately $330,000,000. The increase in fair value is primarily due
to changes in the interest rate environment. The remainder of the notes had fair
values which approximated their carrying amounts.
Interest expense on the above notes was approximately $461,000, $10,457,000
and $37,136,000 for the years ended December 31, 1995, 1996 and 1997,
respectively.
8. GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets at December 31, 1996 and 1997 consist of the following
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
------------ --------
<S> <C> <C>
Goodwill......................................................... $ 79,732 $213,527
Deferred financing costs......................................... 10,988 11,655
Other Intangibles................................................ 626 3,331
-------- --------
91,346 228,513
Less accumulated amortization.................................... (3,741) (13,530)
-------- --------
Intangible assets--net........................................... $ 87,605 $214,983
-------- --------
-------- --------
</TABLE>
Amortization expense for the years ended December 31, 1995, 1996 and 1997
was $548,000, $3,193,000 and $9,980,000, respectively.
9. SHAREHOLDERS' EQUITY
Common Stock
During 1996, the Company issued 4,117,522 shares of Class B Common Stock
for cash aggregating $50,000,000. During 1995, 6,411,365 shares of Class B
Common Stock were issued for $1,851,000.
On September 30, 1997, the Company revised its capital structure (the
"Recapitalization"), in part to (i) effect a 2.19-for-one stock split for each
outstanding share of each class of common shares and each outstanding share of
Preferred Stock, (ii) increase the number of authorized shares of its Class A
Common Stock and Class B Common Stock to an aggregate of 438,000,000 shares and
(iii) increase the number of authorized shares of its Preferred Stock to
65,700,000. The holders of the Class A
F-17
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
9. SHAREHOLDERS' EQUITY--(CONTINUED)
Common Stock are entitled to one vote per share, and the holders of the Class B
Common Stock are entitled to ten votes per share.
On September 30, 1997, the Company commenced an initial public offering of
8,280,000 shares of its Class A Shares. The aggregate offering price of the
8,280,000 shares of Class A Common Stock sold in the equity offering to the
public was $182,160,000, with net proceeds to the Company of $167,542,000.
In June 1997, RSL North America's founder and former Chairman elected to
exchange his shares in RSL North America, a subsidiary of the Company, for
shares in the Company. Accordingly, the Company issued 1,457,094 of the Class A
Common Stock, par value $0.00457 per share, of the Company in exchange for
15,619 shares of common stock of RSL North America and recorded approximately
$32,575,000 for each of additional paid in capital and goodwill.
During 1997, the Company issued 712,142 shares of Class A Common Stock upon
the exercise of options.
During 1997, in connection with the acquisition of certain minority
interests, the Company issued 411,105 shares of Class A Common Stock.
Preferred Stock
During 1995, the Company issued 9,243,866 shares of its preferred stock to
the holders of its Class B Common Stock for cash of $13,354,000. The preferred
stock ranked senior to the Company's common stock as to dividends and a
liquidation preference of $1.00 per share. Each share was convertible at the
holder's option into 2.19 shares of Class B Common Stock. All preferred shares
were automatically converted into the Company's Class B Common Stock as the
public offering yielded proceeds in excess of $25,000,000, in accordance with
the terms of the Preferred Stock agreement. Dividends, at the rate of 8%, were
cumulative. Upon conversion of the shares of the preferred stock, the cumulative
dividends were deemed to be cancelled and waived upon conversion. The cumulative
amount of such dividends was approximately $16,000.
10. CAPITAL LEASE OBLIGATIONS
Future minimum annual payments applicable to assets held under capital
lease obligations for years subsequent to December 31, 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED
- --------------------------------------------------------------
<S> <C>
1998.......................................................... $ 7,189
1999.......................................................... 8,346
2000.......................................................... 6,528
2001.......................................................... 4,018
2002.......................................................... 3,373
2003 and thereafter........................................... 625
-------
Total minimum lease obligations............................... 30,079
Less interest................................................. (6,542)
-------
Present value of future minimum lease obligations............. 23,537
Less current portion, included in other current liabilities... (3,429)
-------
Long-term lease obligations at December 31, 1997.............. $20,108
-------
-------
</TABLE>
F-18
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
10. CAPITAL LEASE OBLIGATIONS--(CONTINUED)
The assets and liabilities under capital leases are recorded at the present
value of the minimum lease payments using effective interest rates ranging from
9% to 11% per annum.
Assets held under capital leases aggregated $13,225,000 and $26,632,000 at
December 31, 1996 and 1997, respectively. The related accumulated depreciation
was $825,000 and $2,557,000, respectively.
11. RELATED PARTY TRANSACTIONS
In September 1996, the Company borrowed $35,000,000 from Ronald S. Lauder,
the Chairman of the Board of the Company and the principal shareholder of the
Company, bearing interest at the rate of 11% per annum (the "Subordinated
Shareholder Loan"). The Company repaid the Subordinated Shareholder Loan with
the proceeds of the Shareholder Equity Investment (described below).
The Company used the proceeds of the Subordinated Shareholder Loan to repay
$35,000,000 of the amounts outstanding under the Revolving Credit Facility
available in August 1996 (see Note 7) and reduced the outstanding commitment
amount under the Revolving Credit Facility to $15,000,000 at December 31, 1996
and $7,500,000 at December 31, 1997. The Revolving Credit Facility is personally
guaranteed by the Company's Chairman.
Prior to the closing of the Debt Offering, Ronald S. Lauder, the Company's
Chairman, Leonard A. Lauder, a director of the Company and Ronald S. Lauder's
brother, and Lauder Gaspar Venture LLC ("LGV"), an investment vehicle the
principal investors of which are Ronald S. Lauder and Leonard A. Lauder and the
managing member (through a wholly owned company) of which is Andrew Gaspar, a
director of the Company, purchased an aggregate of 4,117,522 shares of Class B
Common Stock (approximately 11.6% of the outstanding common shares of the
Company on a fully diluted basis) for $50,000,000 (the "Shareholder Equity
Investment"). LGV purchased one-half of such shares and Ronald S. Lauder and
Leonard A. Lauder each purchased one-quarter of such shares.
Nesim N. Bildirici, a director and the Vice President of Mergers and
Acquisitions of the Company, was an employee of both the Company and R.S.
Lauder, Gaspar & Co., L.P. ("RSLAG"), a venture capital company owned and
controlled by Ronald S. Lauder and Andrew Gaspar. During 1996 Mr. Bildirici's
salary was paid by RSLAG and the Company reimbursed RSLAG for a majority of
Mr. Bildirici's salary. During the years ended December 31, 1996 and 1997, the
Company reimbursed RSLAG approximately $130,000 and $287,000, respectively, for
Mr. Bildirici's services. Mr. Bildirici became a full time employee of the
Company as of January 1, 1997.
RSL Management Corporation ("RSL Management"), which is wholly owned by
Ronald S. Lauder, the Chairman of the Board of the Company and the principal
shareholder of the Company, subleases an aggregate of 11,000 square feet of
office space to the Company at an annual rent of $767,000 per annum. RSL
Management subleases such space from The Estee Lauder Companies Inc. ("Estee
Lauder"). Ronald S. Lauder is also a principal shareholder of Estee Lauder and
Leonard A. Lauder, a director of the Company, is the Chief Executive Officer of
Estee Lauder. In addition, RSL Management provides payroll and benefit services
to the Company for an annual fee of $6,000.
The Company has employment contracts with certain of its executive
officers. These agreements expire beginning April 1998 through January 2002
unless terminated earlier by the executive or the Company, and provide for
annual salaries and bonuses based on the performance of the Company. Salary
expense for these officers was approximately $646,000, $1,419,000 and $1,555,000
for the years ended December 31, 1995, 1996 and 1997, respectively. The
aggregate commitment for annual future salaries pursuant to the employment
agreements at December 31, 1997, excluding bonuses, is
F-19
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
11. RELATED PARTY TRANSACTIONS--(CONTINUED)
approximately $1,371,000, $1,098,000, $615,000, $550,000 and $600,000 for 1998,
1999, 2000, 2001, and 2002, respectively.
12. DEFINED CONTRIBUTION PLAN
In 1996, the Company instituted a defined contribution plan which provides
retirement benefits for most of its domestic employees. The Company's
contributions to the defined contribution plan, which are based on a percentage
of the employee's annual compensation subject to certain limitations, were not
significant for the years ended December 31, 1996 and 1997.
13. STOCK OPTION PLANS
1995 Stock Option Plan
In April 1995, the Company established an Incentive Stock Option Plan (as
amended and restated, the "1995 Plan") to reward employees, nonemployee
consultants and directors for service to the Company and to provide incentives
for future service and enhancement of shareholder value. The 1995 Plan is
administered by the Compensation Committee of the Board of Directors of the
Company (the "Committee"). The Committee consists of three members of the Board
of Directors. The Plan provides for awards of up to 2,847,000 shares of Class A
Common Stock of the Company.
The options granted in 1995 vest over a period of three years commencing on
the first anniversary of the date of grant such that the option holder may not
acquire more than 2% of the outstanding capital stock as of the date upon which
the related employment agreement expires. The options granted in 1996 vest in
one-third increments on each of the first, second and third anniversaries of the
grant date, unless a different vesting schedule is designated by the committee.
Further, the options granted under the 1995 Plan terminate on the tenth
anniversary of the date of grant. A total of 2,716,617 options have been granted
under this plan. The Company will not grant further options under the 1995 Plan.
1997 Stock Incentive Plan
During 1997, the Company established the 1997 Stock Incentive Plan (the
"1997 Plan") to attract and motivate key employees of the Company. The 1997 Plan
is administered by the Committee. The 1997 Plan provides for the grant of the
incentive and non-incentive stock options, stock appreciation rights, restricted
stock, and various combinations thereof. The maximum number of shares of
Class A Common Stock available under the 1997 Plan is 3,100,000, with no more
than 500,000 options or stock appreciation rights to be granted to any one
participant in a calendar year. The options vest over a three-year period,
unless a different vesting schedule is designated by the Committee. A total of
432,856 options have been granted under this plan.
1997 Performance Incentive Compensation Plan
During 1997, the Company established the 1997 Performance Incentive
Compensation Plan (the "1997 Performance Plan") to reward employees for superior
performance. Awards under the 1997 Performance Plan may be made to key employees
recommended by the Chief Executive Officer, selected by the Committee and
approved by the Board of Directors. The 1997 Performance Plan provides for the
grant of up to 400,000 shares of Class A Common Stock.
F-20
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
13. STOCK OPTION PLANS--(CONTINUED)
1997 Directors' Compensation Plan
During 1997, the Company adopted the 1997 Directors' Compensation Plan (the
"1997 Directors' Plan"). During the ten year term of the 1997 Directors' Plan,
each non-employee Director will be granted options to acquire a number of
Class A Common Stock with an aggregate fair market value on the date of grant
equal to $50,000, except for the Chairman and the Vice Chairman of the Board,
whose grants have a fair market value of $75,000 and $150,000, respectively. The
1997 Directors' Plan provides for the grant of up to 250,000 shares of Class A
Common Stock. The options vest over a five-year period, subject to certain
acceleration provisions. A total of 17,046 options have been granted under this
plan.
The exercise price of stock options granted under the 1997 Performance
Incentive Compensation Plan and 1997 Directors' Compensation Plan (the "1997
Plans") initially will equal the fair market value of the Class A Common Stock
on the date of the grant and will be increased quarterly based on the yield to
maturity of United States Treasury securities having a maturity approximately
equal to the term of such options.
The Company records stock option grants under the 1997 Stock Incentive
Plan, the 1997 Plans based on the fair market value of the underlying security
on the date of grant. The Company used the expected life of the underlying
security to calculate the fair market value of such security. At each quarter,
the Company compares the index option price to the fair market value of stock at
such quarter, and determines whether any compensation expense should be
recorded. At December 31, 1997, the first measurement date, the indexed exercise
prices for all of the options granted under the 1997 Plans were above the fair
market value of the Class A Common Stock on such date. Accordingly, no
compensation or other expense was recorded for the grant of such stock options
for 1997.
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
OPTIONS EXERCISE PRICE EXERCISE PRICE
--------- -------------- --------------
<S> <C> <C> <C>
Outstanding at January 1, 1995
Granted............................................ 1,423,500 $ 0.000457 $ 0.000457
Exercised.......................................... -- -- --
Rescinded/Canceled................................. -- -- --
--------- -------------- ----------
Outstanding at December 31, 1995..................... 1,423,500 0.000457 0.000457
Granted............................................ 283,824 1.60-2.51 1.73
Exercised.......................................... -- -- --
Rescinded/Canceled................................. -- -- --
--------- -------------- ----------
Outstanding at December 31, 1996..................... 1,707,324 0.000457-2.51 0.29
Granted............................................ 1,459,195 .00457-22.00 10.44
Exercised.......................................... 712,142 .000457 .000457
Rescinded/Canceled................................. -- -- --
--------- -------------- ----------
Outstanding at December 31, 1997..................... 2,454,377 $.000457-22.00 $ 6.41
--------- -------------- ----------
--------- -------------- ----------
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED
RESERVED FOR AVERAGE
EXERCISABLE FUTURE GRANTS EXERCISE PRICE
----------- ------------- -----------------
<S> <C> <C> <C>
December 31, 1995..................................... -- 766,500 $ --
December 31, 1996..................................... 177,701 482,676 0.000457
December 31, 1997..................................... 459,607 3,430,481 0.44
</TABLE>
F-21
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
13. STOCK OPTION PLANS--(CONTINUED)
The following table summarizes information concerning the remaining options
granted under the 1997 Plans outstanding as of December 31, 1997.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- ------------------------------------------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED -----------------------
WEIGHTED AVERAGE WEIGHTED
NUMBER AVERAGE REMAINING NUMBER OF AVERAGE
RANGE OF OF SHARES EXERCISE CONTRACTUAL SHARES EXERCISE
EXERCISE PRICES OUTSTANDING PRICES LIFE EXERCISABLE PRICES
- ------------------------------------------- ----------- --------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.000457 711,358 $0.000457 7.83 -- $ --
$ 0.00457 590,584 $ 0.00457 9.66 350,400 $0.00457
$ 1.60 - $ 2.51 283,824 $ 1.73 8.73 109,207 $ 1.83
$12.142 - $22.00 868,611 $ 17.53 7.98 -- $ --
--------- -------
2,454,377 459,607
--------- -------
--------- -------
</TABLE>
SFAS Statement No. 123, "Accounting for Stock Based Compensation" ("SFAS
No. 123") was issued by the FASB in 1995 and if fully adopted, changes the
methods for recognition of costs on plans similar to those of the Company.
Adoption of the recognition provisions of SFAS No. 123 is optional; however, pro
forma disclosures as if the Company adopted the cost recognition requirements
under SFAS No. 123 are presented below.
Under SFAS No. 123, for options granted, the fair value at the date of
grant was estimated using the Black-Scholes option pricing model. The fair value
was estimated using the minimum value method. Under this method, a volatility
factor of approximately 0.45 was used for options granted on or after the date
of the initial public offering and the minimum value method was used for options
granted prior to the date of the initial public offering, as there was no market
for the Company's common stock in which to measure the stock price volatility.
The following weighted average assumptions were used in calculating the
fair value of the options granted in the years ended December 31, 1995, 1996 and
1997, respectively: risk-free interest rates between 5.63% and 5.95%; no
dividends are expected to be declared; expected life of the options are between
30 and 42 months, between 39 and 51 months and between 18 and 72 months,
respectively; and a maximum contractual life of 10 years.
For purposes of the pro forma disclosures, the estimated fair value of the
options granted is amortized to compensation expense over the options' vesting
period. The Company's pro forma information is as follows:
<TABLE>
<CAPTION>
($ IN THOUSANDS, EXCEPT LOSS PER
COMMON SHARE
AND WEIGHTED AVERAGE FAIR VALUE
OF OPTIONS GRANTED)
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
------- -------- ---------
<S> <C> <C> <C>
Net loss
As reported.................................................... $(9,402) $(38,240) $(100,199)
Pro forma...................................................... $(9,404) $(38,315) $(118,176)
Net loss per common share:
As reported.................................................... $ (1.67) $ (5.13) $ (5.27)
Pro forma...................................................... $ (1.67) $ (5.14) $ (6.22)
Weighted average fair value of options granted during the
Period......................................................... $0.0002 $ 0.26 $ 12.32
</TABLE>
F-22
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
14. COMMITMENTS AND CONTINGENCIES
At December 31, 1997, the Company was committed to unrelated parties for
the rental of office space under operating leases. Minimum annual lease payments
with respect to the leases is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
- ---------------------------------------------------------------------------------
<S> <C>
1998............................................................................. $ 4,018
1999............................................................................. 3,621
2000............................................................................. 3,285
2001............................................................................. 2,798
2002............................................................................. 2,172
2003 and thereafter.............................................................. 1,427
--------
$ 17,321
--------
--------
</TABLE>
Rent expense on the above leases for the years ended December 31, 1995,
1996 and 1997 was $210,000, $2,276,000, and $3,842,000, respectively.
The Company is committed to pay for transmission capacity under certain
operating leases. The minimum annual lease payments with respect to these
agreements is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
- ---------------------------------------------------------------------------------
<S> <C>
1998............................................................................. $ 10,842
1999............................................................................. 8,592
2000............................................................................. 8,087
2001............................................................................. 6,000
2002............................................................................. 5,330
--------
$ 38,851
--------
--------
</TABLE>
Rent expense for the year ended December 31, 1997 was approximately
$9,100,000.
Commitments and Contingencies--The Company is involved in various claims
that arose in the ordinary course of its acquired business, and certain claims
that arose in the ordinary course of its business. The expected settlements from
certain of these matters have been accrued and are recorded as "Other
Liabilities." In management's opinion, the settlement of such claims would not
have a material adverse effect on the Company's consolidated financial position
or results of its operations.
In connection with the acquisition of one of its United States
subsidiaries, the Company recorded what management believed to be its best
estimate of the unfavorable portion related to certain transmission capacity
agreements. During 1997, the Company successfully amended such transmission
capacity agreements. The resulting settlement of approximately $7,000,000 has
been recorded as Other Income.
The Company is a party to separate stockholder agreements with certain
minority stockholders of its subsidiaries, pursuant to which the Company has
granted put rights with roll-up right provisions ("put rights"). These
agreements restrict the sale of the minority stockholders' interest to any
person or entity other than the Company and in certain cases require the Company
to purchase these interests in certain of the Company's subsidiaries. Certain of
the minority stockholders have the option to require the Company to purchase
their interests at any time in exchange for cash or Class A Common Stock (in
most instances, at the sole discretion of the Company) and have the right to
require the Company to purchase their interests in whole or in part at various
times through December 31, 2005 or upon cessation of such stockholder's
employment with the Company for any reason. Generally, the minority
F-23
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
14. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
stockholder remains employed by the Company and receives a salary and a
performance based bonus. The Company has issued put rights to substantially all
of its subsidiaries' minority stockholders at the time the Company acquired a
majority shareholding in the entity acquired or formed. Such put rights were
issued to create an incentive for the Company's minority shareholders to
maximize the long term value of their respective subsidiaries and to provide
liquidity to the shareholders at the time of exercise.
The Company's issuance of put rights did not at the time of grant provide
the recipient of such rights with any tangible value other than the right to put
their minority shares to the Company, in a value for value exchange (fair value
of the minority shares of the subsidiary for fair value of Class A Common Stock
or cash), in most instances, at the sole discretion of the Company. Solely for
the purpose of illustration, if all such options were in effect on December 31,
1997, the Company's aggregate purchase obligation is estimated to be
approximately $65 million.
The Company is contractually committed to the purchase of three
international gateway and two domestic switches. This commitment amounts to
approximately $8.0 million, all of which will be financed under the Company's
existing $50.0 million facility provided by one of the Company's primary
equipment vendors.
Letters of Credit--The Company has outstanding letters of credit
aggregating $550,000 and $6,047,000 at December 31, 1996 and 1997, respectively,
expiring at various dates. Such letters of credit, which were issued as deposits
to vendors or security on leased premises, are fully secured by marketable
securities, certificates of deposit, and the Revolving Credit Facility and are
classified as current assets.
15. SIGNIFICANT CUSTOMER
For the years ended December 31, 1997 and 1996 no customer accounted for
more than 10% of the Company's revenues. For the year ended December 31, 1995,
one customer accounted for 26% of the Company's revenues.
F-24
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
16. OPERATING DATA BY GEOGRAPHIC AREA
The following table provides certain geographic data on the Company's
operations for the years ended December 31, 1995, 1996 and 1997 (in thousands).
<TABLE>
<CAPTION>
OPERATING IDENTIFIABLE
REVENUE INCOME (LOSS) ASSETS
-------- ------------- ------------
<S> <C> <C> <C>
Year ended December 31, 1995
US..................................................................... $ 18,461 $ (6,969) $ 37,760
Europe................................................................. 156 (538) 1,953
Corporate.............................................................. -- (1,874) 13,359
-------- --------- --------
$ 18,617 $ (9,381) $ 53,072
-------- --------- --------
-------- --------- --------
Year ended December 31, 1996
US..................................................................... $ 85,843 $ (11,702) $ 54,509
Europe................................................................. 27,414 (13,438) 50,147
Corporate.............................................................. -- (5,612) 323,313
-------- --------- --------
$113,257 $ (30,752) $427,969
-------- --------- --------
-------- --------- --------
Year ended December 31, 1997
US..................................................................... $194,518 $ (26,119) $118,363
Europe................................................................. 73,653 (35,905) 106,746
Asia and Others........................................................ 32,625 (3,430) 58,905
Corporate.............................................................. -- (15,602) 321,650
-------- --------- --------
$300,796 $ (81,056) $605,664
-------- --------- --------
-------- --------- --------
</TABLE>
Intersegment and intergeographic revenue are not significant to the revenue
of any business segment or geographic location. There is no export revenue from
the United States. Corporate and other assets consist principally of cash and
cash equivalents, marketable securities and goodwill.
17. SUMMARIZED FINANCIAL INFORMATION
The following presents summarized financial information of RSL
Communications PLC a company incorporated in 1996 ("RSL PLC") as of December 31,
1996 and 1997. RSL PLC is a 100% wholly owned subsidiary of the Company. RSL PLC
had no independent operations other than serving solely as a foreign holding
company for certain of the Company's U.S. and European operations. The Notes
issued by RSL PLC are fully and unconditionally guaranteed by the Company. The
Company's financial statements are, except for the Company's capitalization,
corporate overhead expenses, certain operations and available credit facilities,
identical to the financial statements of RSL PLC (in thousands).
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1997
-------------------- --------------------
<S> <C> <C>
Current Assets.................................................... $306,104 $212,568
Non-current Assets................................................ 120,761 324,118
Current Liabilities............................................... 74,948 122,672
Non-current Liabilities........................................... 394,556 557,448
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997
-------------------- --------------------
<S> <C> <C>
Net Revenue....................................................... $113,257 $266,142
Net Loss.......................................................... (34,309) (95,824)
</TABLE>
F-25
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
18. SUBSEQUENT EVENTS
In January 1998, the Company purchased 90% of Telecenter Oy, a Finnish
agent customer base. The Company paid approximately $10.0 million in cash with a
purchase price adjustment based on future results to be calculated in two years.
On February 8, 1998, the Board of Directors authorized the issuance of
$200,000,000 Senior Notes (collectively, "1998 Notes") due 2008 and Senior
Discount Notes (collectively, "1998 Discount Notes") with a discounted value of
approximately $200,000,000.
Such issuance is expected to occur on February 23, 1998. Both the 1998
Notes and the 1998 Discount Notes are guaranteed as to payment of principal and
interest by RSL Communications, Ltd.
19. SUPPLEMENTAL FINANCIAL INFORMATION
The following table sets forth selected unaudited quarterly financial
information for the years ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT LOSS PER SHARE)
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997 FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
Revenues...................................................... $ 42,168 $ 67,193 $ 83,243 $108,192
-------- -------- -------- --------
-------- -------- -------- --------
Net loss...................................................... $(19,147) $(21,570) $(27,342) $(32,140)
-------- -------- -------- --------
-------- -------- -------- --------
Loss per share................................................ $ (1.82) $ (1.90) $ (2.28) $ (0.77)
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average number of shares of common stock
outstanding................................................. 10,541 11,378 11,998 41,633
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
<S> <C> <C> <C> <C>
Revenues...................................................... $ 15,864 $ 23,900 $ 30,458 $ 43,035
-------- -------- -------- --------
-------- -------- -------- --------
Net loss...................................................... $ (4,789) $ (7,489) $ (8,431) $(17,531)
-------- -------- -------- --------
-------- -------- -------- --------
Loss per share................................................ $ (0.75) $ (1.17) $ (1.31) $ (1.66)
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average number of shares of common stock
outstanding................................................. 6,411 6,411 6,426 10,541
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
20. SUBSEQUENT EVENTS (UNAUDITED)
On February 27, 1998, RSL PLC consummated concurrent offerings of
$200,000,000 9 1/8% Senior Notes due 2008 and $328,084,000 ($200,000,000 initial
accreted value) 10 1/8% Senior Discount Notes due 2008. The notes are guaranteed
by RSL.
On March 16, 1998, RSL PLC consummated an offering of DM296,000,000
(approximately $99,100,000 initial accreted value) 10% Senior Discount Notes due
2008. These notes are guaranteed by RSL.
On April 3, 1998 the Company redeemed $90,000,000 of the original aggregate
principal amount of the Notes with the net proceeds of the initial public
offering.
In April, 1998, the Company entered into an agreement with CBS Corporation
("CBS") pursuant to which the Company agreed to acquire the business of
Westinghouse Communications ("WestComm"), a division of CBS, for a cash purchase
price of approximately $90,000,000.
F-26
<PAGE>
RSL COMMUNICATIONS, LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
<S> <C> <C>
ASSETS
Cash and Cash Equivalents........................................................ $144,894 $ 82,196
Accounts Receivable, Net......................................................... 70,610 185,744
Securities--Available for Sale................................................... 13,858 --
Prepaid Expenses and Other Current Assets........................................ 16,073 85,379
-------- -----------
Total Current Assets............................................................. 245,435 353,319
-------- -----------
Restricted Marketable Securities--Held to Maturity............................... 68,836 30,579
Property and Equipment........................................................... 85,581 227,526
Less: Accumulated Depreciation................................................... (13,804) (32,069)
Investment in Unconsolidated Subsidiaries........................................ -- 35,458
Goodwill and Other Intangibles, Net.............................................. 214,983 516,856
Deposits and Other Assets........................................................ 4,633 35,380
-------- -----------
Total Assets................................................................... $605,664 $ 1,167,049
-------- -----------
-------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts Payable and Other Liabilities........................................... $154,324 $ 364,260
Short-term Debt.................................................................. 8,033 17,700
-------- -----------
Total Current Liabilities........................................................ 162,357 381,960
-------- -----------
Long-term Debt................................................................... 20,108 21,197
Senior Notes and Senior Discount Notes, Net...................................... 296,500 697,570
Other Liabilities--Noncurrent.................................................... -- 48,303
-------- -----------
Total Liabilities................................................................ 478,965 1,149,030
-------- -----------
Other Shareholders' Capital...................................................... 274,638 322,209
Accumulated Deficit.............................................................. (147,939) (304,190)
-------- -----------
Total Shareholders' Equity....................................................... 126,699 18,019
-------- -----------
Total Liabilities and Shareholders' Equity..................................... $605,664 $ 1,167,049
-------- -----------
-------- -----------
</TABLE>
See notes to condensed consolidated financial statements.
F-27
<PAGE>
RSL COMMUNICATIONS, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR LOSS PER SHARE)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1997 1998
------------- -------------
<S> <C> <C>
Revenues......................................................................... $ 192,604 $ 564,118
Operating costs and expenses
Cost of Services (exclusive of depreciation and amortization shown separately
below)...................................................................... (171,203) (462,181)
Selling, general and administrative expenses................................... (62,085) (147,494)
Depreciation and amortization.................................................. (14,367) (43,282)
--------- ---------
(247,655) (652,957)
--------- ---------
Loss from operations............................................................. (55,051) (88,839)
Interest income.................................................................. 9,947 13,239
Interest expense................................................................. (28,910) (51,646)
Other income (expense)-net....................................................... 6,572 445
Foreign exchange loss............................................................ -- (10,621)
Minority interest................................................................ (212) 4,322
Income taxes..................................................................... (405) (726)
Loss in equity interest of unconsolidated subsidiaries........................... -- (1,625)
--------- ---------
Loss before extraordinary item................................................... (68,059) (135,451)
Extraordinary item............................................................... -- (20,800)
--------- ---------
Net loss......................................................................... $ (68,059) $(156,251)
--------- ---------
--------- ---------
Loss per share of common stock before extraordinary item......................... $ (2.16) $ (3.17)
Net loss per share............................................................... $ (2.16) $ (3.66)
</TABLE>
See notes to condensed consolidated financial statements.
F-28
<PAGE>
RSL COMMUNICATIONS, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1997 1998
-------- ---------
<S> <C> <C>
Net loss............................................................................... $(68,059) $(156,251)
Depreciation and amortization.......................................................... 14,367 43,279
Working capital change and other....................................................... (6,751) (3,395)
-------- ---------
Net cash used in operations....................................................... (60,443) (116,367)
-------- ---------
Acquisitions of subsidiaries........................................................... (26,828) (271,162)
Purchase of property and equipment..................................................... (14,267) (99,882)
Proceeds from marketable securities.................................................... 43,735 13,858
Proceeds from maturities of restricted securities...................................... 22,665 18,750
Proceeds from sales of restricted securities........................................... -- 21,889
Other.................................................................................. -- 3,775
-------- ---------
Net cash provided by (used in) investing activities............................... 25,305 (312,772)
-------- ---------
Proceeds from issuance of 1998 Notes................................................... -- 499,090
Payment of offering cost............................................................... -- (5,647)
Retirement of 1996 Notes............................................................... -- (127,493)
Proceeds from notes payable............................................................ -- 3,189
Payment of notes payable............................................................... (13,542) --
Proceeds from issuance of Class A shares............................................... -- 538
Other.................................................................................. (1,434) (2,666)
-------- ---------
Net cash (used in) provided by financing activities............................... (14,976) 367,011
-------- ---------
(Decrease) increase in cash and cash equivalents....................................... (50,114) (62,128)
Effects of foreign currency on cash and cash equivalents............................... (1,248) (570)
Cash and cash equivalents at beginning of period....................................... 104,068 144,894
-------- ---------
Cash and cash equivalents at end of period............................................. $ 52,706 $ 82,196
-------- ---------
-------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid for interest................................................................. $ 23,185 $ 22,561
-------- ---------
-------- ---------
SUPPLEMENTAL SCHEDULE OF NON-
CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of Class A Common Stock....................................................... $ 32,582 $ 8,712
-------- ---------
-------- ---------
Assets acquired under capital lease obligations........................................ $ 12,568 $ 4,986
-------- ---------
-------- ---------
Acquisition of distribution rights..................................................... $ -- $ 45,000
-------- ---------
-------- ---------
</TABLE>
See notes to condensed consolidated financial statements.
F-29
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
1. BASIS OF PRESENTATION
The condensed consolidated financial statements of which these notes are
part have been prepared by RSL Communications, Ltd. ("RSL") and RSL
Communications PLC, a wholly owned subsidiary of RSL ("RSL PLC" and, together
with RSL and their direct and indirect subsidiaries, the "Company"), pursuant to
the rules and regulations of the Securities and Exchange Commission (the
"Commission"). Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations; however, in the opinion of management of the Company, the Condensed
Consolidated Financial Statements include all adjustments, consisting only of
normal recurring accruals, necessary to present fairly the financial information
for such periods. These Condensed Consolidated Financial Statements should be
read in conjunction with the Consolidated Financial Statements of RSL and the
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
2. PRIVATE PLACEMENT OF NOTES AND EXCHANGE OFFER AND EXTRAORDINARY ITEM
On February 27, 1998, RSL PLC completed concurrent offerings (the "1998
U.S. Offerings") of $200.0 million principal amount of 9 1/8% Senior Notes due
2008 and $328.1 million principal amount at maturity ($200.0 million initial
accreted value) of 10 1/8% Senior Discount Notes due 2008 (together, the "1998
U.S. Notes"). The 1998 U.S. Offerings generated gross proceeds to the Company of
$400.0 million. On March 16, 1998, RSL PLC completed an offering (the "1998 DM
Offering," and together with the 1998 U.S. Offerings, the "Offerings") of 182.0
million Deutsche Mark denominated 10% Senior Discount Notes due 2008 (the "1998
DM Notes," and together with the 1998 U.S. Notes, the "1998 Notes"). The 1998 DM
Offering generated proceeds to the Company of $99.1 million. The 1998 Notes and
the 12 1/4% Senior Notes due 2006 (the "1996 Notes") of RSL PLC are collectively
referred to herein as the "Notes". The Notes are fully and unconditionally
guaranteed as to payment of principal, interest and any other amounts thereof by
RSL.
In connection with the Offerings, RSL PLC entered into Registration Rights
Agreements for the benefit of the holders of the 1998 Notes (the "Registration
Rights Agreements"), pursuant to which RSL PLC agreed to offer to exchange the
1998 Notes for substantially identical notes registered under the Securities
Act. In May 1998, in accordance with the Registration Rights Agreements, RSL and
RSL PLC offered for exchange the 1998 Notes for substantially identical notes
registered under the Securities Act. The Company's Registration Statement on
Form S-4 (Registration No.333-49857) filed with the Commission with respect to
such offering was declared effective by the Commission on May 12, 1998.
In April 1998, the Company used approximately $101.0 million of the net
proceeds from its initial public offering of shares of Class A Common Stock (the
"IPO") in 1997 to redeem (the "Equity Clawback") $90.0 million of the 1996 Notes
at a premium of $11.0 million, as permitted under the 1996 Indenture. In April
1998, the Company used approximately $43.1 million to redeem (the "Buyback")
$37.5 million of the 1996 Notes at a premium of $5.6 million, as permitted under
the 1996 Indenture. The redemption premiums, and part of the discount and
offering cost were expensed in the amount of $20.8 million in the second quarter
of 1998 as an extraordinary item.
3. REGISTRATION OF SHARES
In March 1998, the Company registered 1,152,715 shares of Class A Common
Stock to be issued pursuant to the terms of a warrant agreement governing the
Warrants (the "Warrant Registration") and 300,000 shares of Class A Common Stock
to be sold by Bukfenc, Inc. a corporation wholly owned by Andrew Gaspar, former
Vice Chairman of the Company, and members of his family (the "Selling
F-30
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998--(CONTINUED)
3. REGISTRATION OF SHARES--(CONTINUED)
Shareholder") (which necessarily assumes the conversion by the Selling
Shareholder of an identical number of shares of Class B Common Stock). The
Warrant Registration was required pursuant to a registration rights agreement
entered into in connection with the private offering (the "1996 Units Offering")
of 300,000 units (the "Units") each consisting of (i) $1,000 principal amount of
12 1/4% Senior Notes due 2006 and (ii) one warrant to purchase 3.975 shares of
Class A Common Stock of RSL (each a "Warrant").
In August 1998, the Company filed a registration statement for a public
offering by the Company and certain of its shareholders of shares of Class A
Common Stock (the "Pending Registration").
4. EFFECTS OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS
No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosure About
Segments of an Enterprise and Related Information." The Company adopted SFAS
No. 130 during the nine month period ended September 30, 1998. The Company has
determined to present the data on a geographical basis for SFAS No. 131.
SFAS No. 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, it has no impact on the
Company's net income. Comprehensive income includes both net income and other
comprehensive income. Other comprehensive loss for the nine months ended
September 30, 1998 and September 30, 1997 of $6.7 million and $1.2 million,
respectively, represented foreign currency translation adjustment. Accumulated
other comprehensive loss included in the accompanying condensed consolidated
balance sheet as of September 30, 1998 and September 30, 1997 was $12.0
million and $1.8 million, respectively, consisting of the accumulated foreign
currency translation adjustment.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards for derivative instruments and hedging activities. Generally, it
requires that an entity recognized all derivatives as either an asset or
liability and measure those instruments at fair value, as well as identify the
conditions for which a derivative may be specifically designed as a hedge. The
Company has not yet determined the impact on its financial statements of the
adoption of SFAS 133.
5. NET LOSS PER SHARE
Net loss per share is computed on the basis of the weighted average number
of common shares outstanding during the period. The average number of shares
outstanding for the nine month period ended September 30, 1997 have been
presented retroactively to give effect to the Company's recapitalization in
September 1997.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1997 1998
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Weighted average number of shares of
common stock outstanding.....................................................
31,541 42,740
</TABLE>
Diluted income (loss) per share amounts are not presented because the
inclusion of these amounts would be anti-dilutive.
F-31
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998--(CONTINUED)
6. ACQUISITIONS
In January 1998, RSL Finland purchased 90% of the equity of Telecenter OY,
an independent sales agent in Finland, for approximately $30.5 million.
In March 1998, RSL COM Australia Pty. Ltd., a subsidiary of the Company,
acquired the customer base of First Direct Communications Pty, Limited and Link
Telecommunications Pty Ltd., two switchless mobile telecommunications resellers,
for approximately $18 million.
In April 1998, the Company entered into an agreement with CBS Corporation
("CBS") pursuant to which the Company agreed to acquire the business of
Westinghouse Communications ("WestComm"), a division of CBS, for a cash purchase
price of approximately $90.0 million (the "WestComm Acquisition") plus the
assumption of certain liabilities amounting to less than $5.0 million. WestComm
provides both voice telephony and data services (including frame relay and
TCP/IP networks) to a customer base consisting primarily of small to medium size
businesses in the United States. WestComm operates six switches strategically
located in the United States and employs approximately 280 people. The
transaction closed in July 1998.
In May 1998, RSL Sweden purchased 100% of the equity of Tele 2001, a
Swedish Telecommunications reseller, for approximately $1.0 million.
In June 1998, the Company entered into an agreement with British Columbia
Railway Company pursuant to which the Company agreed to acquire (the "Westel
Acquisition") 100% of Westel Telecommunications Ltd. ("Westel") for a cash
purchase price of approximately $36.7 million. Westel offers a broad range of
enhanced telecommunications services (including long distance, data, private
line and Internet access) to a customer base consisting primarily of commercial
and residential customers located in British Columbia. The Westel Acquisition
closed on July 31, 1998. The Company accounts for the Westel Acquisition under
the purchase method of accounting.
In connection with the Westel Acquisition and in compliance with the
Canadian Telecommunications Act (the "Telecom Act"), the Company agreed to
transfer (the "MK Network Transfer") Westel's "telecommunications facilities"
(as defined in the Telecom Act) to MK Telecom Network Inc. ("MK Network"), an
entity in which the Company owns a 46.7% beneficial interest, for a purchase
price of approximately $6.5 million, the net realizable value of the assets
transferred to MK Network (such assets were purchased in the Westel
acquisition). The MK Network Transfer was effective as of July 31, 1998. The
Company recorded its investment in MK Network as an equity investment which was
completed through a transfer of assets, which were recorded at the Company's
historical cost basis (which also approximates net realizable value). The assets
transferred consist of telecommunications microwave facilities. Neither Westel
nor MK Network and their respective owners are related parties.
In July 1998, RSL Italy acquired 75% of the equity of Comesa, a
telecommunications company located in Northern Italy, for approximately
$1.0 million.
In July 1998, RSL COM France purchased 100% of the equity of Geovox SARL, a
prepaid calling card company operating in Paris, France for approximately
$6.5 million.
In July 1998, RSL Austria acquired 100% of the equity of TC Telecom GmbH, a
telecommunications reseller located in Austria, for approximately $1.1 million.
In August 1998, the Company acquired the business of Motorola Tel.co
("Motorola Tel.co") in the United Kingdom, Germany and Belgium from Motorola
Inc. for approximately $68.1 million. Motorola Tel.co resells wireless services
and related products in these countries to a base of over 360,000
F-32
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998--(CONTINUED)
6. ACQUISITIONS--(CONTINUED)
subscribers. This transaction significantly increases the number of direct
customer relationships in Europe and will allow the Company to cross-sell long
distance and wireless services.
All of the above acquisitions have been accounted for by the purchase
method of accounting and, accordingly, the purchase price has been allocated to
the assets acquired based on their estimated fair value at the date of
acquisition and is being amortized using the straight-line method over fifteen
years.
The valuation of the above acquired assets and liabilities, including
goodwill, is final at September 30, 1998.
In May 1998, the Company acquired for approximately $33.6 million a 49.86%
ownership interest in Telegate Holding GmbH ("Telegate Holding"), which holds a
54.55% ownership interest in Telegate AG ("Telegate"), resulting in a 27.19%
economic interest in Telegate. Telegate is a directory information provider in
Germany. The Company is accounting for the investment using the equity method of
accounting. The investment was included in investment in unconsolidated
subsidiaries and had been adjusted for the Company's pro-rata allocable loss.
In connection with this transaction, the Company granted to Metro Holding,
a minority shareholder of Telegate Holding, the right (the "Telegate Put
Option") to exchange its shares in Telegate Holding, representing 25% on a fully
diluted basis of the shares of Telegate, for Class A Common Stock of the
Company. The Telegate Put Option is only exercisable if Telegate has a positive
EBITDA (as defined) for a three month period ending on or before May 31, 1999
and if any class of securities of Telegate is not, at such time, publicly
traded. If the Telegate Put Option is exercised, at such time, the equity values
of Telegate Holding and the Company would be determined. The exercise of the
Telegate Put Option will require the Company to begin accounting for Telegate as
a majority controlled consolidated subsidiary. The Company will also be
required, at such time, to commence a fair value study to determine the
allocation of its purchase price for the additional Telegate Holding shares,
between the proportionate net assets acquired and liabilities assumed.
Currently, there has been no accounting treatment applied to the Telegate Put
Option.
In June 1998, the Company entered into a marketing and distribution
services agreement with Metro Holding AG ("Metro Holding"), the management
holding company for Metro AG, one of the largest retailers in Europe. Under this
agreement, Metro Holding will assist the Company in promoting, marketing,
selling and distributing the Company's services through Metro AG's wholesale and
retail operations in Europe. This arrangement is designed to provide the Company
access to Metro AG's extensive distribution network and customer base (which
includes a large number of small and medium-sized businesses) and is expected to
significantly accelerate the Company's penetration into key European markets. In
connection with its alliance with the Company, Metro Holding initially acquired
in April 1998 a 12.5% equity interest in RSL Europe. In June 1998, Metro Holding
converted all of its interest in RSL Europe into 1,607,142 shares of Class A
Common Stock (based on value for value) and purchased an equal number of
Class A Common Stock from certain shareholders of the Company. In the aggregate,
Metro Holding acquired approximately 7.2% of the outstanding stock of the
Company, which it is required to hold until at least April 1, 2001. The Company
has recorded in the financial statements the issuance of 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 asset in a like amount which is being amortized over the five-year life of
the agreement.
The Company has provided its Austrian subsidiary's minority shareholder
with the right to acquire additional shareholdings upon the occurrence of
certain events. If this shareholder chooses to exercise his option, it will
cause him to make a pro rata investment into the Company based on an independent
F-33
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998--(CONTINUED)
6. ACQUISITIONS--(CONTINUED)
valuation of the Company at the time notice to exercise is presented to the
Company. The value of this option is not material.
7. SUMMARIZED FINANCIAL INFORMATION FOR RSL PLC
The following presents summarized financial information of RSL PLC as of
September 30, 1998 and as of December 31, 1997. RSL PLC had no independent
operations other than serving solely as a foreign holding company for the
Company's North American and European operations. The Notes issued by RSL PLC
are fully and unconditionally guaranteed by RSL. RSL has not presented separate
financial statements and other related disclosure concerning RSL PLC because
management has determined that such information is not material to shareholders
or holders of the Notes. RSL's financial statements are, except for RSL's
capitalization, Delta Three operations, Asia/Pacific Rim operations, Latin
American operations, corporate overhead expenses and available credit
facilities, identical to the financial statements of RSL PLC.
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Current Assets................................................................. $212,568 $ 302,699
Non-current Assets............................................................. 324,118 737,064
Current Liabilities............................................................ 122,672 349,782
Non-current Liabilities........................................................ 557,448 938,967
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1997 1998
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Net Revenue...................................................................... $ 178,711 $ 473,482
Net Loss......................................................................... (58,243) (138,506)
</TABLE>
8. SUBSEQUENT EVENTS
In 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 proceeds to the Company of approximately $90.5
million. The 12% Notes are fully and unconditionally guaranteed as to payment of
principal, interest and any other amounts thereof by RSL.
In December 1998, RSL PLC issued (the "10 1/2% Notes Offering")
$200 million aggregate principal amount of 10 1/2% Senior Notes due 2008 (the
"10 1/2% Notes"). The 10 1/2% Notes generated proceeds to the Company of
approximately $196.1 million. The 10 1/2% Notes are fully and unconditionally
guaranteed as to payment of principal, interest and any other amounts thereof by
RSL.
On December 1, 1998, the Company issued 7,000,000 shares of Class A Common
Stock in a registered offering under the Securities Act. An additional 544,278
shares of Class A Common Stock were issued by the Company on December 15, 1998
pursuant to underwriters' overallotment options. The net proceeds to the Company
were approximately $169.0 million after deducting the underwriting discount and
estimated expenses.
F-34
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
International Telecommunications Group Ltd. and Subsidiaries
We have audited the consolidated statements of operations and accumulated
deficit and of cash flows of International Telecommunications Group Ltd. and
subsidiaries for the nine months ended September 30, 1995. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements of International
Telecommunications Group Ltd. and subsidiaries present fairly, in all material
respects, the results of their operations and their cash flows for the nine
months ended September 30, 1995 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
New York, New York
March 14, 1997
F-35
<PAGE>
INTERNATIONAL TELECOMMUNICATIONS GROUP LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
NINE MONTHS ENDED SEPTEMBER 30, 1995
<TABLE>
<S> <C>
Revenues......................................................................................... $ 26,351,634
Operating Costs and Expenses
Cost of Services............................................................................... 24,614,337
Selling, General and Administrative Expenses................................................... 6,299,188
------------
30,913,525
------------
Loss from Operations............................................................................. (4,561,891)
Interest Income.................................................................................. 56,148
Interest Expense................................................................................. (345,212)
------------
Net Loss......................................................................................... (4,850,955)
Accumulated Deficit, January 1, 1995............................................................. (5,153,000)
------------
Accumulated Deficit, September 30, 1995.......................................................... $(10,003,955)
------------
------------
</TABLE>
See notes to consolidated financial statements.
F-36
<PAGE>
INTERNATIONAL TELECOMMUNICATIONS GROUP LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1995
<TABLE>
<S> <C>
Cash Flows from Operating Activities:
Net loss........................................................................................ $(4,850,955)
Adjustments to reconcile net loss to net cash provided by operating activities, net of effects
of purchase of subsidiaries:
Depreciation and amortization................................................................ 379,782
Provision for losses on accounts receivable.................................................. 2,881,440
Changes in operating assets and liabilities:
Increase in accounts receivables........................................................... (9,204,455)
Decrease in accounts receivables-affiliates................................................ 111,434
Increase in prepaid expenses and other current assets...................................... (325,013)
Increase in deposits and other assets...................................................... (398,003)
Increase in accounts payable and accrued expenses.......................................... 11,849,193
Increase in other current liabilities...................................................... 601,084
Increase in other liabilities.............................................................. 1,355,703
Decrease in due to affiliates.............................................................. (534,941)
-----------
Net cash provided by operating activities............................................... 1,865,269
-----------
Cash Flows From Investing Activities:
Acquisition of subsidiary, net of cash acquired................................................. (1,500,000)
Purchase of marketable debt securities.......................................................... (2,200,000)
Purchase of property and equipment.............................................................. (446,517)
-----------
Net cash used in investing activities........................................................ (4,146,517)
-----------
Cash Flows from Financing Activities:
Repayment of short-term note payable............................................................ (1,000,000)
Proceeds from issuance of common stock.......................................................... 5,749,300
Proceeds from issuance of preferred stock....................................................... 3,000,000
Principal payments under capital lease obligations.............................................. (100,166)
Repayment of long-term debt..................................................................... (241,080)
-----------
Net cash provided by financing activities.................................................... 7,408,054
-----------
Increase in Cash.................................................................................. 5,126,806
Cash at January 1, 1995........................................................................... 451,865
-----------
Cash at September 30, 1995........................................................................ $ 5,578,671
-----------
-----------
Supplemental Disclosure of Cash Flows Information:
Cash paid for:
Interest........................................................................................ $ 185,996
-----------
-----------
Supplemental Schedule of Noncash Investing Activities-Assets acquired under capital lease
obligation...................................................................................... $ 443,710
-----------
-----------
</TABLE>
See notes to consolidated financial statements.
F-37
<PAGE>
INTERNATIONAL TELECOMMUNICATIONS GROUP LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1995
1. BUSINESS DESCRIPTION
International Telecommunications Group Ltd. and its subsidiaries ("RSL
North America") operate a domestic and international communications network
which provides international and domestic long distance telephone services for
businesses and individuals in the United States and abroad.
2. ACQUISITION
Effective September 1, 1995, RSL North America's subsidiary International
Telecommunications Corporation ("RSL USA") (collectively, "RSL North America")
consummated a stock purchase agreement with Cyberlink, Inc. ("Cyberlink") and
Cyberlink's principal stockholder.
The agreement provided for the purchase of 51% of the capital stock of
Cyberlink. The purchase price consisted of $1,500,000 paid to Cyberlink and
assumption of net liabilities of $14,131,000. In connection with the purchase of
Cyberlink, the Company recorded approximately $15,631,000 of goodwill as of
September 30, 1995.
In connection with the acquisition of Cyberlink, the 49% minority
stockholders of Cyberlink may sell their shares to RSL USA at fair market value
if RSL USA consummates an initial public offering of its securities. RSL USA can
call the 49% minority stockholders shares at any time after December 31, 1996
for a price equal to 49% of the sum of eight times Cyberlink's average monthly
revenues of the last quarter prior to exercise date plus cash minus long-term
liabilities.
The acquisition has been accounted for by the purchase method of
accounting, and accordingly, the purchase price has been allocated to the assets
acquired and liabilities assumed based on their estimated fair values at the
date of acquisition. The excess of the purchase price over the estimated fair
values of the net assets acquired has been recorded as goodwill, which will be
amortized over fifteen years.
The accompanying consolidated statements of operations and accumulated
deficit and cash flows include the results of Cyberlink from its date of
acquisition through September 30, 1995.
The following presents the unaudited pro forma consolidated statement of
operations of the Company for the nine months ended September 30, 1995, assuming
the Company had purchased Cyberlink at January 1, 1995. The consolidated
statement does not necessarily represent what the Company's results of
operations would have been had such acquisition actually occurred on such date,
or of results to be achieved in the future:
<TABLE>
<CAPTION>
PRO FORMA FOR THE NINE
MONTHS ENDED
SEPTEMBER 30, 1995
----------------------
(UNAUDITED)
<S> <C>
Revenue.................................................... $ 40,504,172
Operating Costs and Expenses
Cost of services......................................... 37,087,243
Selling, general and administrative expenses............. 23,555,216
------------
60,642,459
------------
Loss from operations....................................... (20,138,287)
Interest income............................................ 56,148
Interest expense........................................... (738,496)
------------
Net loss................................................... $(20,820,635)
------------
------------
</TABLE>
F-38
<PAGE>
INTERNATIONAL TELECOMMUNICATIONS GROUP LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1995
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation--The consolidated
financial statements include the accounts of International Telecommunications
Group Ltd. and its majority-owned subsidiaries. The Company has included 100% of
its subsidiaries' operating losses since the minority interests' investment has
been reduced to zero. All material intercompany accounts and transactions have
been eliminated. All of the Company's subsidiaries' fiscal years end
December 31.
Management Assumptions--The preparation of the consolidated financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities and the reported amounts of revenues and expenses. Such
estimates primarily relate to reserves recorded for doubtful accounts and
accruals for litigation and other claims. Actual results could differ from these
estimates.
Revenue Recognition--The Company records revenue based on minutes (or
fractions thereof) of customer usage.
The Company records payments received in advance for prepaid calling card
services and services to be supplied under contractual agreements as deferred
revenues until such related services are provided. Deferred revenue is included
in other current liabilities.
Goodwill--Goodwill represents the excess of cost over the fair value of the
net assets of acquired entities, and is being amortized using the straight-line
method over fifteen years. The Company periodically reviews the value of its
goodwill to determine if an impairment has occurred. The Company measures the
potential impairment of recorded goodwill by the undiscounted value of expected
future cash flows in relation to its net capital investment in the subsidiary.
Based on its review, the Company does not believe that an impairment of its
goodwill has occurred.
Amortization expense for the nine months ended September 30, 1996 was
$86,838.
Property and Equipment and Related Depreciation--Property and equipment are
stated at cost or fair values at the date of acquisition, and in the case of
equipment under capital leases, the present value of the future minimum lease
payments, less accumulated depreciation. Depreciation is calculated using the
straight-line method over the estimated useful lives of the depreciable assets,
which range from five to fifteen years. Improvements are capitalized, while
repair and maintenance costs are charged to operations as incurred. Construction
in progress represents costs incurred in connection with the building of a
switch facility center.
Deposits--Deposits consist principally of amounts paid to the Company's
providers of telephone access lines.
Income Taxes--The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for
Income Taxes. SFAS No. 109 establishes financial accounting and reporting
standards for the effect of income taxes that result from activities during the
current and preceding years. SFAS No. 109 requires an asset and liability
approach for financial reporting for income taxes.
New Accounting Standards--During 1995, the Company adopted SFAS No. 121,
Impairment of Long-Lived Assets. There was no adjustment recorded as a result of
adopting this standard. The Company periodically compares the carrying value of
its long-lived assets, principally property and equipment, to undiscounted cash
flows generated by the long-lived assets. The Company's undiscounted cash flows
exceed the carrying value of its long-lived assets.
F-39
<PAGE>
INTERNATIONAL TELECOMMUNICATIONS GROUP LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1995
4. CONCENTRATION OF CREDIT RISK
The Company is subject to significant concentrations of credit risk which
consist principally of trade accounts receivable. The Company sells a
significant portion of its services to other carriers and, as a result,
maintains significant receivable balances with certain carriers. If the
financial condition and operations of these customers deteriorate below critical
levels, the Company's operating results could be adversely affected. During
1995, one of the Company's customers, which represented approximately 18% of the
Company's sales for the nine months ended September 30, 1995, failed to meet
minimum payments schedules and, as a result, the Company terminated services to
this customer. Consequently, the customer refused to pay outstanding receivable
balances totaling approximately $4,653,000. At September 30, 1995, the Company
had written off the entire $4,653,000. The Company has commenced legal
proceedings to recover amounts owed to the Company.
The Company now performs ongoing credit evaluations of its customer's
financial condition and requires collateral in the form of deposits in certain
circumstances.
5. INCOME TAXES
No provision for income taxes has been made because the Company has
sustained cumulative losses since the commencement of its operations in 1994.
For the nine months ended September 30, 1995, the Company had net operating loss
carryforwards generated primarily in the United States of approximately
$10,000,000. The net operating loss carryforwards will expire at various dates
beginning in 2009 through 2010 if not utilized.
In accordance with SFAS No. 109, the Company has computed the components of
deferred income taxes as follows:
<TABLE>
<S> <C>
Deferred tax assets....................................... $ 8,120,000
Less valuation allowance.................................. (8,120,000)
-----------
Net deferred tax assets................................. $ --
-----------
-----------
</TABLE>
The Company's net operating losses and legal reserves generated the
deferred tax assets. At September 30, 1995, a valuation allowance of $8,120,000
is provided as the realization of the deferred tax benefits is not likely.
6. NOTES PAYABLE AND LONG-TERM DEBT
RSL USA has a series of notes payable to different vendors in the amount of
$1,136,712 which bear interest at rates from 8% to 14.5%, of which $874,066 is
current.
Cyberlink has a credit agreement which provides for up to $5,000,000 in
committed credit lines to finance its accounts receivable. Interest is payable
at 2 1/4% over the prime rate of interest (prime being 8.75% at September 30,
1995). A second credit line provides for up to $2,000,000 in capital expenditure
financing with interest payable at 2 1/2% over the prime rate. The total amounts
outstanding at September 30, 1995 from the above credit lines are $1,713,296 and
$0, respectively. The credit lines terminate on August 31, 1998.
Cyberlink has a long-term note payable to a vendor in the amount of
$1,000,000 which bears interest at the rate of 10%, commencing January 1, 1997.
RSL North America's notes payable had fair values that approximated their
carrying amounts.
Interest expense on the above notes was approximately $190,603 for the nine
months ended September 30, 1995.
F-40
<PAGE>
INTERNATIONAL TELECOMMUNICATIONS GROUP LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1995
7. EMPLOYMENT AGREEMENTS
The Company has employment contracts with certain of its executive
officers. These agreements expire beginning April 1998 through May 2000 unless
terminated earlier by the executive or the Company, and provides for an annual
base salary. Salary expense for the officers was $253,750 for the nine months
ended September 30, 1995. The aggregate commitment for annual future salaries at
September 30, 1995, excluding bonuses, was approximately $453,750 for 1996,
$454,500, $300,000, $200,000 and $116,667 for 1997, 1998, 1999 and 2000,
respectively.
8. COMMITMENTS AND CONTINGENCIES
At September 30, 1995, the Company is committed to unrelated parties for
the purchase of certain capital assets and the rental of office space under
operating leases. Minimum annual lease payments with respect to the leases and
capital commitment is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
- ----------------------------------------------------------
<S> <C>
1996...................................................... $ 849,435
1997...................................................... 808,300
1998...................................................... 546,760
1999...................................................... 366,998
2000...................................................... 305,226
2001 and thereafter....................................... 431,612
-----------
$ 3,308,331
-----------
-----------
</TABLE>
Rent expense for the nine months ended September 30, 1995 was $173,072.
The Company is committed to the rental of transmission capacity under
certain operating leases. The minimum annual lease payments with respect to
these agreements is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
- ----------------------------------------------------------
<S> <C>
1996...................................................... $20,400,000
1997...................................................... 38,000,000
1998...................................................... 7,500,000
-----------
$65,900,000
-----------
-----------
</TABLE>
The Company is currently negotiating the termination of these operating
leases.
Litigation and Other Claims--The Company is involved in various litigation
and other claims that arose in the ordinary course of its acquired businesses
prior to the Company's acquisition of such businesses. The expected settlements
from these matters have been accrued and are recorded as "Other Liabilities." In
management's opinion, the settlement of such litigation and claims would not
have a material adverse effect on the Company's consolidated financial position
or results of its operations.
Letters of Credit--The Company has outstanding letters of credit
aggregating approximately $76,000 at September 30, 1995, expiring at various
dates between June 1, 1996 and August 8, 1996. Such letters of credit, which
were issued as deposits to vendors or security on leased premises, are fully
secured by certificates of deposit and are classified as current assets.
9. SIGNIFICANT CUSTOMER
For the nine months ended September 30, 1995, one customer accounted for
18% of the Company's revenues.
F-41
<PAGE>
PRINCIPAL OFFICE OF THE COMPANY AND THE ISSUER
HEADQUARTERS
CLARENDON HOUSE
CHURCH STREET
HAMILTON HM CX
EXECUTIVE OFFICES
767 FIFTH AVENUE
SUITE 4300
NEW YORK, NEW YORK 10153
LEGAL ADVISORS TO THE COMPANY
AS TO UNITED STATES LAW
DEBEVOISE & PLIMPTON
875 THIRD AVENUE
NEW YORK, NEW YORK 10022
AUDITORS OF THE COMPANY
DELOITTE & TOUCHE LLP
TWO WORLD FINANCIAL CENTER
NEW YORK, NEW YORK 10281
TRUSTEE AND EXCHANGE AGENT
THE CHASE MANHATTAN BANK
450 W. 33RD STREET
NEW YORK, NEW YORK 10001
PAYING AGENT
THE CHASE MANHATTAN BANK LUXEMBOURG S.A.
5 RUE PLAETIS
L-2338 LUXEMBOURG
LISTING AGENT
BANQUE INTERNATIONALE A LUXEMBOURG
69, ROUTE D'ESCHE
L-1470 LUXEMBOURG
<PAGE>
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