<PAGE>
As filed with the Securities And Exchange Commission on May 5, 1999.
Registration No. 333-46125
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
POST EFFECTIVE
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------
RSL COMMUNICATIONS, LTD.
(Exact Name Of Registrant As Specified In Its Charter)
<TABLE>
<S> <C> <C>
Bermuda 4813 N/A
(State Or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation Or Organization) Classification Code Number) Identification Number)
</TABLE>
Clarendon House
Church Street
Hamilton HM CX, Bermuda
(441) 295-2832
(Address and Telephone Number of Registrant's Principal Executive Offices)
----------------------
Itzhak Fisher
President And Chief Executive Officer
RSL Communications, N. America, Inc.
767 Fifth Avenue, Suite 4300
New York, NY 10153
(212) 317-1800
(Name, Address and Telephone Number of Agent For Service)
----------------------
Copies to:
Avery S. Fischer, Esq. Robert L. Kohl, Esq.
Vice President of Legal Rosenman & Colin LLP
Affairs and General Counsel 575 Madison Avenue
767 Fifth Avenue, Suite 4300 New York, NY 10022
New York, NY 10153
Approximate date of commencement of proposed sale to the public: As
soon as practicable after the effective date of this registration statement.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. /X/
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule
462(C) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
<PAGE>
CROSS REFERENCE SHEET TO FORM S-1
Pursuant to Item 501(b) Of Regulation S-K
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<CAPTION>
Item Number and Caption Caption or Location in Prospectus
----------------------- ---------------------------------
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1. Forepart of Registration Statement and Forepart of the Registration and Outside Front
Outside Front Cover Page of Prospectus Cover Pages
2. Inside Front and Outside Back Cover Pages of Inside Front Cover Page
Prospectus
3. Summary Information, Risk Factors and Ratio Prospectus Summary; Risk Factors; Summary of
of Earnings to Fixed Charges Selected Consolidated Financial Data
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Determination of Offering Price
6. Dilution Omitted from this prospectus because the item is
inapplicable or the answer is in the negative
7. Selling Security Holders Omitted from this prospectus because the item is
inapplicable or the answer is in the negative
8. Plan of Distribution Plan of Distribution
9. Description of Securities to be Registered Outside Front Cover; Description of Capital Stock;
Plan of Distribution
10. Interests of Named Experts and Counsel Legal Matters
11. Information with Respect to the Registrant Outside Front Cover Page; Prospectus Summary; Price
Range of Class A Common Shares; Dividend Policy;
Capitalization; Selected Consolidated Financial
Data; Management's Discussion and Analysis of
Financial Condition and Results of Operations;
Quantitative and Qualitative Disclosures About
Market Risk; Business; Management; Compensation
Committee Interlocks and Insider Participation;
Certain Relationships and Related Transactions;
Principal Shareholders; Rights to Acquire Class A
Common Shares; Shares Eligible for Future Sale;
Description of Capital Stock; Consolidated
Financial Statements
12. Disclosure of Commission Position on Omitted from this prospectus because the item is
Indemnification for Securities Act inapplicable or the answer is in the negative
Liabilities
</TABLE>
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED MAY 5, 1999
PROSPECTUS
RSL COMMUNICATIONS, LTD.
909,798 CLASS A COMMON SHARES
RSL logo
The 909,798 Class A common shares of RSL Communications, Ltd. offered by this
prospectus are to be issued and sold by us upon the exercise of warrants issued
by us. The warrants were issued as part of a private offering of 300,000 units,
each unit consisting of $1,000 principal amount of 12 1/4% senior notes due 2006
of RSL Communications PLC, our wholly owned subsidiary, and one warrant. We will
not have any net proceeds after the payment of expenses associated with this
offering.
See "Risk Factors" beginning on page 5 for a discussion of investment factors
that you should consider before you invest in the common shares offered and sold
with this prospectus.
Our Class A common shares are traded on The Nasdaq Stock Market National Market
System under the symbol "RSLC." On May 3, 1999, the last reported sale price of
the Class A common shares was $30.625 per share.
Neither the SEC nor any state securities commission has approved the Class A
common shares offered by this prospectus, nor have any of these organizations
determined if this prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
May , 1999
<PAGE>
TABLE OF CONTENTS
Page
Prospectus Summary...........................................................1
Risk Factors.................................................................5
Use of Proceeds..............................................................14
Determination of Offering Price..............................................14
Plan of Distribution.........................................................14
Price Range of Class A Common Shares.........................................14
Dividend Policy .............................................................15
Capitalization...............................................................15
Selected Consolidated Financial Data.........................................17
Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................................20
Quantitative and Qualitative Disclosures About Market Risk...................32
Business.....................................................................33
Management...................................................................55
Compensation Committee Interlocks and Insider Participation..................71
Certain Relationships and Related Transactions...............................71
Principal Shareholders.......................................................72
Description of Capital Stock.................................................75
U.S. Federal Income Tax Considerations.......................................80
Bermuda Tax Considerations...................................................86
Legal Matters................................................................87
Experts .....................................................................87
Service of Process and Enforcement of Liabilities............................87
Index to Consolidated Financial Statements...................................F-1
--------------------------
In this prospectus, references to "dollars" and "$" are to U.S.
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 historical financial information
included in this prospectus have been calculated for the purposes of the
statements of operations on the basis of average exchange rates over the periods
presented. Exchange rates per U.S. dollars for the material currencies in which
we transact business are set forth below.
Rate as of Rate as of Rate as of Rate as of
December 31, December 31, December 31, April 30,
Currency 1996 1997 1998 1999
- -------- ------------ ------------ ------------ ----------
Austrian Schilling...... (1) 12.63 11.72 13.01
Australian Dollar....... 1.26 1.54 1.61 1.51
Belgian Franc........... (1) (1) 34.36 38.13
British Pound........... 0.58 0.61 0.60 0.62
Canadian Dollar......... 1.37 1.43 1.54 1.46
Danish Krone............ (1) 6.85 6.36 7.02
Dutch Guilder........... 1.74 2.03 1.88 2.08
Finnish Markka.......... 4.60 5.45 5.06 5.62
French Franc............ 5.19 6.01 5.59 6.20
German/Deutsche Mark.... 1.54 1.80 1.68 1.85
Italian Lira............ (1) 1,770 1,654 1,830
Spanish Peseta.......... (1) 152.30 142.15 157.27
Swedish Krona........... 6.89 7.94 8.10 8.41
Swiss Franc............. (1) 1.46 1.37 1.52
Venezuelan Bolivar...... (1) 504.30 565.00 591.63
- ----------
(1) We had no business activity in these countries during the period indicated.
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 that information is not guaranteed. Although these
data have been correctly reproduced in this prospectus from the internal
surveys, market research, publicly available information and industry
publications, we have not independently verified the data.
<PAGE>
PROSPECTUS SUMMARY
The following summary highlights selected information from this
prospectus. It may not contain all of the information that is important to you.
We encourage you to read the entire prospectus.
This Offering
We previously registered 1,152,715 Class A Common shares to be issued
under a warrant agreement governing the warrants and 300,000 Class A common
shares to be sold by a selling shareholder. 242,917 Class A common shares have
already been issued by us upon the exercise of these warrants and all 300,000
Class A common shares previously offered by the selling shareholder have been
sold. Accordingly, this prospectus covers the offer of the remaining 909,798
Class A common shares that can be issued upon the exercise of the warrants. The
registration of the shares underlying the warrants was required by a
registration rights agreement we entered into in connection with the issuance of
the warrants. We can discontinue the offering upon the earlier of October 3,
1999, and the issuance of all the 909,798 shares offered by this prospectus.
About RSL COM
We are a rapidly growing multinational telecommunications company which
provides a broad array of telecommunications services, with an emphasis on
international long distance voice services. Our target customers are primarily
small and medium-sized businesses in key markets. We define key markets as
countries where significant levels of international phone calls originate or
terminate and in which deregulation has occurred or is occurring. Our services
include:
o international and national fixed and wireless
o calling card
o fax
o data
o Internet
o private line
o other value-added telecommunications services
We started our business by acquiring operations in the U.S. 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 20 countries. In 1997 approximately 70% of all international long
distance switched telecommunications minutes originated in these 20 countries.
We were formed to capitalize on the growth, deregulation and
profitability of the international long distance switched telecommunications
market. We currently have 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 year through the year 2001.
We are building a low-cost, facilities-based global network designed to
provide high quality telecommunications services. We are also developing a wide
range of marketing and distribution channels to expand our 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:
o direct sales forces;
o strategic marketing alliances with companies that have access to
significant customer bases;
o networks of independent agents and distributors;
o strategic alliances with resellers; and
o 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;
<PAGE>
o expand marketing and distribution channels;
o pursue strategic acquisitions and alliances;
o leverage expertise of management team; and
o expand Internet-based telephony and other on-line services offered.
Risk Factors
Please see the "Risk Factors" section beginning on page 5 for a
discussion of risks that you should consider before investing in our Class A
common shares.
Headquarters
Our headquarters is 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, NY
10153 (telephone number: 212-317-1800).
Where You Can Find More Information
We are required to file periodic reports, proxy and information
statements and other information with the SEC. You may read any materials filed
by us at the SEC's public reference room at 450 Fifth Street, N.W., Washington,
D.C. You may obtain information about the operation of the public reference room
by calling the SEC at 1-800-SEC-0330. Our SEC filings are also available to the
public on the SEC's Internet website located at http://www.sec.gov.
We have filed with the SEC a registration statement on Form S-1 under
the Securities Act covering the issuance of the Class A common shares underlying
the warrants. This prospectus is part of that registration statement. As allowed
by SEC rules, this prospectus does not contain all of the information included
in the registration statement or in the exhibits to the registration statement.
You should read the registration statement and the exhibits filed with the
registration statement for further information about us and the securities
offered by this prospectus. You may obtain copies of the registration statement
and exhibits from the SEC upon payment of a fee determined by the SEC or examine
the documents, free of charge, at the public reference room referred to above. A
summary in this prospectus of any document filed as an exhibit to the
registration statement, although materially complete, does not summarize all of
the information in that document. You should read the exhibit for a more
complete understanding of the document or matter involved.
You should rely only on the information provided in this prospectus. No
person has been authorized to provide you with different information and you
should not rely on any information you receive or representations made that are
not contained in, or incorporated by reference into, this prospectus.
This prospectus is not an offer to sell these securities and it is not
soliciting an offer to buy these securities in any state where the offer or sale
is not permitted.
The information in this prospectus is accurate as of the date on the
front cover. You should not assume that the information contained in this
prospectus is accurate as of any other date.
Forward-Looking Statements
This prospectus includes discussions of future expectations and
contains projections of results of operations or financial condition or other
"forward-looking" information. We make forward-looking statements to provide you
with information regarding our goals and what we hope to achieve. However, these
statements are subject to known and unknown risks and uncertainties that could
cause actual results to differ materially from those contemplated by the
statements. For a discussion of important factors that could cause actual
results to differ materially from the forward-looking statements, see "Risk
Factors." Given the significant risks and uncertainties inherent in the
forward-looking statements included in this prospectus, the inclusion of these
statements is not a representation by us or any other person that our objectives
and plans will be achieved, and we are protected by law in most instances if
these statements prove to be inaccurate.
2
<PAGE>
Summary of Selected Consolidated Financial Data
The following tables contain summary consolidated financial data for
each of the three years in the period ended December 31, 1998, which have been
derived from the Consolidated Financial Statements and notes to those
statements, which have been audited by Deloitte & Touche LLP. The selected
consolidated statements of operations data for the year ended December 31, 1995
are derived from audited financial statements not included in this prospectus.
The information as of and for the year ended December 31, 1994 was derived from
the Consolidated Financial Statements of our predecessor entity, RSL North
America, formerly International Telecommunications Group.
You should read the summary consolidated financial and operating data
presented below along with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and notes to those statements included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------------
Predecessor
1994 1995(l) 1996 1997 1998(9)
----------- ------- ---- ---- -------
($ and shares in thousands, except loss per share)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenues.................................... $ 4,702 $ 18,617 $ 113,257 $ 300,796 $ 885,938
Operating costs and expenses:
Costs of services (exclusive of
depreciation and amortization shown
separately below)....................... (4,923) (17,510) (98,461) (265,321) (702,602)
Selling, general and administrative expense. (2,395) (9,639) (38,893) (94,712) (238,141)
Depreciation and amortization............... (240) (849) (6,655) (21,819) (75,445)
------- -------- --------- --------- -----------
(7,558) (27,998) (144,009) (381,852) (1,016,188)
------- -------- --------- --------- -----------
Loss from operations........................ (2,856) (9,381) (30,752) (81,056) (130,250)
Interest income............................. -- 173 3,976 13,826 16,104
Interest expense............................ (225) (194) (11,359) (39,373) (75,431)
Other income - net.......................... -- -- 470 6,595(2) 739
Foreign exchange transaction loss........... -- -- -- -- (11,055)
Minority interest........................... -- -- (180) 210 6,079
Loss in equity interest of unconsolidated
subsidiaries............................. -- -- -- -- (3,276)
Income taxes................................ -- -- (395) (401) (1,334)
------- -------- --------- --------- -----------
Loss before extraordinary item.............. (3,081) (9,402) (38,240) (100,199) (198,424)
Extraordinary item(3)....................... -- -- -- -- (20,800)
------- -------- --------- --------- -----------
Net loss.................................... $(3,081) $ (9,402) $ (38,240) $(100,199) $ 219,224
======= ======== ========= ========= ===========
Loss per common share before
extraordinary item(3)(4)................. $(15.41) $ (1.67) $ (5.13) $ (5.27) $ (4.52)
Extraordinary item per common share......... $ -- $ -- $ -- $ -- $ (0.47)
Net loss per common share (3)(4)............ $(15.41) $ (1.67) $ (5.13) $ (5.27) $ (4.99)
Weighted average number of common shares
outstanding(4)........................... 200 5,641 7,448 19,008 43,913
Other Financial Data:
EBITDA(as defined)(5)....................... $(2,616) $ (8,532) $ (24,097) $ (59,237) $ (54,805)
Capital expenditures(6)..................... 1,126 6,074 23,880 49,417 247,665
Cash (used in) provided by operating
activities............................... (1,987) 3,554 (10,475) (91,812) (82,752)
Cash used in investing activities........... (478) (16,537) (225,000) (18,821) (509,438)
Cash provided by financing activities....... 2,888 18,143 335,031 152,035 815,476
</TABLE>
<TABLE>
<CAPTION>
As of
Balance Sheet Data: December 31, 1998
-----------------
<S> <C>
Cash and cash equivalents............................................................... 367,823
Marketable securities available for sale................................................ 111,548
Restricted marketable securities(7)..................................................... 20,159
Total assets............................................................................ 1,714,593
Short-term debt, current portion of long-term debt, and current portion of capital lease
obligations(8)....................................................................... 36,130
Long-term debt and capital lease obligations(8)......................................... 1,089,375
Shareholders' equity.................................................................... 133,484
</TABLE>
(footnotes on next page)
3
<PAGE>
(footnotes from previous page)
(1) Effective with the acquisition of a majority equity interest in RSL North
America, in September 1995, we began to consolidate RSL North America's
operations. From March 1995, the date of our initial investment, to
September 1995, we accounted for our investment in RSL North America using
the equity method of accounting.
(2) Other income includes the reversal of specific liabilities accrued in
connection with our obligations under an agreement that required us to
meet a carrier vendor's minimum usage requirements, which agreement was
entered into by one of our subsidiaries prior to our acquisition of that
subsidiary. During May 1997, we 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 notes
we issued in 1996.
(4) Loss per share is calculated by dividing the loss attributable to our
common shares (Class A common shares and Class B common shares) by the
weighted average number of common shares outstanding, and has been
retroactively restated to reflect the 2.19-for-one stock split. Shares
issuable pursuant to (a) outstanding stock options, (b) unexercised
warrants, (c) a warrant issued to Ronald S. Lauder, (d) roll-up rights (as
described in "Rights to Acquire Class A Common Shares") or (e) incentive
units granted under our 1997 Stock Incentive Plan are not included in the
loss per share calculation as their effect is anti-dilutive.
(5) EBITDA, as used herein, consists of loss from operations before
depreciation and amortization. EBITDA is provided because it is a
measure commonly used in the telecommunications industry. It is presented
to enhance an understanding of our operating results and is not intended
to represent cash flow or results of operations in accordance with U.S.
GAAP for the periods indicated. Our use of EBITDA may not be comparable to
similarly titled measures used by other companies due to the use by other
companies of different financial statement components in calculating
EBITDA.
(6) Capital expenditures include assets acquired through capital lease
financing and other debt.
(7) The restricted marketable securities consist of U.S. government
securities pledged to secure the payment of interest on the principal
amount of the notes we issued in 1996.
(8) As of December 31, 1998, we had approximately $33.9 million of available
(undrawn) borrowing capacity under our current bank and vendor
facilities.
(9) During 1998, we acquired various companies. See footnote 2 of the
consolidated financial statements for information regarding these
acquisitions.
4
<PAGE>
RISK FACTORS
You should consider carefully the following risks before you invest in
our Class A common shares. The risks and uncertainties described below are not
the only ones facing us. Additional risks and uncertainties may also adversely
affect our business operations. Our business, financial condition or results of
operations would likely be adversely affected if any of the following risks
actually occur. The trading price of our Class A common shares could decline as
a result of any adverse changes, and you may lose all or part of your
investment.
We have a short operating history and limited operating experience. This may
negatively affect future operations.
We started operating our business in 1995. We acquired some of our
operations from others and we started our other operations. However, most of our
operations started or were started by us subsequent to 1995. Therefore, our
operations have limited operating histories and we have limited experience in
conducting those operations.
Entering into newly opening markets has special risks.
One key aspect of our business strategy is to acquire or start
businesses in markets where there was little, if any, privately-owned telephone
service and where government-owned or government-controlled monopolies provide
most of the telephone services. You should consider our prospects in light of
the risks, expenses, problems and delays inherent in both establishing a new
business and in establishing a new business in a market where competition did
not previously exist, where customers are not accustomed to having choices and
where our abilities are unknown. These inherent risks, expenses, problems and
delays, many of which we have experienced, include, but are not limited to:
o significant initial expenditures to build infrastructure (for
example, purchases of switches and ownership and other rights to use
fiber optic and wired cable systems to transport and route phone
calls)
o scarcity of experience in market
o absence of recognition by consumers
o reluctance of consumers to use an untested service provider
o lack of consumer education
o resistance by consumers, regulators and existing competitor(s) to a
change in the status quo
o need to commit to arrangements regarding transmission of
phone calls prior to knowing level of customer usage
o legislative delays in adopting necessary laws and regulations
Additionally, we have discounted and may need to discount services in
order to attract and retain customers and to compete with discounted prices
offered by our competitors. We have incurred low and negative operating margins
in some countries due, in part, to discounting and the other risks listed above.
Some of our competitors are in a better financial position to absorb these
losses. Some of the listed risks are described in further detail below. For more
information, see "Overview" under "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
We may experience problems integrating our new operations.
When we acquire or start a business we must integrate it with our
existing operations. For businesses that we acquire, we must integrate various
systems and administrative matters, including:
o switching operations
o transmission
o information systems
o sales and marketing
o customer service
o billing
o finance and accounting
o quality control
o management
o personnel
o regulatory compliance
5
<PAGE>
Some or all of the operational hardware and software systems used in businesses
we acquire may be incompatible with our systems. Acquired businesses also may
offer products and services that we have no previous or limited experience in
providing. Acquired businesses generally suffer from higher levels of employee
resignations and customer terminations, beginning when employees and customers
learn of a proposed transaction and ending some time after the transaction has
been completed.
In countries where we expand by establishing a new business, we must:
o recruit and train personnel;
o establish offices;
o obtain regulatory authorization;
o lease transmission lines from our competitors;
o obtain interconnection agreements with our competitors; and
o install hardware and software.
In addition, since we already operate businesses in many countries and we intend
to expand into additional countries and regions, we must manage the problems
associated with integrating a culturally and linguistically diverse workforce.
Our anticipated growth and acquisitions may strain our business operations.
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 depends on our ability to:
o evaluate new markets and investment vehicles;
o create or integrate an effective management team and operations
infrastructure; and
o monitor operations and control costs.
Our rapid growth puts strains on our resources, including our ability
to:
o identify additional 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 entail
considerable expense in advance of anticipated revenues and may cause
substantial fluctuations in our operating results.
Moreover, 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 lack of control may interfere with our growth and the integration of our
operations.
In addition, we have in the past acquired, and may continue to acquire,
interests in operations for strategic reasons, even though those operations had
or have operational or managerial problems or were or are incurring losses.
These operational or managerial problems or losses have caused and may in the
future cause us significant operational difficulties or consume substantial
monetary, management and other resources.
Our planned expansions will result in continued losses.
We have generated net losses of $367.2 million from our inception
through December 31, 1998. We have also incurred negative earnings before
depreciation and amortization, loss in equity interest of unconsolidated
subsidiaries, extraordinary item, interest, foreign exchange transaction loss,
minority interest, other income-net
6
<PAGE>
and income taxes, or EBITDA, since inception. We must continue to expand our
operations and meet increasing demands for service, quality, availability of
value-added services and competitive pricing to establish and maintain a
competitive position in our markets. When we say value-added services, we mean
services such as video-teleconferencing, on-line billing services, consolidated
billing for all services offered by us, on-line directory assistance, on-line
conference calling, and international directory assistance. We expect to incur
significant net losses at least through 2001 due to our need to expand our
operations, develop RSL-NET and build our customer base and marketing operations
and as a result of our interest expenses in connection with our notes. In
addition, we may also experience negative cash flow from operating activities
until at least the third-quarter of 1999. We cannot be sure that significant net
losses and negative cash flow from operating activities will not continue beyond
the years indicated.
We may need to raise additional capital regardless of market conditions.
We made capital expenditures of approximately $247.7 million in 1998.
In 1999 and 2000, we intend to make capital expenditures of similar amounts. We
have also experienced a consistently increasing working capital deficit. We also
currently intend to seek to raise substantial additional capital to fund our
capital expenditures, acquisitions, strategic alliances, start-up operations and
anticipated substantial net losses. We believe that the remaining net proceeds
from our previous sales of stock (equity) and notes (indebtedness) and other
sources of cash will be sufficient to fund a reduced capital expenditure and
expansion plan for our existing operations, as well as continuing net losses,
through the first quarter of 2000, if we do not raise additional capital due
to market conditions or otherwise. 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.
We may also be required to raise capital to refinance outstanding notes
when they mature. We cannot be sure that we will be able to raise additional
capital. The failure to obtain additional capital on acceptable terms could
negatively impact our business, results of operations and financial condition
and our ability to repay our existing obligations.
If additional funds are raised, the percentage ownership of our shareholders may
be reduced and the securities issued may have rights senior to those of our
shareholders.
The percentage ownership of our company by existing shareholders will
be reduced if additional funds are raised through the sale of stock or other
securities, such as convertible debt securities, when our stock is issued or our
securities are converted. These securities may have rights and preferences
senior to those of our current shareholders.
Our substantial indebtedness could adversely affect our financial condition and
prevent us from satisfying our obligations.
At December 31, 1998, we had total consolidated indebtedness of
approximately $1.02 billion and stockholder's equity of approximately $133.5
million. We may incur substantial amounts of additional indebtedness.
If (1) our operations do not generate enough revenues or (2) we cannot
obtain, at acceptable rates, sufficient funds to make our debt payments when
they are due or (3) we fail to comply with the material terms of the legal
documents governing our indebtedness, the holders of our indebtedness would be
entitled to require us to repay our indebtedness immediately.
7
<PAGE>
Our high level of debt could also restrict our business significantly.
Our level of indebtedness could have important consequences to you
because:
o it could limit our ability to obtain any additional financing in
the future for working capital, capital expenditures, debt service
requirements or other purposes;
o a substantial portion of any future cash flow from operations will
be dedicated to the payment of our indebtedness and will not be
available for investment in our business or to pay dividends;
o it could limit our flexibility in planning for, or reacting to
changes in, our business;
o it could place us at a competitive disadvantage compared to
competitors who have less debt; and
o it could make us more vulnerable in the event of a downturn in our
business or a general downturn in the economy in any of our
significant markets.
The foregoing risks would be intensified to the extent we may borrow additional
money or incur additional debt. For more information regarding this topic, see
"Selected Consolidated Financial Data" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
The legal documents governing our indebtedness restrict our ability to take
certain actions.
The legal documents governing our outstanding indebtedness contain
restrictive covenants which impose limitations on our ability and the ability of
some of our subsidiaries to:
o incur additional indebtedness;
o pay dividends or make other distributions;
o issue capital stock of some of our subsidiaries;
o guarantee debt;
o enter into transactions with shareholders and affiliates;
o create liens;
o enter into sale-leaseback transactions;
o sell assets; and
o make some types of investments.
These restrictions could prevent us from taking actions that are beneficial to
shareholders or that we believe would be beneficial to us.
We will require a significant amount of cash. Our ability to generate cash
depends on many factors beyond our control.
Our ability to make payments on our indebtedness and to fund planned
capital expenditures depends on our ability to generate cash. This, to some
extent, is subject to general economic, financial, competitive, legislative,
regulatory and other factors that are beyond our control. We currently believe
available cash and available borrowings under our credit facilities will be
adequate to meet our future liquidity needs through the first quarter of 2000.
We cannot be sure that currently anticipated operating improvements
will be realized on schedule or that future borrowings will be available to us
under our credit facilities in an amount sufficient to enable us to pay our
indebtedness or to fund our other liquidity needs. We may need to refinance all
or a portion of our indebtedness on or before it becomes due. We cannot be sure
that we will be able to refinance any of our indebtedness on commercially
reasonable terms, if at all.
8
<PAGE>
Our holding company structure may further jeopardize our ability to repay our
obligations.
We are a holding company and our only material assets consist of stock
of our subsidiaries and fluctuating cash balances. We have contributed or loaned
to our subsidiaries and other of our affiliates a substantial majority of the
net proceeds from our sales of stock and notes. Our ability to pay our debt
obligations therefore depends upon our ability to receive cash from our
subsidiaries. However, our subsidiaries may face difficulties distributing cash
to us because:
o they are legally distinct from us and may have no obligation to pay
amounts due by us or to make funds available for us;
o their ability to make distributions to us is subject to the
availability of funds and the terms of their indebtedness;
o their repayment of loans and advances we made to them may be
subject to statutory or contractual restrictions or taxation;
o their repayment of loans and advances is contingent upon their
earnings;
o their payment of dividends to us may have adverse tax consequences;
and
o their ability to declare and pay dividends to us may be subject to
legal restrictions or restrictions contained in organizational
documents or loan agreements.
If a subsidiary or other affiliate is liquidated or reorganized, there
may not be sufficient assets for us to recover our investment in that subsidiary
or affiliate. Any right we have to receive assets from a subsidiary or other
affiliate upon its liquidation or reorganization is secondary to the claims of
the subsidiary's or affiliate's creditors, unless we are independently
recognized as a creditor. Even if we are recognized as a creditor, our claim
could be junior to claims held by other creditors.
If we are unable to adapt to the rapidly changing industry in which we operate,
we may be negatively affected.
The international telecommunications industry is changing rapidly, due
to:
o deregulation;
o privatization of government-owned telephone monopolies;
o technological improvements;
o expansion of telecommunications infrastructure;
o the globalization of the world's economies; and
o free trade.
We may be unable to compete effectively or adjust our contemplated plan of
development to meet these changing market conditions.
Moreover, the telecommunications industry is in a period of rapid
technological evolution and expansion, marked by the introduction of new
products and services offered, including the use of the Internet for
international voice and data communications, and increased satellite and fiber
optic cable transmission capacity. We cannot predict which of the many possible
future products and services will be necessary to establish and maintain a
competitive position or what expenditures will be required to develop and
provide these products and services, nor can we predict how any developments
will affect pricing of telecommunications 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 these technological changes or offer these services on a timely basis. Even
if we are able to do so, we may not be able to do so at reasonable cost or on a
profitable basis.
9
<PAGE>
Worldwide deregulation is increasing competition in our industry. If we are
unable to compete effectively, our operations will be negatively impacted.
Most of the markets we compete in have only recently deregulated or are
in the process of deregulating telephone services. Customers in these markets
generally are not familiar with obtaining telephone services from anyone other
than government-owned or government-controlled monopolies and may be (and often
are) reluctant to use new providers. We cannot, therefore, guarantee that our
target customers will entrust their telecommunications needs to us.
Additionally, our target customers may switch to other service providers as a
result of the price competition that often arises in these markets as we, along
with other new market entrants, attempt to establish ourselves and gain
customers and the existing providers attempt to retain their dominance in their
markets. We anticipate increased competition as worldwide deregulation
accelerates.
We must compete with a variety of other telecommunications providers in
each of our markets, including:
o government-owned and government-controlled telephone monopolies,
established competitors such as AT&T, Sprint, MCI WorldCom and Cable
& Wireless and alliances such as AT&T's alliance with British
Telecom that offer long distance services, local service in
conjunction with long distance services or packages of value-added
services in addition to local and long distance services;
o international long distance resellers; and
o other carriers, including Colt Industries, Espirit Telecom, Global
Crossing, GTS, ICG, Pacific Gateway, Primus Telecommunications,
Quest, Star Telecommunications, and Viatel, with similar business
objectives to ours.
Many of the government-owned or government-controlled monopolies and
established competitors have significantly greater financial, management and
operational resources than us and more operational history and experience. In
addition, government-owned and government-controlled monopolies and existing
local carriers generally have specific competitive advantages over us due to (1)
their control over and connection to intra-national and local exchange
transmission facilities, (2) their ability to delay access to lines and (3) the
reluctance of some regulators to adopt policies and grant approvals that would
increase competition. Our local operators in these jurisdictions would be
adversely affected to the extent that the government-owned or
government-controlled monopolies or incumbent local exchange carriers in any
jurisdiction use their competitive advantages to the fullest extent.
Recent and pending deregulation in each of our markets is encouraging
new entrants or empowering incumbents. 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.
Pricing pressures may negatively impact 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.
Prices for long distance calls, our principal service, are decreasing
substantially in most of our markets. These price decreases are significant in
some of our markets, particularly in the U.S. and Germany.
We attempt to discount our services from the prices charged by the
government-owned or government-controlled monopolies and other established
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 fund price wars that could cause smaller
companies, including us, to exit a market because of the inability to operate
profitably. In some deregulated or deregulating markets, including the U.S. and
Germany, severe price competition has occurred and, as deregulation progresses
in other markets we may encounter severe price competition in those markets. See
"Industry Overview" under the heading "Business."
10
<PAGE>
There is currently excess international telephone transmission
capacity. Industry observers have predicted that this excess capacity may result
in significant downward pricing pressures and that, within a few years, the cost
of a phone call may no longer be based on the distance the call is carried.
Already, some 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 negative impact on our prospects, financial
condition and results of operations and our ability to pay our obligations.
Government regulations restrict our operations. Delay in the liberalization of
the European Union may delay our entry into some European markets.
National and local laws and regulations differ significantly among the
countries in which we operate. The interpretation and enforcement of these laws
and regulations vary and could limit our ability to provide telecommunications
services, including telephone calls over the Internet. Changes in laws and
regulations, the adoption of new laws and regulatory schemes and future judicial
or regulatory intervention in the U.S. or in any other country may have a
negative effect on us.
Our European strategy is based in large part upon the ongoing
deregulation of the European Union and deregulation of other foreign markets
based on European Commission directives and an international agreement of the
World Trade Organization. Several EU member states have already experienced
delays in deregulation. Moreover, even if a national legislature of an EU member
state implements the relevant EC directives within the time frame established by
the EC, there may be significant resistance to the implementation of these
measures from government-owned monopolies, regulators within each member
country, 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 a national regulatory authority. This authority in the U.K. has
imposed mandatory rate reductions on the dominant operator in the U.K. 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 also fail to implement
deregulation or even if they do implement deregulation it may not proceed on
schedule. In addition, even if these other foreign markets act to deregulate
their telecommunications markets on the current schedule, the national
governments of these foreign markets must pass legislation or other national
measures to deregulate the markets within the countries. The national
governments may not pass this legislation or other national measures or may not
pass them in the form required, or may pass legislation or measures only after a
significant delay. These and other potential obstacles to deregulation would
have a negative effect on our operations by preventing us from expanding our
operations as currently anticipated.
The Internet telephone services that we provide through our subsidiary,
Delta Three, may be subject to and affected by regulations introduced by the
authorities in each country where Delta Three operates. In the U.S., the FCC has
advised Congress that it may, in the future, regulate Internet telephone
services as basic telecommunications services. In addition, several efforts
have been made to enact federal legislation that would either regulate or exempt
from regulation services provided over the Internet. State public utility
commissions may also retain jurisdiction to regulate the provision of intrastate
Internet telephone services.
If we are unable to accurately predict traffic volumes, we may be forced to pay
additional monies.
At least some portion of all telephone calls made by our customers are
transported through transmission facilities that we lease from our competitors.
We generally lease transmission facilities on a short-term basis, which usually
means on a per-minute basis. However, in cases where we anticipate higher
volumes of traffic, we lease capacity 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 overestimate
the volume of phone calls our customers actually make, we would be obligated to
pay
11
<PAGE>
for calling capacity without adequate corresponding revenues and could be
subject to underutilization charges. On the other hand, if we underestimate our
need for calling capacity, we may be required to obtain calling capacity through
more expensive means. In the past, we have at times overestimated our need for
leased capacity and leased capacity which was underutilized resulted in our
paying additional charges. We have at times also underestimated our needs and as
a result we have transported traffic at a higher cost. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
We rely significantly on other carriers. If we lose the ability to use other
carriers or if they charge us inflated prices, our business would be
significantly negatively impacted.
We do not own any local transmission facilities and we own only a
limited number of intra-national transmission facilities. Therefore, all of the
telephone calls made by our customers are connected at least in part through
transmission facilities that we lease from competitors who own and maintain
their own systems. In many of the foreign jurisdictions in which we conduct
business, the primary provider of significant local and intra-national
transmission facilities is a government-owned or government-controlled monopoly.
Accordingly, prior to full deregulation in those countries, we may be required
to lease transmission capacity at artificially high rates. These rates may
prevent us from generating gross profit on the related calls. In addition, we
may encounter delays in commencing operations and negotiating leases and
interconnection agreements (as has been the case in Italy and Spain).
Additionally, disputes may result with respect to pricing terms and billing with
any third party with which we conduct business.
In the U.S., the providers of local exchange transmission facilities
are generally the incumbent local exchange carriers, principally the regional
Bell operating companies. The permitted pricing of local facilities that we
lease in the U.S. is subject to uncertainties. An appeals court has held that
the FCC does not have jurisdiction to create national rules for the pricing of
these facilities, but rather that jurisdiction rests with each of the individual
states. Although the U.S. Supreme Court has recently upheld the FCC's
jurisdiction, the appeals court is now considering the substantive merits of the
FCC's rate methodology. An order by the appeals court rejecting the FCC's rate
methodology could make it more burdensome or expensive for us to enter a local
market.
We are also vulnerable to service interruptions and poor transmission
quality from leased lines.
Sophisticated information systems are vital to our growth. A failure to have
effective information systems could negatively impact our operations.
Sophisticated information systems are vital to our growth and ability
to:
o monitor costs;
o bill and receive payments from customers;
o reduce credit exposure;
o transport phone calls on the best route in terms of pricing and
call quality; and
o achieve operating efficiencies.
We currently operate separate network management information systems
for our U.S., European and Australian operations. We integrate and operate the
information services for all of our local operators from the regional
headquarters of those local operators. Specific systems failures that could
negatively impact our operations include a failure:
o of any of our current systems;
o by us to efficiently implement or integrate new systems;
o of any new systems; or
o to upgrade systems as necessary.
12
<PAGE>
The Year 2000 problem places our technology systems at risk.
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 be unable to implement successfully these upgrades, and
additional steps may be necessary. In addition, our ability to operate without
interference by the year 2000 problem is contingent upon remedial efforts by our
vendors, customers and other third parties with whom we conduct business. A
failure of our computer systems or the failure of our vendors or customers or
other third parties to effectively upgrade their computer systems to correct the
year 2000 problem could have a negative effect on our business and financial
condition or results of operations. For more information on the year 2000
problem, see "Year 2000 Technology Risks" under "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Our results may be affected by devaluation and currency risks.
Most of our revenues, costs, assets and liabilities are denominated in
local currencies. 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 U.S. dollar, we cannot quantify the
effect of exchange rate fluctuations on our future financial condition or
results of operations. In the future, we may acquire interests in entities that
operate in countries where the export or conversion of currency is restricted.
Currently, we do not hedge against foreign currency exchange risks but in the
future we may commence 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 negative effect on our ability to meet
our obligations.
Our controlling shareholder has the ability to fundamentally control our
business.
Ronald S. Lauder, chairman of our board of directors, beneficially
owns approximately 31% of our outstanding capital stock and controls
approximately 56.5% of our voting power. As a result, Mr. Lauder has the voting
power to approve certain fundamental corporate transactions and to elect all
members of our board of directors. Mr. Lauder, together with other executive
officers and directors, companies and partnerships they control and members of
their immediate families, control approximately 91.9% of the voting power of our
outstanding capital stock. See "Principal Shareholders."
If there is a change in control we may be required to buy back debt obligations.
If we experience a change of control, we may be required to purchase
some or all of the then-outstanding notes issued by us at a price greater than
the principal amount at the date of purchase. However, we may not have
sufficient funds to purchase these outstanding debt obligations.
We may not be able to obtain legal judgments against our officers and directors
that reside outside the U.S.
We are incorporated in Bermuda. Some of our officers and directors
reside outside the U.S. All or a substantial portion of the assets of these
persons are or may be located outside the U.S. Consequently, it may not be
possible to serve process within the U.S. upon these persons or to enforce
against them judgments obtained in U.S. courts, including judgments predicated
upon the civil liability provisions of the U.S. federal securities laws.
Our board of directors has the ability to suspend the use of the registration
statement.
We have the right during any consecutive 365-day period to suspend
availability of the registration statement of which this prospectus is a part
for (1) up to two consecutive 30-day periods, if our board of directors
determines in good faith that there is a valid purpose for a suspension and (2)
up to five additional, non-consecutive three-day periods, if our board of
directors determines in good faith that we cannot provide adequate disclosure
during these periods due to circumstances beyond our control. We will not be
able to issue Class A common shares under this prospectus upon the exercise of
the warrants during the period in which the availability of the registration
statement is suspended.
13
<PAGE>
USE OF PROCEEDS
We will receive gross proceeds of approximately $4,158 if all 909,798
Class A common shares are issued upon the exercise of the warrants at an
exercise price of $.00457 per share. We will not have any net proceeds after
payment of the expenses associated with this offering.
DETERMINATION OF OFFERING PRICE
Each outstanding warrant may be converted into 3.975 Class A common
shares upon payment of an exercise price of $.00457 per share. The exercise
price and conversion ratio may be adjusted in limited circumstances under an
agreement we entered into to issue the warrants. The terms, conditions and
exercise price for the warrants were determined with the placement agents of the
original 300,000 units at the time of the units offering. For more information
regarding the warrants, see "Warrants" under "Description of Capital Stock."
PLAN OF DISTRIBUTION
The Class A common shares issuable upon the exercise of the warrants
are offered solely by us. No underwriters are participating in this offering.
The warrants are exercisable in accordance with the terms of the agreement we
entered into to issue the warrants. We will bear all expenses in connection with
this registration statement (including the original filing of this registration
statement), estimated at $375,000.
PRICE RANGE OF CLASS A COMMON SHARES
Our Class A common shares have been quoted on The Nasdaq Stock Market
National Market System under the symbol "RSLC" (previously, "RSLCF") since
October 1, 1997. Prior to that date, there was no trading market for the Class A
common shares. The following table lists, for the periods indicated, the high
and low sales prices of the Class A common shares as reported on The Nasdaq
Stock Market National Market System. The quotations reflect inter-dealer prices,
without retail markup, mark-down or commissions, and may not necessarily reflect
actual transactions. On May 3, 1999, the last reported price for the Class A
common shares was $30.625 per share. There is no public market for our Class B
common shares. As of April 19, 1999, there were 101 holders of record for the
Class A common shares and 13 holders of our Class B common shares.
<TABLE>
<CAPTION>
Price
-----------------------------------
Period High Low
------ ---- ---
<S> <C> <C>
Fiscal Year 1997
Fourth Quarter.......................... $35.25 $21.13
Fiscal Year 1998
First Quarter........................... $27.50 $17.00
Second Quarter.......................... $30.00 $21.88
Third Quarter........................... $44.50 $21.50
Fourth Quarter.......................... $31.03 $15.06
Fiscal Year 1999
First Quarter........................... $42.00 $24.00
Second Quarter
(to May 3, 1999)........................ $38.75 $28.00
</TABLE>
14
<PAGE>
DIVIDEND POLICY
We have never paid dividends on any class of common shares and do not
anticipate paying any dividends on the Class A common shares or any other class
of common shares in the foreseeable future. Some of our credit facilities and
the documents governing senior notes issued by our wholly owned subsidiary, RSL
Communications PLC, contain restrictions on our ability to declare and pay
dividends on our common shares. Our declaration and payment of dividends are
subject to the discretion of our board of directors. Any determination as to the
payment of dividends in the future will depend upon our results of operations,
capital requirements, restrictions in loan agreements and other factors as our
board of directors may deem relevant. See "Risk Factors," "Liquidity and Capital
Resources" under "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Description of Capital Stock" and "Bermuda Tax
Considerations."
CAPITALIZATION
The following table contains information regarding our capitalization
as of December 31, 1998. Unless otherwise disclosed in this prospectus, there
has been no material change in our consolidated cash and capitalization since
December 31, 1998. You should read the table along with the Consolidated
Financial Statements and notes to those statements and the other information
included elsewhere in this prospectus. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
As of December 31, 1998
--------------------------------
(in thousands, except share data)
<S> <C>
Cash and cash equivalents...................................................... $ 367,823
==========
Marketable securities-available for sale....................................... $ 111,548
==========
Restricted marketable securities (1)........................................... $ 20,159
==========
Short-term debt and current portion of long-term debt and current portion of
capital lease obligations.................................................... $ 36,130
Long-term debt and capital lease obligations:
Capital leases............................................................... 77,864
12-1/4% senior notes due 2006 (net of amortized discount of $1.8 million).... 170,724
9-1/8% senior notes due 2008................................................. 200,000
10-1/8% senior discount notes due 2008....................................... 217,456
10% senior discount notes due 2008........................................... 117,692
12% senior notes due 2008 (net of unamortized discount of $5.5 million)...... 94,533
10-1/2% senior notes due 2008 (net of unamortized discount of $1.5 million).. 198,463
----------
Total long-term debt, short-term debt and capital lease obligations(2)......... 1,112,862
----------
Shareholders' equity
Common shares, $.00457 par value, 438,000,000 authorized, 26,529,479
Class A common shares outstanding (3)..................................... 121
26,245,315 Class B common shares outstanding (4).......................... 120
Preferred shares, $.00457 par value; 65,700,000 shares authorized; no shares
outstanding............................................................... -
Warrants-common shares......................................................... 5,544
Additional paid-in capital..................................................... 500,292
Accumulated deficit............................................................ (367,163)
Foreign currency translation adjustment........................................ (5,430)
----------
Total shareholders' equity....................................................... 133,484
----------
Total capitalization............................................................. $1,246,346
==========
</TABLE>
(footnotes on next page)
15
<PAGE>
(footnotes from previous page)
(1) The restricted marketable securities consist of U.S. government
securities pledged to secure the payment of interest on the principal
amount of the notes we issued in 1996.
(2) As of December 31, 1998, we had approximately $33.9 million of
available (undrawn) borrowing capacity under our current bank and vendor
facilities.
(3) The foregoing does not include (a) 1,876,931 Class A common shares
issuable upon the exercise of outstanding stock options, (b) 26,245,315
Class A common shares issuable upon the conversion of outstanding Class
B common shares, (c) 459,900 Class A common shares issuable upon the
conversion of a warrant issued to Ronald S. Lauder to acquire Class B
common shares, (d) 909,798 Class A common shares issuable upon the
exercise of the unexercised warrants, (e) 109,500 shares of restricted
stock granted under our 1997 Stock Incentive Plan or (f) Class A common
shares issuable upon the exercise of roll-up rights or incentive units
(as described in "Rights to Acquire Class A Common Shares").
(4) Does not include 459,900 Class B common shares issuable upon the
exercise of a warrant issued to Ronald S. Lauder.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The tables below contain selected consolidated financial data for each
of the years in the five year period ended December 31, 1998. The selected
consolidated financial statements of operations data presented below with
respect to the years ended December 31, 1998, 1997 and 1996 and balance sheet
data as of December 31, 1997 and 1998 have been derived from the Consolidated
Financial Statements, audited by Deloitte & Touche LLP, appearing elsewhere in
this prospectus. The selected consolidated statements of operations data for the
year ended December 31, 1995 and balance sheet data as of December 31, 1995 and
1996 are derived from audited financial statements not included in this
prospectus. The information as of and for the year ended December 31, 1994 has
been derived from the financial statements of the our predecessor entity, RSL
North America, formerly International Telecommunications Group.
The information in the table below is qualified by reference to the
Consolidated Financial Statements. You should read the Consolidated Financial
Statements and notes to those statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" along with this
table.
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------------------------------------------
Predecessor
1994 1995(1) 1996 1997 1998(9)
----------- ------------ ---------- ---------- ----------
($ and shares in thousands, except loss per share)
<S> <C> <C> <C> <C> <C>
Consolidated Statements of
Operations Data:
Revenues......................... $4,702 $18,617 $113,257 $300,796 $885,938
Operating costs and expenses:
Cost of services (exclusive of
depreciation and amortization
shown separately below)... (4,923) (17,510) (98,461) (265,321) (702,602)
Selling, general and
administrative expense.... (2,395) (9,639) (38,893) (94,712) (238,141)
Depreciation and amortization. (240) (849) (6,655) (21,819) (75,445)
------- ------- -------- -------- ----------
(7,558) (27,998) (144,009) (381,852) (1,016,188)
------- ------- -------- --------- ----------
Loss from operations............. (2,856) (9,381) (30,752) (81,056) (130,250)
Interest income.................. - 173 3,976 13,826 16,104
Interest expense................. (225) (194) (11,359) (39,373) (75,431)
Other income-net................. - - 470 6,595(2) 739
Foreign exchange transaction loss - - - - (11,055)
Minority interest................ - - (180) 210 6,079
Loss in equity interest of
unconsolidated subsidiaries... - - - - (3,276)
Income taxes..................... - - (395) (401) (1,334)
------- ------- -------- --------- ---------
Loss before extraordinary item... (3,081) (9,402) (38,240) (100,199) (198,424)
Extraordinary item(3)............ - - - - (20,800)
------- ------- -------- --------- ---------
Net loss......................... $(3,081) $(9,402) $(38,240) $(100,199) $(219,224)
======= ======= ======== ========= =========
Loss per common share
before extraordinary item(4).. $(15.41) $(1.67) $(5.13) $(5.27) $(4.52)
Extraordinary item per common share $ - $ - $ - $ - $(0.47)
Net loss per common share (4).... $(15.41) $(1.67) $(5.13) $(5.27) $(4.99)
Weighted average number of
common shares outstanding(4).. 200 5,641 7,448 19,008 43,913
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
------------------------------------------------------------------------------
Predecessor
1994 1995(1) 1996 1997 1998(9)
----------- --------- --------- ---------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Other Financial Data:
EBITDA(as defined)(5)............ $ (2,616) $ (8,532) $ (24,097) $ (59,237) $ (54,805)
Capital expenditures(6)............ 1,126 6,074 23,880 49,417 247,665
Cash (used in) provided by operating
activities....................... (1,987) 3,554 (10,475) (91,812) (82,752)
Cash used in investing activities.. (478) (16,537) (225,000) (18,821) (509,438)
Cash provided by financing activities 2,888 18,143 335,031 152,035 815,476
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
------------------------------------------------------------------------------
Predecessor
1994 1995(1) 1996 1997 1998(9)
----------- --------- --------- ---------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents........ $ 452 $ 5,163 $ 104,068 $ 144,894 $ 367,823
Marketable securities available for
sale............................. -- -- 67,828 13,858 111,548
Restricted marketable securities(7) -- -- 104,370 68,836 20,159
Total assets ...................... 3,682 53,072 427,969 605,664 1,714,593
Short-term debt, current portion of
long-term debt and current portion
of capital lease obligations(8).. 2,645 5,506 6,974 8,033 36,130
Long-term debt and capital lease
obligations(8)................... 1,404 6,648 314,425 316,608 1,089,375
Shareholders' (deficiency) equity.. (3,651) 5,705 20,843 126,699 133,484
</TABLE>
- --------------------------------
(1) Effective with the acquisition of a majority equity interest in RSL North
America in September 1995, we began to consolidate RSL North America's
operations. From March 1995 (the date of our initial investment) to
September 1995, we accounted for our investment in RSL North America using
the equity method of accounting.
(2) Other income--net includes the reversal of specific liabilities accrued in
connection with our obligations under an agreement that required us to meet
a carrier vendor's minimum usage requirements, which agreement was entered
into by a subsidiary of ours prior to our acquisition of that subsidiary.
During May 1997, we 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 notes we
issued in 1996.
(4) Loss per share is calculated by dividing the loss attributable to our
common shares (Class A common shares and Class B common shares) by the
weighted average number of common shares outstanding, and has been
retroactively restated to reflect the 2.19-for-one stock split. Shares
issuable pursuant to (a) outstanding stock options, (b) unexercised
warrants, (c) the warrant to purchase 459,900 Class B common shares at an
exercise price of $.00457 per share, subject to adjustment, issued to
Ronald S. Lauder as consideration for his previous guarantee of a revolving
credit facility, (d) options granted to a number of minority shareholders
of our subsidiaries, exercisable on the occurrence of specific events, to
exchange their
(footnotes continued on next page)
18
<PAGE>
(footnotes continued from previous page)
shares in the respective subsidiaries for, in specific circumstances, Class
A common shares or, in specific circumstances, cash, or (e) incentive
units, which are options granted to some of the employees of our
subsidiaries to acquire shares of those subsidiaries or similar rights,
some of which are currently exercisable, and the right to exchange these
incentive units for Class A common shares or, in other circumstances, at
our option, cash, are not included in the loss per share of common shares
calculation as their effect is anti-dilutive.
(5) EBITDA, as used herein, consists of loss from operations before
depreciation and amortization. EBITDA is provided because it is a measure
commonly used in the telecommunications industry. It is presented to
enhance an understanding of our operating results and is not intended to
represent cash flow or results of operations in accordance with U.S. GAAP
for the periods indicated. Our use of EBITDA may not be comparable to
similarly titled measures used by other companies due to the use by other
companies of different financial statement components in calculating
EBITDA.
(6) Capital expenditures include assets acquired through capital lease
financing and other debt.
(7) Restricted marketable securities--held to maturity consists of U.S.
government securities pledged to secure the payment of interest on the
principal amount of our notes issued in 1996.
(8) As of December 31, 1998, we had approximately $33.9 million of available
(undrawn) borrowing capacity under our current bank and vendor facilities.
(9) During 1998, we acquired various companies. See footnote 2 of the
consolidated financial statements for information regarding these
acquisitions.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis together with the
Consolidated Financial Statements, including the notes to those statements,
appearing elsewhere in this prospectus. The following discussion contains
statements which constitute forward-looking statements regarding our current
intent, belief or expectations with respect to, among other things:
o our financing plans;
o trends affecting our financial condition or results of operations;
o the impact of competition;
o the start up of certain operations; and
o acquisition opportunities.
We make forward-looking statements to provide you with information
regarding our goals and what we hope to achieve. You are cautioned, however,
that forward-looking statements are subject to risks and uncertainties,
including those discussed in the "Risk Factors" section of this prospectus and
that actual results may differ significantly from those in the forward-looking
statements. The inclusion of forward-looking statements, therefore, is not a
guarantee that the plans, objectives and results will be achieved and we are
protected by law in most instances if these statements prove to be inaccurate.
Overview
We are a rapidly growing multinational telecommunications company which
provides a broad array of telecommunications services, with an emphasis on
international long distance voice services. Our target customers are primarily
small and medium-sized businesses in key markets. Our services include:
o international and national fixed and wireless
o calling card
o fax
o data
o Internet
o private line
o other value-added telecommunications services
We currently have revenue generating operations in:
o Australia
o Austria
o Belgium
o Canada
o Denmark
o Finland
o France
o Germany
o Italy
o Japan
o Luxembourg
o Mexico
o The Netherlands
o Portugal
o Spain
o Sweden
o Switzerland
o U.K.
o U.S.
o Venezuela
In 1997, approximately 70% of all international long distance switched
telecommunications minutes originated in these markets. We have recently
commenced start-up operations in Mexico through our investments in an entity in
that country. We plan to expand our operations and network over the next two
years particularly within the Asia/Pacific Rim and Latin American markets.
North America. We began operating in the U.S. in 1995 through the
acquisition of our predecessor entity, RSL North America, formerly International
Telecommunications Group. Since then, we have acquired additional businesses and
expanded the businesses we acquired. Some of the operations we acquired had poor
operational
20
<PAGE>
controls or management or were burdened by unfavorable transmission capacity
arrangements. We have since implemented solutions designed to improve their
operations and consolidated these operations under our U.S. subsidiary, RSL COM
U.S.A. We added key members to our management and purchased and developed
additional management software systems which provide current traffic reports and
an enhanced ability to predict future traffic volume. We also successfully
negotiated and continue to negotiate rate reductions and more appropriate
transmission capacity arrangements based on our current and anticipated capacity
requirements. In addition, we anticipate that expanded use of our owned
facilities, as this component of RSL-NET continues to grow, will result in more
cost-efficient methods of transport for our U.S. business.
As of December 31, 1998, we recorded approximately $284.8 million of
goodwill in connection with our North American acquisitions. Goodwill represents
the excess of cost over the fair value of the net assets of acquired entities.
Our component cost and purchase price allocation for our North American
acquisitions for each of 1995, 1996, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
Component Cost and
Purchase Price Allocation
-------------------------------------------
1995 1996 1997 1998
-------- ------- -------- --------
($ in millions)
<S> <C> <C> <C> <C>
Assets Acquired:
Cash and cash equivalents........................................ $7.4 $-- $5.0 $ 1.1
Accounts receivable.............................................. 9.0 -- 5.2 29.6
Telecommunications equipment..................................... 4.5 -- 0.8 28.7
Deposits and others.............................................. 1.9 -- 0.5 5.5
Intangible assets--goodwill...................................... 29.3 27.6 80.3 147.6
Intangible assets--customer base................................. -- -- 0.7 22.2
Liabilities Assumed:
Accounts payable and other long-term liabilities................. 32.6 8.1 12.3 91.3
Long-term debt................................................... 5.1 -- -- --
Equity:
Increase to shareholders' equity................................. -- -- 38.2 9.5
----- ----- ----- ------
Total Cash Invested................................................... $14.4 $19.5 $42.0 $133.9
Total Net Liabilities Assumed......................................... 14.9 8.1 0.8 26.4
Total Stock Issued.................................................... -- -- 38.2 9.5
----- ----- ----- ------
Total Purchase Price.................................................. $29.3 $27.6 $81.0 $169.8
===== ===== ===== ======
</TABLE>
Europe. EU member states are in various stages of deregulation.
Historically, deregulation in these countries occurred because the member states
of the EU decided to open up their own markets, as was the case in the U.K.,
Sweden and Finland. More recently, deregulation has occurred because member
states were obligated to deregulate under a series of directives adopted by the
EC to liberalize and harmonize the provision of telecommunications services and
networks within the EU. An EC directive is addressed to the national legislative
body of each EU member state, calling for the legislative body to implement the
directive through the passage of national legislation.
Although interconnection was not available or 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 us 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. We can provide value-added services before interconnection is available
and, in some EU member states, we are already providing dial-in access, coupled,
when possible, with autodialers or the programming of customers' phone systems
to dial access codes to route traffic to our switches over the domestic public
switched telephone network.
21
<PAGE>
As of December 31, 1998, we had recorded an aggregate of approximately
$187.8 million of goodwill in connection with our European acquisitions. Our
component cost and purchase price allocation for our European acquisitions for
each of 1995, 1996, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
Component Cost and
Purchase Price Allocation
------------------------------------------
1995 1996 1997 1998
------ ------ ------ ------
($ in millions)
<S> <C> <C> <C> <C>
Assets Acquired:
Cash............................................................. $-- $2.3 $1.4 $--
Accounts receivable.............................................. 0.2 0.7 2.3 28.7
Telecommunications equipment..................................... -- 2.3 0.8 8.2
Deposits and others.............................................. -- 0.1 0.8 13.1
Intangible assets--goodwill...................................... 0.9 24.2 31.4 131.3
Intangible assets--customer base................................. -- -- -- 5.2
Intangible assets--name.......................................... -- -- -- 10.0
Liabilities Assumed:
Accounts payable and other long-term liabilities................. 0.2 5.3 5.3 62.4
Lease commitments................................................ -- 2.4 -- --
Equity:
Increase to shareholders' equity................................. -- -- 3.4 --
---- ----- ----- ------
Total Cash Invested................................................... $0.9 $21.9 $28.0 $134.1
Total Net Liabilities Assumed......................................... -- 2.3 -- 12.4
Total Stock Issued.................................................... -- -- 3.4 --
---- ----- ----- ------
Total Purchase Price.................................................. $0.9 $24.2 $31.4 $146.5
==== ==== ===== ======
</TABLE>
Revenues
We provide both domestic and international long distance
telecommunications services. Revenues are derived from the number of minutes
(and fractions of minutes) of use billed by us and are recorded upon the
completion of the calls. We also derive revenues from prepaid calling cards.
These revenues are recognized at the time of usage or upon expiration of the
calling card. We maintain local market pricing structures for our services and
generally price our services at a discount to the prices charged by larger and
more established carriers. We have experienced, and expect to continue to
experience, declining revenue per minute in all of our markets as a result of
increasing competition in the telecommunications industry. We expect the
declining revenue per minute to be offset by increased minute volumes and
decreased operating costs per minute.
22
<PAGE>
<TABLE>
<CAPTION>
North American Operations
Year Ended December 31,
------------------------------------------------------------------
Predecessor
1994 1995 1996 1997 1998
----------- ------ ------- ------ ------
(in thousands, except percentage of consolidated revenues)
<S> <C> <C> <C> <C> <C>
Revenues....................................... $ 4,702 $ 18,461 $ 85,843 $ 194,518 $ 449,974
Percentage of consolidated revenues............ 100% 99.2% 75.8% 64.7% 50.8%
Operating costs and expenses:
Cost of services (exclusive of
depreciation and amortization shown
separately below)........................ (4,923) (17,367) (76,892) (176,780) (366,267)
Selling, general and administrative expenses (2,395) (7,444) (17,606) (38,207) (86,110)
Depreciation and amortization............... (240) (619) (3,047) (5,650) (18,758)
--------- -------- ---------- --------- ----------
(7,558) (25,430) (97,545) (220,637) (471,135)
--------- -------- ---------- --------- ----------
Loss from operations........................... $ (2,856) $(6,969) $ (11,702) $ (26,119) $ (21,161)
========= ======= ========== ========= =========
</TABLE>
Prior to 1997, our revenues had been derived primarily from operations
within the U.S. U.S. revenues result primarily from the sale of long distance
voice services (1) on a retail basis to commercial customers, (2) on a bulk
discount basis to distributors of prepaid calling cards, and (3) on a wholesale
basis to other carriers. Carrier customers acquire our services for the purpose
of reselling these services on a wholesale basis to other carriers or on a
retail basis to end users. Carrier customers react to temporary price
fluctuations and spot market availability. We, therefore, experience significant
month-to-month changes in revenues generated by our carrier customers. We have
shifted our marketing focus in the U.S. to small and medium-sized businesses
over the past two years, and have restructured our pricing of wholesale services
to other carriers. We believe that as a result of these changes to our business
and as a result of using a greater proportion of owned versus leased facilities,
we began to experience decreasing quarterly losses in the U.S. in January 1998.
We have derived increased revenues from our commercial customers, and continue
to reduce reliance on wholesale carrier revenues. We have begun deriving
additional North American revenues as a result of our 1998 acquisitions of
Westel Communications in Canada and Westinghouse Communications in the U.S.
European Operations
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------
1995 1996 1997 1998
------------ ------------ ----------- -----------
(in thousands, except percentage of consolidated revenues)
<S> <C> <C> <C> <C>
Revenues................................................. $ 156 $ 27,414 $ 73,653 $ 306,289
Percentage of consolidated revenues...................... 0.8% 24.2% 24.5% 34.6%
Operating costs and expenses:
Cost of services (exclusive of depreciation
and amortization shown separately below).......... (143) (21,569) (59,516) (232,977)
Selling, general and administrative
expenses........................................... (539) (17,377) (43,004) (103,874)
Depreciation and amortization......................... (12) (1,906) (7,038) (25,829)
------ ---------- ---------- ---------
(694) (40,852) (109,558) (362,680)
------ ---------- ---------- ---------
Loss from operations..................................... $ (538) $ (13,438) $ (35,905) $ (56,391)
====== ========== ========== =========
</TABLE>
We began substantial European operations in three countries in
the second quarter of 1996 and have since established operations in 11
additional European countries.
23
<PAGE>
We derive revenues from international and domestic long distance voice
services, as well as reselling wireless services in some countries in which we
operate. Almost all revenues from our European operations are from commercial
sales to end users. Our target customers are small to medium-sized businesses,
and to some extent niche consumer markets, including selected communities with
significant immigrant populations. To reduce our credit risk to these niche
consumer markets, we primarily offer prepaid products to our targeted consumers.
Each of the countries in which we operate has experienced different levels of
deregulation, resulting in various levels of competition and differing ranges of
services which we are permitted to offer our customers. We believe that as we
pursue our strategic growth strategy we will continue to encounter various
degrees of start-up time and competition.
Effect of Deregulation on European Revenues. We operate in various
countries in Europe, each of which is in a different state of deregulation. We
anticipate that deregulation will have a favorable impact on revenues because
(1) customers will be able to access our services more easily and (2) we will
have the ability to provide a broader array of products and services. We believe
that, with established or start-up operations in 14 European countries, we are
well positioned to benefit from the anticipated continued deregulation of
European markets. However, we cannot be sure of the timing or extent of
deregulation in any particular country. See "Industry Overview--European Long
Distance Market" and "Regulatory Environment" under "Business."
Asia/Pacific Rim Operations
<TABLE>
<CAPTION>
Inception
(April 1997 through Year Ended
December 31, 1997) December 31, 1998
------------------ -----------------
(in thousands, except percentage of consolidated revenues)
<S> <C> <C>
Revenues........................................................... $ 32,333 $ 128,881
Percentage of consolidated revenues................................ 10.7% 14.5%
Operating costs and expenses:
Cost of services (exclusive of depreciation and
amortization shown separately below)........................ (28,873) (102,621)
Selling, general and administrative expenses.................... (5,827) (29,734)
Depreciation and amortization................................... (824) (7,231)
--------- ----------
(35,524) (139,586)
--------- ----------
Loss from operations............................................... $ (3,191) $ (10,705)
========= ==========
</TABLE>
We began Asia/Pacific Rim revenue producing operations through our
Australian subsidiary with the acquisition of a customer base in Australia in
the second quarter of 1997. We initiated operations in Japan through RSL COM
Japan in July 1998.
Latin American Operations
We commenced Latin American revenue producing operations in Venezuela
in the third quarter of 1997. Our operations in Venezuela have generated
approximately $292,000 in revenues in 1997 and $794,000 in revenues in 1998.
Cost of Services (Exclusive of Depreciation and Amortization)
Our 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 our cost of services is variable, including local access charges and
transmission capacity leased on a per-minute of use basis. We plan to make
significant investments in international and domestic circuits and, as a result,
expect an increasing amount of total operating costs to become fixed, as the
volume of our calls carried over owned facilities increases. We have experienced
improved operating results in our operations where we have shifted from leased
facilities to owned facilities. The depreciation expense with respect to our
owned circuits is not accounted for in cost of services. In addition, we intend
to lower the variable cost of termination as a percentage of revenues by
carrying traffic under more of our existing operating
24
<PAGE>
agreements and by negotiating additional operating agreements on strategic
routes. We have directly linked some of our local operators in Europe and the
U.S. using lines leased on a fixed cost point-to-point basis and owned circuits.
To the extent traffic can be transported between two local operators over leased
or owned circuits, there is only marginal cost to us 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 circuit. Our
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. Settlement rates are the rates paid to other carriers to terminate an
international call. While we intend to purchase or construct intra-national
transmission facilities where these facilities are available for purchase or may
be constructed and these investments are cost effective and warranted by traffic
patterns, a significant percentage of our intra-national transmission facilities
will continue to be leased on a variable cost basis. Accordingly, variable costs
will continue to be most of our cost of services for the foreseeable future.
Effect of Deregulation on European Cost of Services (Exclusive of
Depreciation and Amortization)
Our current cost structure varies from country to country, partly as a
result of the different level of regulatory policies in place in each country.
In general, our cost structure is lower in countries that have been
substantially deregulated than in those which are partially deregulated, and
some of our European operations have become EBITDA positive. In countries that
are not substantially deregulated, our access to the local exchange network is
through more expensive means, such as leased lines or dial-in access. This
results in higher costs to us for carrying international traffic. In addition,
local regulations in many countries restrict us from purchasing capacity on
international cable and fiber systems. We 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 we operate is expected to permit us to (1)
interconnect our switches with the local exchange network and (2) purchase our
own international facilities. We believe that deregulation will result in
improved European operating results. Deregulation in a particular country is
also expected to permit us to terminate international inbound traffic in that
country, which will result in an improved cost structure for us as a whole. We
cannot be sure that deregulation will proceed as expected or lower our cost of
services.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses consist of costs to
support (1) the continued expansion of RSL-NET, (2) the introduction of new
services and (3) the provision of ongoing customer service. These costs are
principally comprised of costs associated with:
o employee compensation;
o occupancy;
o insurance;
o professional fees;
o sales and marketing, including sales commissions; and
o bad debt expenses.
In addition, as we begin operations in different countries, we
incur significant start-up costs, which are expensed in the period incurred,
particularly for hiring, training and retention of personnel, leasing of office
space and advertising.
We have grown, and intend 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 our 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
these operations, we generally incur additional fixed costs to facilitate
growth. During periods of significant expansion, selling, general and
administrative expenses have increased, and are expected to continue to increase
significantly. Accordingly, our consolidated results of operations will vary
depending on the timing and speed of our expansion strategy. During a period of
rapid expansion, the consolidated results of operations will not necessarily
reflect the performance of our more established local operators.
25
<PAGE>
Acquisition Accounting
Since our formation in 1994, we have expanded our revenues, customer
base and network through internal growth and acquisitions. All of our
acquisitions were negotiated on an arm's-length basis with unaffiliated third
parties. We accounted for all of our acquisitions of controlling interests using
the purchase method of accounting. Accordingly, the 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 primarily
been recorded as goodwill, which is being amortized over a 15- to 20-year
period.
Results of Operations
Years Ended December 31, 1998 and 1997
Revenues. Revenues increased to $885.9 million for 1998 compared to
$300.8 million for 1997, an increase of 195%. This increase is due primarily to
an increase in (1) North American revenues to $450.0 million for 1998 from
$194.5 million for 1997 and (2) European revenues, which increased to $306.3
million for 1998 from $73.7 million for 1997. We had revenue generating
operations in the U.S., Canada, 14 European countries, Venezuela, Australia and
Japan during 1998. The increase in North American revenues was primarily due to
acquisitions, which contributed $150.8 million in 1998 and $11.2 million in
1997, a significant increase in our U.S. commercial customer base and increased
traffic volume from existing customers. Revenues from European operations
increased as a result of (1) increased sales of prepaid calling cards, which
contributed $24.6 million in 1998 and $3.0 million in 1997, (2) acquisitions,
primarily the Motorola Tel.co acquisition, which contributed $153.7 million to
1998 European revenues, and (3) an increase in the European customer base.
Revenues from Asia/Pacific Rim operations increased to $128.9 million for 1998,
compared with $32.3 million for 1997, primarily as a result of various
acquisitions which had taken place throughout the period.
Cost of Services (Exclusive of Depreciation and Amortization). Cost of
services increased to $702.6 million for 1998 from $265.3 million for 1997, an
increase of 165%. This increase is primarily due to increased traffic and, to
some extent, increased rates paid to our carrier vendors. As a percentage of
revenues, cost of services decreased to 79.3% for 1998 from 88.2% for 1997. The
decrease in cost of services as a percentage of revenues is primarily due to (1)
the increased diversification in our customer base, (2) an increase in
commercial accounts and mobile subscribers which positively impacted our
profitability, and (3) the improvement in our North American operations' costs
of services, which represented 52.1% of our total cost of services in 1998. This
was offset by our European operations, which experienced problems in purchasing
capacity in Germany and France due to some delays in implementing deregulation
in these countries. Accordingly, traffic arising from increased prepaid calling
card sales in these countries had to be carried over uneconomical overflow
capacity which produced low or negative gross margins for our prepaid operations
in Germany and France. We believe that these capacity problems were temporary
and have since been corrected. In order to reduce costs, we intend to purchase
additional capacity, if and when regulations permit, in each of our countries of
operation, on routes on which we have experienced, or anticipate experiencing,
overflow traffic.
Selling, General and Administrative Expense. Selling, general and
administrative expense for 1998 increased by $143.4 million, or 151%, to $238.1
million from $94.7 million for 1997. This increase is primarily due to (1) costs
of start ups in and expansion of our European operations, (2) costs associated
with the hiring of new personnel in Europe and (3) acquisitions in North America
and Australia. Our European operations contributed $103.9 million or 43.6% of
our consolidated selling, general and administrative expense for 1998, although
these operations accounted for only 34.6% of our total revenues in 1998.
European selling, general and administrative
26
<PAGE>
expense increased as a result of the Motorola Tel.co acquisition and the
significant increase in employees in many of our European operations. Selling,
general and administrative expense will continue to increase as a result of
start-up costs and infrastructure expansion and start-up costs attributable to
new local operations.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased 246% to $75.4 million for 1998 from $21.8 million for 1997.
This increase is primarily due to the increased amortization of goodwill
recorded as a result of our acquisitions, as well as an increase in investment
in property and equipment. Depreciation and amortization expense is expected to
increase in the future as a result of our acquisition of additional assets.
Interest Income. Interest income increased to $16.1 million for 1998
from $13.8 million for 1997, primarily as a result of interest earned on the
remaining net proceeds of notes we issued in 1998.
Interest Expense. Interest expense increased to $75.4 million for 1998
from $39.4 million for 1997, primarily as a result of interest related to notes
we issued in 1998.
Foreign Exchange Transaction Loss. We experienced a foreign exchange
transaction loss of $11.1 million for 1998, primarily because of the increase in
the Deutsche mark against the U.S. dollar in connection with notes we issued in
1998 denominated in Deutsche marks.
Loss in Equity Interest of Unconsolidated Subsidiaries. We recorded a
loss in equity interest of unconsolidated subsidiaries of $3.3 million for 1998
to account for our pro-rata allocable loss in our investment in each of Maxitel,
Telegate Holding and MK Telecom Network, Inc. In December 1998, our voting
interest in Telegate Holding was increased to 50.2% and has been consolidated
from the transaction date through the end of the year.
Loss Before Extraordinary Item. Loss before extraordinary item
increased to $198.4 million for 1998, as compared to a net loss of $100.2
million for 1997 due to the factors described above. An extraordinary item of
$20.8 million for 1998 represents primarily the premium paid to retire
approximately $127.5 million of the original $300.0 million of notes we issued
in 1996. We had no similar expense in 1997.
Years Ended December 31, 1997 and 1996
Revenues. Revenues increased to $300.8 million for 1997 compared to
$113.3 million for 1996, an increase of 165.6%. This increase was due primarily
to an increase in (1) U.S. revenues to $194.5 million for 1997 from $85.8
million for 1996 and (2) European revenues, which increased to $73.7 million for
1997 from $27.4 million for 1996. We generated revenues in the U.S., in 10
European countries and in Australia and Venezuela during the fourth quarter of
1997. We had revenue producing operations in only the U.S. and five European
countries in 1996. The increase in U.S. revenues was primarily due to (1)
increased traffic volume from existing customers, (2) increases in our U.S.
commercial customer base and (3) our acquisition of LDM Systems on October 1,
1997, which contributed $13.1 million to our 1997 revenue. The increase in
European revenues was primarily due to (1) increased traffic volume from
existing customers and (2) increases in our customer base in the U.K., Sweden,
Finland, Germany and The Netherlands. Our 1996 European acquisitions in France,
Germany and The Netherlands contributed $32.7 million in revenue for the full
1997 year 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). Cost of
services increased to $265.3 million for 1997 from $98.5 million for 1996, an
increase of 169.5%. This increase was primarily due to increased traffic and
increased rates paid to our carrier vendors. As a percentage of revenues, cost
of services increased to 88.2% for 1997 from 86.9% for 1996. The increase in
cost of services as a percentage of revenues was primarily due to our U.S.
operations' cost of services, which represented 66.6% of our total cost of
services. Although we anticipated a decrease in U.S. and European cost of
services during 1997, rapid revenue growth in excess of our expectations
continued to cause traffic overflow resulting in higher cost of services, and
increased operating losses.
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Selling, General and Administrative Expense. Selling, general and
administrative expense for 1997 increased by $55.8 million, or 143.5%, to $94.7
million from $38.9 million for 1996. This increase occurred primarily because of
the costs associated with our expansion into nine new markets and the concurrent
hiring of more than 1,000 new employees. We also recognized all of the costs
associated with opening new offices, commencing advertising campaigns and
product development. As a percent of U.S. revenues, our U.S. selling, general
and administrative expense decreased to 19.6% for 1997 from 20.5% for 1996. Our
U.S. bad debt expense for 1997 increased by $8.1 million, or 289%, to $10.9
million from $2.8 million for 1996. This increase was primarily due to a 127%
increase in our U.S. revenues for the same period and increased credit exposure
primarily due to the increased diversity in our customer base. Additionally, our
1997 bad debt expense included approximately $3.0 million of bad debt recorded
in connection with the bankruptcy filing of one of our major customers, Cherry
Communications. As a percent of European revenues, our European selling, general
and administrative expense decreased to 58.4% for 1997 from 63.4% for 1996. Our
consolidated selling, general and administrative expense in Europe was 45.4% of
our total consolidated selling, general and administrative expense, despite our
European operations accounting for only 24.5% of our 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 1997 from $6.7 million for 1996,
an increase of $15.1 million. This increase was primarily due to the increased
amortization of goodwill recorded as a result of our acquisitions.
Interest Income. Interest income increased to $13.8 million for 1997
from $4.0 million for 1996, primarily as a result of interest earned on the
remaining net proceeds of the notes we issued in 1996 and the net proceeds from
our IPO in October 1997.
Interest Expense. Interest expense increased to $39.4 million for 1997
from $11.4 million for 1996, an increase of approximately $28.0 million, as a
result of interest related to the notes we issued in 1996.
Net Loss. Net loss increased to $100.2 million for 1997, as compared
to a net loss of $38.2 million for 1996 due to the factors described above.
Liquidity and Capital Resources
We have incurred significant operating and net losses and negative cash
flow, due in large part to the start up and development of our operations and
RSL-NET. We expect that our net losses and negative cash flow will increase as
we implement our growth strategy. Historically, we have funded our losses and
capital expenditures through capital contributions, borrowings and a portion of
the net proceeds of securities offerings.
Cash used in operating activities equaled $10.5 million in 1996, $91.8
million in 1997 and $82.8 million in 1998. Capital expenditures were $23.9
million in 1996, $49.4 million in 1997 and $247.7 million in 1998. These capital
expenditures were principally for domestic and international gateway switches
and related telecommunications equipment. We intend to continue expending
capital at a level similar to 1998 in order to (1) expand and develop our
infrastructure, in part by replacing leased transmission facilities with owned
transmission lines, (2) purchase circuits in inter-city fiber routes in European
countries and (3) install additional national and international telephone
gateway switches. Funds expended for acquisitions were $38.6 million in 1996,
$77.8 million in 1997 and $287.0 million in 1998. During 1996, we funded our
operating losses, capital expenditures and acquisitions with borrowings of $44.5
million and a portion of the net proceeds of our notes offering in 1996. During
1997, we funded our operating losses, capital expenditures and acquisitions with
a portion of the net proceeds of our notes offering in 1996 and a portion of the
net proceeds of our IPO. During 1998, we funded our operating losses, capital
expenditures and acquisitions with a portion of the net proceeds of our IPO, a
portion of the net proceeds of our notes offerings in 1998 and a portion of the
net proceeds of our equity offering in 1998. At December 31, 1998, we had $255.2
million of working capital, compared to $83.1 million of working capital at
December 31, 1997.
Our indebtedness was approximately $1.02 billion at December 31, 1998,
of which approximately $1.01 billion represented long-term debt and
approximately $11.5 million represented short-term debt. Our indebtedness
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was approximately $304.6 million at December 31, 1997, of which approximately
$300.0 million represented long-term debt and approximately $4.6 million
represented short-term debt. Substantially all of our long-term indebtedness is
attributable to notes issued by our wholly owned subsidiary, RSL Communications
PLC, and guaranteed by us.
In October 1996, RSL Communications PLC completed an offering of $300.0
million of 12 1/4% senior notes due 2006, $127.5 million of which were redeemed
by RSL Communications PLC in April 1998. In February 1998, RSL Communications
PLC completed an offering of $200.0 million of 9 1/8% senior notes due 2008 and
$328.1 million ($200.0 million initial accreted value) of 10 1/8% senior
discount notes due 2008. In March 1998, RSL Communications PLC completed an
offering of 296.0 million Deutsche marks (approximately $99.1 million initial
accreted value) of 10% senior discount notes. On November 9, 1998, RSL
Communications PLC issued 12% notes, in the principal amount at maturity of $100
million ($94.5 million initial accreted value). In addition, on December 8,
1998, RSL Communications PLC issued 10 1/2% notes, in the principal amount of
$200 million. The documents governing the notes described above contain
restrictive covenants which impose limitations on our ability to, among other
things:
o incur additional indebtedness;
o pay dividends or make other distributions;
o issue capital stock of some of our subsidiaries;
o guarantee debt;
o enter into transactions with shareholders and affiliates;
o create liens;
o enter into sale-leaseback transactions;
o sell assets; and
o make some types of investments.
In connection with our issuance of the notes in 1996, we were required
to purchase and maintain restricted marketable securities, which are held by the
trustee for these notes, in order to secure the payment of the first six
scheduled interest payments on these notes. The market value of the securities
at December 31, 1998, as adjusted to reflect the redemption in 1998 of $127.5
million of these notes, was $20.7 million.
The original commitment under our revolving credit facility was $7.5
million at June 30, 1998. That amount was permanently reduced to $5 million on
July 1, 1998. Approximately $3.7 million of the commitment under the credit
facility was used at December 31, 1998. The revolving credit facility is payable
on June 30, 1999 and accrues interest at the lender's prime interest rate, which
was 7.75% per year at December 31, 1998.
Through our subsidiary LDM Systems, we have a $10.0 million revolving
credit facility. There was $6.5 million used under this credit facility at
December 31, 1998. This credit facility is payable in full on September 30, 2000
and accrues interest at the lender's prime interest rate plus 2.5% per year. We
were paying a 10.25% per year interest rate on this credit facility at December
31, 1998.
Through our subsidiary Telegate Holding, we have an $8.1 million
revolving credit facility. There was $2.6 million used under this credit
facility at December 31, 1998. This credit facility is payable in annual
payments through December 31, 2002 and accrues interest at a variable interest
rate not to exceed 5.5% per year. The variable rate was 4.3% at December 31,
1998.
At December 31, 1998, Telegate Holding had $12.6 million of additional
unused revolving credit facilities that accrue interest at a rate of 6.5% with
various banks.
Telegate Holding also had various secured and unsecured 6% debentures
held by former shareholders of $3.2 million and $5.6 million as of December 31,
1998. These loans are payable in four semiannual installments beginning June 30,
2001.
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One of our primary equipment vendors has provided to some of our
subsidiaries $93.0 million in vendor financing commitments to fund the purchase
of additional switching and related telecommunications capital equipment. At
December 31, 1998, there was approximately $82.0 million used under this credit
facility. Borrowings under this vendor facility accrue interest at a rate equal
to the London InterBank Offered Rate plus either 5.25% or 4.5% per year
depending on the equipment purchased.
On December 1, 1998, we sold 7,000,000 Class A common shares in a
public offering. We issued an additional 544,278 Class A common shares on
December 15, 1998 pursuant to the underwriters' over-allotment option. Our total
net proceeds from these sales were approximately $169.0 million (after deducting
the underwriting discount and estimated expenses).
In 1999 and 2000, we intend to continue capital expenditures at a level
similar to that of 1998. We intend to raise additional capital in 1999. We
believe that the remaining net proceeds from the issuance of our outstanding
notes and our equity offering in 1998, together with availability under our
revolving credit facilities, vendor financing facility, short-term lines of
credit and overdraft facilities from local banks, will be sufficient to fund our
capital expenditures and operations through the first quarter of 2000. However,
we may be required to raise 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 sales of our securities and
other sources of liquidity otherwise prove to be insufficient.
Regardless, we plan to raise additional capital in 1999 to ensure that adequate
funding is available for capital expenditures and operations for the year 2000
and beyond.
Effects of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
hedging activities. Generally, it requires that an entity recognize all
derivatives as either an asset or liability and measure those instruments at
fair value, as well as identify the conditions for which a derivative may be
specifically designed as a hedge. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. Our officers are currently addressing the
financial reporting measures that will be needed in order to comply with this
disclosure. We have not participated in any hedging activities in connection
with foreign currency exposure.
Inflation
We do not believe that inflation has had a significant impact on our
consolidated operations.
Seasonality
Our European operations experience seasonality during July and August,
December and January, and, to a lesser extent, March. These months are
traditional holiday months in most European countries and many European
businesses, which are our 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 our operations that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000 or not recognize it at all. 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 our business, including
computer systems and voice networks, and
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could cause, among other things, a temporary inability to process transactions,
billing and customer service or to engage in similar normal business activities.
We have been implementing a comprehensive program of analysis of and/or
changes to our computer systems to ensure that all these systems will be year
2000 compliant. Our year 2000 project includes the following phases:
(1) conducting a comprehensive inventory of our internal systems,
including information technology systems and non-information
technology systems such as switching, billing and other platforms
and electrical systems and the systems acquired or to be acquired
by us;
(2) assessing and prioritizing any required remediation;
(3) remediating any problems by repairing or, if appropriate,
replacing the non-compliant systems; and
(4) testing all remediated systems for year 2000 compliance.
Phase 1 has been completed. Phase 2 is expected to be completed during
the second quarter of 1999. Phases 3 and 4 are expected to be completed by June
30, 1999.
We have also retained a year 2000 solution provider as a consultant to
assist us in our assessment and remediation projects and to manage and
coordinate year 2000 compliance for each of our local operators on a global
basis.
In addition to assessing our own systems, we are conducting an external
review of our 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 us. Based on discussions with
Ericsson, our primary equipment vendor, we believe that the equipment provided
to us by Ericsson will be year 2000 compliant. Testing of the Ericsson equipment
is expected to be completed by June 30, 1999. We may experience problems to the
extent that other telecommunications carriers whose services are resold by us or
to which we send traffic for termination are not year 2000 compliant. We cannot
be sure that these problems will not have a material adverse effect on us.
We expect to complete all of the phases of the process described above
by June 30, 1999; although we expect to continue testing our systems for year
2000 compliance during the rest of 1999 as a result of upgrades and other
changes to our systems. We expect that all of our computer systems will be fully
compliant before the end of 1999. We cannot be sure, however, that we will
achieve full compliance before the end of 1999 or that effective contingency
plans will be developed or implemented. A failure of our computer systems or the
failure of our vendors or customers to effectively upgrade their software and
systems for transition to the year 2000 could have a material adverse effect on
our business, financial position and results of operations.
We have completed numerous acquisitions during recent periods and are
in the process of integrating the systems of the acquired businesses into our
operations. Those systems are included in our year 2000 review and remediation
project. During the process of evaluating businesses for potential acquisition,
and after any acquisitions, we will evaluate the extent of the year 2000
problems associated with these acquisitions and the cost and timing of
remediation. We cannot be sure, however, that the systems of any acquired
business will be year 2000 compliant when acquired or will be capable of timely
remediation.
Through April 30, 1999, we have spent approximately $3 million on our
year 2000 program. We expect that it will cost approximately an additional $7
million, to be paid through the first quarter of 2000, to become year 2000
compliant. These amounts will be financed through working capital. We expense
costs associated with software modification when they are incurred.
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Following the completion of our year 2000 assessment by June 30, 1999,
we plan to determine the nature and extent of any contingency plans that may be
required. Even if our assessment is completed without identifying any additional
material non-compliant systems operated by us, or under our control, or under
the control of third parties, the most likely worst case scenario would be a
systems failure beyond our control to remedy. This kind of failure could
materially prevent us from operating our business. We believe that this kind of
a failure would likely lead to lost revenues, increased operating costs, loss of
customers or other business interruptions of a material nature, and potential
claims against us.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have not entered into any financial instruments for trading or
hedging purposes.
We are exposed to fluctuations in foreign currencies relative to the
U.S. dollar, as our revenues, costs, assets and liabilities are, for the most
part, denominated in local currencies. The results of operations of our
subsidiaries, as reported in U.S. dollars, may be significantly affected by
fluctuations in the value of the local currencies in which we transact business.
We recorded a foreign currency translation adjustment of $0.9 million for 1998.
This amount is recorded upon the translation of the foreign subsidiaries'
financial statements into U.S. dollars, and is dependent upon the various
foreign exchange rates and the magnitude of the foreign subsidiaries' financial
statements. As of December 31, 1998, we had recorded a foreign currency
transaction loss of approximately $11.1 million, primarily as a result of the
increase in the Deutsche mark against the U.S. dollar in connection with our
notes denominated in Deutsche marks.
We incur settlement costs when we exchange traffic under operating
agreements with foreign correspondents. These costs currently represent a small
portion of the total costs of services; however, as our international operations
increase, we expect that these costs will become a more significant portion of
our cost of services. These costs are settled by using a net settlement process
with our foreign correspondents comprised of special drawing rights. Special
drawing rights are the established method of settlement among international
telecommunications carriers. The special drawing rights are valued based upon a
basket of foreign currencies and we believe that this mitigates, to some extent,
our foreign currency exposure. We have monitored and will continue to monitor
our currency exposure and, if necessary, may enter into forward contracts and/or
similar instruments to mitigate the potential impacts of these risks.
We are currently not exposed to material future earnings or cash flow
exposures from changes in interest rates on long-term debt obligations since the
majority of our long-term debt obligations are at fixed rates. We are exposed to
interest rate risk, as additional financing may be required due to the large
operating losses and capital expenditures associated with establishing and
expanding our networks and facilities. The interest rate that we will be able to
obtain on additional financing will depend on market conditions at that time,
and may differ from the rates we have secured on our current debt. We do not
currently expect to enter into interest rate swap and/or similar instruments.
Our carrying value of cash and cash equivalents, accounts receivable,
accounts payable, marketable securities--available for sale, restricted
marketable securities--held to maturity, accrued expenses and notes payable is a
reasonable approximation of their fair value.
At December 31, 1998, the fair value of our long-term debt was
estimated to be $937.0 million based on the overall weighted average rate of our
long-term debt of 10.53% and an overall weighted average maturity of 9.1 years
compared to terms and rates currently available in long-term financing markets.
Market risk is estimated as the potential decrease in fair value of our
long-term debt resulting from a hypothetical increase of 105 basis points in
interest rates, which is 10% of our overall weighted average borrowing rate.
This type of an increase in interest rates would result in approximately a $9.8
million decrease in fair value of our long-term debt.
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BUSINESS
Overview
We are a rapidly growing multinational telecommunications company. We
provide a broad array of telecommunications services, with an emphasis on
international long distance voice services, primarily to small and medium-sized
businesses in key markets. Our services include:
o international and national fixed and wireless
o calling card
o fax
o data
o Internet
o private line
o other value-added telecommunications services
We started our business by acquiring operations in the U.S. in 1995. We
have grown rapidly through acquisitions, strategic investments, joint ventures
and alliances and the start up of our own operations in key markets. We generate
revenue in 20 countries. In 1997, approximately 70% of all international long
distance switched telecommunications minutes originated in these 20 countries.
Operations
We conduct operations in four principal regions: North America, Europe,
Asia/Pacific Rim and Latin America. We have developed a different strategy for
each region, driven in part by the pace of local deregulation. In each region,
we conduct our operations within a given country through local subsidiaries,
also known as our local operators.
North America. We began operating in the U.S. in 1995 through the
acquisition of our predecessor entity, RSL North America, formerly
International Telecommunications Group. We have acquired additional businesses
and expanded the businesses we acquired, since then. Some of the operations we
acquired had poor operational controls or management or were burdened by
unfavorable transmission arrangements. We have since implemented solutions
designed to improve their operations and consolidated these operations under our
U.S. subsidiary, RSL COM U.S.A. In July 1998, we acquired the business of
Westinghouse Communications from CBS Corporation for a cash purchase price of
$91.2 million and the assumption of liabilities in the amount of $38.3 million
and have been integrating its operations into RSL COM U.S.A.
In the U.S., we offer voice telephone services, data services,
including frame relay and transmission control protocol/Internet protocol
networks, and Internet access to a customer base consisting primarily of small
to medium-sized businesses through a network of six national switches.
Transmission control protocol/Internet protocol is a suite of network protocols
that allows computers with different architectures and operating system software
to communicate with other companies on the Internet. We are integrating
Westinghouse Communication's network, complementary customer base, and sales and
distribution channels with our existing operations, and are offering to some of
our existing customers the expanded range of Westinghouse Communications'
services, including data and Internet services.
In addition, we have recently expanded our North American operations
outside the U.S. and, as a result, will soon be able to terminate traffic on
RSL-NET in various regions of Canada and Mexico, the two largest country
destinations for U.S. originated traffic. In July 1998, we acquired Westel
Telecommunications from British Columbia Railway Company for approximately $37.6
million. Westel Telecommunications is a telecommunications company that provides
a broad range of enhanced telecommunications services, including long distance
voice telephone services, data, private line and Internet access throughout
British Columbia. Also, through some of the subsidiaries of RSL COM Latin
America, we acquired switches and fiber optic cable covering 14 cities in
Mexico. These switches were fully installed in 1998.
Europe. From 1995 through 1997, we established a presence in most major
EU markets through a series of acquisitions in advance of (but also in
anticipation of) deregulation in most of these markets. We now have
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operations in 14 countries in Europe. As part of this "first to market" entry
strategy, we made significant investments at a time when competition was
restricted in order to establish operations, identify and retain qualified
personnel, build a recognized brand name and improve our chances of obtaining
licenses when they first became available. We have interconnected our switches
directly with the local exchange network in the EU countries where sufficient
regulation has occurred to allow this. In EU countries where interconnection is
not yet available, we operate through more expensive means, such as leased lines
or dial-in access. Additionally, in the fully deregulated European markets we
have linked directly, or are in the process of linking directly, our own
international transmission facilities. This is generally more efficient and less
expensive than entering into long-term lease agreements for international
capacity at a high fixed cost or purchasing per minute of use termination rates
from the incumbent carrier. We will continue to make significant investments to
acquire our own international transmission facilities where these facilities are
available and ownership of these facilities is cost effective and warranted by
traffic patterns.
During 1998, we completed a number of alliances and acquisitions in
Europe in order to significantly expand our distribution channels and broaden
our customer base and products offered.
O We acquired the business of Motorola Tel.co in the U.K. and Germany from
Motorola for approximately $68.1 million in cash and the assumption of
liabilities in the amount of $10.6 million. Motorola Tel.co resells
wireless services and related products in the U.K. and Germany to a base of
more than 350,000 subscribers. This transaction significantly increases the
number of our direct customer relationships in Europe and allows us to
cross-sell long distance and wireless services.
o We entered into a marketing and distribution services agreement with Metro
Holding AG, the management holding company for Metro AG, one of the largest
retailers in Europe with 750 operating units in 18 European countries.
Under this agreement, the holding company will assist us to promote,
market, sell and distribute our services through Metro AG's wholesale and
retail operations in Europe. This arrangement is designed to provide us
access to Metro AG's extensive distribution network and customer base,
which includes a large number of small and medium-sized businesses. In
addition, this arrangement is expected to significantly accelerate our
penetration into key European markets. In connection with its alliance with
us, the holding company initially acquired in April 1998 a 12.5% equity
interest in RSL COM Europe. In June 1998, the holding company converted all
of its interest in RSL COM Europe into 1,607,142 of our Class A common
shares (based on value for value) and purchased an equal number of Class A
common shares from some of our shareholders. As of December 31, 1998, Metro
Holding AG held approximately 6.1% of our outstanding stock in the
aggregate, which it is required to hold until at least April 1, 2001.
o We acquired a majority interest in Telegate Holding GmbH, the controlling
holding company of Telegate AG, Europe's third largest directory
information provider, for approximately $33.6 million. An affiliate of
Metro Holding AG owns a minority interest in Telegate AG and Telegate
Holding. Together with Telegate AG, we plan to expand Telegate AG's
services and provide international directory services and call completion
throughout Europe using RSL-NET.
o We purchased 90% of the equity of Telecenter Oy, an independent sales agent
in Finland, for approximately $14.4 million.
In February 1999, through our subsidiary RSL COM Deutschland GmbH, we
entered into an agreement with Debitel Kommunikationstechnik GmbH & Co. KG,
Europe's largest mobile reseller. Under this agreement, Debitel will use our
fixed wire network for new services that Debitel will provide to German
customers.
Asia/Pacific Rim. Most markets in the Asia/Pacific Rim region are in
the earliest stages of deregulation, with the notable exception of Australia,
which is at a significantly more advanced stage of deregulation. We began
operations in Australia in April 1997 and have established a significant
presence in that market. We also initiated start-up operations in Japan in July
1998.
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In March 1998, we acquired the customer base of First Direct
Communications and Link Telecommunications, two Australian switchless mobile
telecommunications resellers, for approximately $19.6 million.
We are evaluating acquisition opportunities in other Asia/Pacific Rim
markets consistent with our global strategy.
Latin America. Most markets in Latin America are in the earliest
stages of deregulation. Our 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. We
formed a joint venture to pursue this strategy with entities controlled by the
Cisneros Group of Companies in mid-1997. The Cisneros Group of Companies are
engaged in a number of diverse commercial enterprises in a variety of countries
around the world. Revenues from our Latin American operations accounted for
less than 1% of our consolidated revenues for 1997 and 1998.
Industry Overview
According to industry sources, international long distance switched
telecommunications traffic worldwide increased from 28 billion minutes in 1989
to 81.8 billion minutes in 1997 and is projected to reach between approximately
128.7 and 158.6 billion minutes by the year 2001. The international
telecommunications industry is changing rapidly, due to:
o deregulation;
o privatization of government-owned telephone monopolies;
o technological improvements;
o expansion of telecommunications infrastructure;
o globalization of the world's economies; and
o free trade.
These factors have resulted in increased competition and demand for
telecommunications services worldwide.
Deregulation and privatization of telecommunications services and the
onset of competition have also resulted in an increase in the number of
services offered. These services include global voicemail, faxmail and e-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, such as
calling cards. Deregulation and privatization of telecommunications services
and the onset of competition have also resulted in lower prices to customers.
All of these factors have contributed to an increase in the volume of both
inbound and outbound call traffic. Despite falling prices, the overall market
for providers of international long distance traffic has been growing and the
decline in prices generally has been more than offset by an increase in the use
of telecommunications services.
U.S. International Long Distance Market
The U.S. international long distance market is large and growing. The
growth of the U.S.-originated international long distance market was initially
due to deregulation in the U.S. and the resulting decrease in prices which
accompanied the onset of competition. Deregulation and the resulting
competition also led to improvement in the services offered and customer
service. More recently, in addition to continued price decreases and improved
services due to further U.S. deregulation, the growth of the U.S.-originated
international long distance market has been due to the :
o deregulation of other telecommunications markets throughout
the world;
o privatization of existing government-owned telephone
monopolies;
o increased capacity and improved quality;
o expansion of telecommunications infrastructure;
o the globalization of the world's economies; and
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o free trade.
The profitability of the traditional U.S.-originated international
long distance market is principally driven by the difference between settlement
rates, which are the rates paid to other carriers to terminate an international
call, and billed revenues. The factors described above brought about reductions
in settlement rates and costs for leased capacity, reducing termination costs
for U.S.-based carriers. We believe 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 we cannot be sure
of this. See "Risk Factors."
European International Long Distance Market
In Europe, deregulation, together with significant advances in
technology that have decreased the cost of providing services and allowed the
provision of more sophisticated value-added features, have made it possible for
other service providers, including us, to compete with the government-owned and
government-controlled monopolies and more established carriers in providing
international voice telecommunications services. The EC has enacted several
directives requiring EU member states to deregulate the market for
telecommunications services, including a directive in 1990 requiring each
member state to deregulate by 1992 all telephony services offered over its
public switched telephone network, with the exception of some services,
including basic voice telephony. A 1996 EC directive required member states to
deregulate open voice telephony services, effective January 1, 1998, except for
some member states who were granted extensions for a specific period of time.
Some member states have been late in implementing these directives. While no
one can be certain of the timing or extent of deregulation in any particular
country or the EU in general, in response to these European regulatory changes,
we are among a number of different competitors who are emerging to compete with
the European government-owned monopolies.
Asia/Pacific Rim International Long Distance Market
Deregulation is spreading throughout many of the major markets in Asia
and the Pacific Rim. In February 1997, a significant number of countries in
these regions signed an international agreement that requires them to open
their telecommunications 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. In
addition, various Latin American countries have completely or partially
privatized their national carriers, including Argentina, Brazil, Chile, Mexico,
Peru and Venezuela. Some countries also have competitive local and/or long
distance sectors. Some examples of Latin American deregulation, privatization
and competition are described below:
o Chile has competitive operators in both sectors.
o Colombia has granted two long distance operating licenses to
local companies, ending the monopoly of Colombia's
government-owned telephone service provider.
o Venezuela has legalized value-added services and has targeted
January 1, 2000 as the date for deregulation.
o Brazil privatized its government-owned telephone service
provider in July 1998 and has established an independent
regulator to oversee its telecommunications industry.
o Mexico privatized its former government-owned telephone
service provider, Telmex, and Telmex's exclusive long
distance concession was modified in 1990 to allow other
participants to render long distance services as of August
1996. Additionally, since January 1997, Telmex has been
required to interconnect with the networks of competitors.
Competition in Mexico has been initiated and an independent
regulator has been established.
o Peru opened its market to competition in August 1998, ending
the monopoly of its government-owned telephone service
provider one year earlier than scheduled.
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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, remain slow, with domestic and
international traffic still dominated by government-owned or
government-controlled monopolies. We believe that international carriers, like
ourselves, that have already entered into, or are in negotiations to enter
into, operating agreements with the government-owned or government-controlled
monopolies in many of these countries will be well positioned to benefit from
increasing traffic flows as the telecommunications infrastructure in these
countries is expanded and the barriers to competition are dismantled. Although
there is a general trend towards deregulation worldwide, we cannot be certain
of 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.
Our Strategy
Our 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
We provide a broad array of international and domestic
telecommunications services. Our target customers are primarily small and
medium-sized businesses that generate significant calling traffic between
countries to capitalize on (1) the continued growth of international traffic
and (2) the margin opportunity created by the high end-user rates currently
maintained by government-owned monopolies and other dominant carriers.
Identify and Enter Key Markets Ahead of Full Deregulation
We seek to enter deregulating markets that originate or terminate
significant levels of international traffic ahead of full deregulation to gain
competitive advantages over carriers that enter after deregulation is complete.
These advantages include:
o developing multiple sales and distribution channels and a
customer base prior to widespread competition;
o acquiring experienced management, including technical and
marketing personnel;
o achieving name recognition as an early competitor to the
existing government-owned monopolies; and
o a greater chance of obtaining necessary licenses.
In countries that are in the process of deregulating, competition is
often restricted to a limited number of specific services. In these cases, we
employ a two-stage market penetration strategy. First, we take advantage of
current market conditions by offering the allowed services. We then leverage
the advantages of our early entry, including name recognition and established
marketing and distribution capabilities, to take advantage of full
deregulation.
Target Small and Medium-Sized Businesses
We focus on offering our products and services to small and
medium-sized businesses that originate in excess of $500 per month in
international telephone calls. We believe 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
government-owned and government-controlled monopolies. By offering a broad
range of interrelated services and continuing our commitment to provide high
quality customer service, we seek to strengthen our direct relationships with a
diverse and rapidly growing customer base and to build customer loyalty.
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Build a Cost Competitive Global Network
By integrating our current and future owned switching facilities,
known as points of presence, into RSL-NET, we are able to originate, transport
and terminate traffic using our own network. By doing so, we are able to bypass
the high costs of transporting the international portion of a call through a
third-party carrier. Substantially all of our local operators have network
switching facilities to provide international voice and other
telecommunications services in their markets. We currently connect our
facilities principally by a combination of ownership interests in fiber optic
systems and private leased lines. We intend to continue to make significant
investments in transmission capacity and other transmission facilities where
these facilities become available and if these investments are cost effective
and warranted by traffic patterns.
Expand Marketing and Distribution Channels
We will continue to develop marketing and distribution channels to
expand our customer base, particularly in our target market of small to
medium-sized businesses. We have been innovative in seeking marketing partners
to better identify potential customers and penetrate markets on a
cost-efficient basis. Also, we capitalize on cross-selling opportunities as we
add new customer bases and products through acquisitions and strategic
alliances, and we plan to introduce a universal brand image to create worldwide
name recognition.
Pursue Strategic Acquisitions and Alliances
We seek to acquire control of businesses with:
o an established customer base;
o compatible operations;
o licenses to operate as an international carrier;
o experience with additional or emerging telecommunications
products and technologies; and
o experienced management.
In addition, we seek to enter into strategic alliances that we believe
will enable an accelerated and cost effective expansion of our business.
Leverage Expertise of Management Team
We have attracted experienced management from our industry to
facilitate the integration of our regional operations. Many of our key managers
have had significant experience with existing providers and early competitors
in deregulating markets. In addition, we generally retain key management in the
companies we acquire. As a result, we believe that we are well positioned to
manage the integration of acquisitions and the rapid growth of our customer
base and network infrastructure.
Expand Internet-Based Telephony and On-Line Services Offered
Through our subsidiary Delta Three, we seek to expand our Internet
telephony services offered by increasing our investment in Internet gateway
servers and expanding our sales and marketing channels. Delta Three uses
Internet 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 phone calls over the Internet or Internet
protocol 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 Internet protocol services, we plan to
develop value-added services on the Internet and to provide on-line customer
service and billing. We believe that Delta Three positions us at the forefront
of the rapidly emerging Internet protocol industry. See "Internet Protocol
Telephony."
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As of the date of this prospectus, we are planning to offer up to 20%
of Delta Three's common stock to the public. Delta Three plans to file the
necessary documents with the SEC within the next month and to offer shares in
Delta Three to the public in the third quarter of 1999.
Network
We generally use a single switch technology platform (Ericsson AXE-10
switches) for our international telephony gateway switches. We believe that a
single switch platform gives us a strategic advantage in developing new
services and allows us to upgrade network software on a more efficient basis
when compared to those global carriers who employ multiple switch technologies.
We are also pursuing alternative transmission technologies such as the Internet
and managed Internet protocol networks in order to minimize our operating
costs. See "Internet Protocol Telephony."
Owned Facilities
Our owned facilities include switches and interests in international
fiber optic cable systems. Our 17 international gateway switches are located
in:
o New York
o Los Angeles
o London
o Stockholm
o Paris
o Frankfurt
o Helsinki
o Vienna
o Milan
o Copenhagen
o Lisbon
o Sydney
o Zurich
o Tokyo
In addition, we operate 16 national switches throughout our
operations. Our existing international gateway switches conform to
international signaling and transmission standards and allow us to interconnect
our network to existing government-owned and government-controlled monopolies
and carrier networks around the world while maintaining quality and dependable
services.
We also own capacity on various international digital fiber optic
cable systems. Our U.S. operations own capacity on 19 submarine and two
terrestrial cable systems. Our Swedish operation owns capacity on five
submarine cable systems, our U.K. operation owns capacity on eight submarine
cable systems, and our Australian operation owns capacity on four submarine
cable systems. Our Australian operation also owns capacity on two terrestrial
cable systems. In addition, we have committed to purchase capacity on four
other cable systems and are currently in negotiations to purchase capacity in
various other cable systems.
Together with our joint venture partner in Mexico, we recently
acquired switches and fiber cable covering 14 cities in Mexico, which were
fully installed in 1998.
Operating Agreements
Our operating agreements provide us with ability to transport traffic
directly to foreign carriers over jointly-owned facilities rather than using
leased capacity. Our U.S. operations currently hold 23 operating agreements,
one of which allows us to transport traffic into three countries. These
agreements provide potential direct access to 22 countries. We believe that we
are one of only a limited number of carriers within the U.S. that has been able
to secure a significant number of operating agreements with non-U.S. carriers.
Our Swedish operation currently uses two operating agreements which enable us
to exchange traffic with Denmark and Norway and our Finnish operation uses an
operating agreement which enables us to exchange traffic with Russia.
Operating agreements lower the cost of transporting traffic by
allowing us to use our capacity rights to correspond directly with our foreign
carriers. This eliminates the cost of transporting a call through leased
capacity. In addition, if we can develop sufficient traffic into another
country, we can potentially develop an additional source
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of revenue through return traffic or other settlement arrangements with the
government-owned monopoly or other carriers in that country.
Leased Capacity
For all routes where we do not own facilities or use operating
agreements, we lease capacity. In addition, we have arrangements with local
carriers in each country in which we originate traffic to transport domestic
calls from end users to our switches. We intend to purchase or construct
transmission facilities where these facilities are available for purchase or
may be constructed and the purchase or construction is cost effective and
warranted by traffic patterns. Nonetheless, a significant percentage of our
transmission facilities will continue to be leased. Leased capacity is
typically obtained on a per-minute basis or point-to-point fixed cost basis. We
use leased satellite facilities for traffic to and from those countries where
digital undersea fiber optic cables are not available or cost effective. Leased
satellite facilities are also used for redundancy when digital undersea cable
service is temporarily interrupted.
Network Strategy
We have connected, or are in the process of connecting, our switches
in all of the countries in which we operate. We have connected our switches,
and expect to connect switches we install in the future, by purchasing circuits
on a point-to-point fixed cost basis, subject to local regulatory conditions.
In each new market we enter, we intend to install our own switching facilities
which will then be integrated into RSL-NET to improve our overall cost
structure. We realize a cost savings by routing a portion of our international
traffic over our owned and leased facilities as opposed to corresponding via
operating agreements. We expect that we will continue to realize cost savings
by routing an increasing portion of our international traffic over our owned
and leased facilities, in particular once the markets in which we operate
deregulate sufficiently to allow interconnect. See "Effect of Deregulation on
European Cost of Services" under "Management's Discussion and Analysis of
Financial Condition and Results of Operations." In addition, each of our local
operators maintains an independent cost structure for all other traffic. By
directly linking our operations, we will be better able to implement a
least-cost routing system. Least-cost routing involves the programming of our
switches to transport international calls over the route which is most likely
to produce the lowest cost to us without compromising call quality.
For calls to countries where we do not have a local operator, we seek
to establish and use 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. We
have not generated significant return minutes to date. In addition, by
strategically establishing our local operators and entering into operating
agreements, we can take advantage of the different settlement rates established
in the relevant countries.
Origination and termination of traffic locally is accomplished through
transmission capacity leased on a per-minute basis, except where we provide
private line service. As our operations in a given country grow, we generally
will install additional points of presence and invest in transmission capacity
on a point-to-point fixed cost basis to connect the new points of presence to
our international gateway switch. This will enable us to reduce our dependence
on relatively high cost-per-minute leases by reducing the distance calls will
travel over capacity leased on that basis.
Products And Services
We offer a variety of fixed and wireless local, long distance and
international products and services to our customers, as well as value-added
services. Although we focus on providing international service, we also provide
domestic long distance services, where permitted under relevant regulations, to
accommodate customer demands. In addition, we provide, or plan to provide,
local services as a competitive local carrier in some U.S. states by reselling
the services of facilities-based local exchange carriers.
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We provide the services described below to the extent permitted by
local regulations in each of our markets.
Long Distance Services
We provide domestic and international long distance services to our
customers. In nearly every country in which we operate in Europe, we provide
domestic long distance services. In the U.S., we are certified or authorized to
originate intrastate, interexchange calls in 49 states and the District of
Columbia and can terminate calls throughout the U.S.
Local Exchange Service
In the U.S., we are authorized to resell local exchange service in 22
states. This authority enables us to purchase local telephone service from Bell
operating companies and other local carriers at a discount rate and resell that
service to our customers.
Private Line Service
We can provide dedicated point-to-point connections to businesses
requiring dedicated private telephone lines for high volumes of voice and data
between the customers' offices in some countries where we have operations.
Calling Cards
Our calling cards are either prepaid or post-paid cards (for which
calls are billed in arrears). Our calling cards provide international call
access to or between many countries that have direct-dial service with the U.S.
Prepaid calling cards are similar to other calling cards, but differ in
marketing focus as well as the method of payment. A customer purchases a
prepaid calling card that entitles the customer to make phone calls on the card
up to a specified limit. We also offer prepaid calling cards that are
rechargeable. In all cases, the card number is personal to the customer and is
secured by means of a personal identification number. We currently offer these
products in most of our existing operations.
Value-Added Services
We currently offer facsimile services in all of our operations. We
offer toll-free dialing in the U.S., the U.K. and Sweden. Also, we offer
Internet access in the U.S., Sweden and Canada. In the future, we intend to
offer most of these services in all our markets where we are allowed to do so.
We also intend to introduce the following services:
o video-teleconferencing;
o on-line billing services;
o consolidated billing for all services offered by us;
o on-line directory assistance;
o on-line conference calling; and
o international directory assistance.
In addition, through Delta Three, we can offer international long
distance voice service to niche markets utilizing Internet protocol 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 us to obtain volume discounts when we lease
capacity on a per-minute basis and allows us to generate revenues from
otherwise unused capacity on our owned circuits and under our point-to-point
leases.
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Transit traffic is traffic that 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
We provide wireless services to corporate, business and residential
subscribers in the U.K., Germany and Australia. Through our agreements with
network operators, we provide subscribers with connection and access to
wireless networks, and we sell airtime services. We charge our subscribers for
service activation, monthly access, per-minute airtime and custom calling
features. We generally offer our subscribers 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 and we
cross-sell our long distance services to these subscribers.
Data Services
We offer a range of data transmission services to our customers in the
U.S. and Canada, including:
o frame relay;
o Internet protocol networks;
o Internet access;
o remote access;
o e-mail;
o packet switching;
o LAN integration; and
o network and facilities management.
Customers
Small and Medium-Sized Businesses. We focus on offering our products
and services to small and medium-sized businesses with significant
international telephone usage, generally in excess of $500 per month in
international phone calls. We have focused on industries which traditionally
have significant volumes of international traffic. We believe that small and
medium-sized businesses have generally been underserved by the major global
telecommunications carriers and the government-owned monopolies, which have
focused on offering their lowest rates and best services primarily to higher
volume multinational business customers. We offer these companies significantly
discounted international calling rates as compared to the standard rates
charged by the major carriers and government-owned and government-controlled
monopolies.
Carriers. We offer international termination and transit traffic
services to other carriers, including resellers, on a wholesale basis, as a
"carriers' carrier." Although our carrier customers may switch service
providers because of price, we receive revenues from carrier customers as a
group on a relatively stable basis. Having a stable customer base helps us to
more accurately project the potential use of our network facilities. In
addition, the significant level of traffic volume generated by carrier
customers enables us to obtain large usage discounts on leased circuits based
on volume commitments. We believe that revenues from our carrier customers will
continue to represent a significant portion of our overall revenues in the
future.
Residential Customers. We target residential customers in
neighborhoods with large immigrant populations and/or with high international
calling patterns. We intend to capitalize on global immigration patterns by
targeting communities with large immigrant populations, primarily for our
prepaid calling cards.
Large Corporations. Primarily as a result of the acquisition of
Westinghouse Communications, we service a number of large corporations in the
U.S. We also target large corporations on those routes where our cost structure
allows us to compete effectively.
Customer Management. We strive to provide competitive pricing, high
quality services and superior customer care and believe that these factors are
important to our ability to compete effectively. We work closely
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with our customers to develop competitively priced telecommunications and
value-added services, such as customized billing, that are tailored to their
needs. We have invested significant resources in developing information systems
to allow us to provide accurate and timely responses to customer inquiries. In
addition, each of our local operators has customer service and engineering
personnel available to address service and technical problems as they arise.
Marketing And Sales
We have developed a wide range of marketing and distribution channels
focused on reaching a broad range of customers in the most cost-effective
manner. We market our products and services through:
o direct sales forces;
o strategic marketing alliances with companies that have access
to significant customer bases;
o networks of independent agents and distributors;
o strategic alliances with resellers; and
o telemarketing organizations.
Our services are currently marketed independently by our local
operators in each country.
We continually seek innovative ways to expand the scope of our
marketing channels and to enhance our ability to identify and retain customers.
For example, in 1998 we entered into a strategic alliance with Metro Holding
AG. This alliance will help us promote, market, sell and distribute our
services through Metro's subsidiary's wholesale and retail operations in
Europe. In addition, we capitalize on cross-selling opportunities as we add new
customer bases and products through acquisitions and strategic alliances. As a
result of our acquisition of Motorola Tel.co, we cross-sell our fixed wire and
other traditional long distance services to the Motorola Tel.co subscriber base
and Motorola Tel.co's wireless services to our existing customers.
Residential customers are targeted in neighborhoods with large
immigrant populations. We use resource materials and third-party market
research companies, among other things, as sources of information about these
communities. Carriers typically approach us directly to inquire about our
transit and termination rates.
Billing Systems
We own and operate an Electronic Data Systems IXPlus System that runs
on an IBM AS/400 hardware platform. We are using this system in the U.S. to:
o provide sophisticated billing information that can be
tailored to meet a specific customer's needs;
o provide high quality customer service;
o detect and reduce fraud;
o efficiently integrate additions to our customer base; and
o provide real-time traffic and call detail management.
We have also implemented a customer care and trouble management
system, as well as developed an information system that produces, among other
things, (1) profitability margin analysis, (2) routing statistics and (3)
overall traffic trends by country, customer, vendor and switch. Our information
systems are important to our operations as they allow us to assess and
determine quickly:
o customer billing and collection problems;
o production by and compensation or commissions owed to agents,
sales representatives and distributors;
o proper pricing for our services; and
o other matters which are important to our operation.
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The billing and information systems purchased by us in connection with
our acquisition of Westinghouse Communications are being integrated into our
current operations.
RSL COM Europe has developed its own proprietary information and
billing system employing a Hewlett Packard 9000 UNIX server and a Sybase
developed customized software package. This system provides for billing,
customer service, management information, financial reporting and related
functions. We have invested significant resources in the development of this
system and management has worked closely with Sybase to develop software which
reflects the experiences of management in our industry. This system has been
designed to be easily integrated into the operations of each of our current,
planned and future European local operators. We believe that this system is one
of our key assets and an important advantage in the management of our growth.
This system provides for sophisticated, automatic, itemized billing that can be
tailored to meet each customer's specific needs, including customized tariffs
and discount schemes. We expect that this system will also facilitate
integration and central oversight of our European operations through automated
data entry by our local operators and through easily generated financial
status, sales information, performance and sales commission reports.
Headquarters Operations
We direct our subsidiaries' operations, including:
o the management of the growth of current operations;
o the expansion of operations into new markets;
o the formation of joint ventures and strategic alliances; and
o the execution of acquisitions.
At the headquarters level, we identify key markets, determine the vehicles
through which, as well as the manner in which, we will enter these markets, and
we oversee the implementation of these vehicles. We continuously review and
consider investment and acquisition opportunities. We intend to pursue
acquisitions which we believe will expand or enhance current operations. All
these acquisitions will be identified, negotiated and completed at the
headquarters level, generally working together with local and regional
management in cases where the acquisitions supplement existing operations. In
addition, we seek alliances with carriers to expand the scope of our network
and improve our competitive profile.
We currently provide centralized financial services for all of our
local operators, including financial planning and analysis, cost control and
network management. We attempt to coordinate the acquisition of additional
transmission capacity, either leased or owned, with the growth of traffic
volumes of each local operator. We help secure financing and discounts for
these expenditures as well as other capital expenditures through our
arrangements with particular vendors. We also maintain 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.
We manage 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. We coordinate the routing of traffic on
RSL-NET to effect routing on a least-cost basis. Least-cost routing involves
the programming of our switches to transport international calls over the route
which is most likely to produce the lowest cost to us without compromising call
quality. We consolidate the least-cost routing information of each of our local
operators to allow them to take advantage of each others' cost structure.
We are in the process of coordinating the marketing activities of our
local operators. In addition, we intend to direct the services offered by our
local operators to enable us to provide services to a single customer in more
than one country. We intend to then provide the customer with a single bill and
designate a primary customer service representative to address the customer's
overall needs.
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Internet Protocol Telephony
Delta Three uses the Internet and managed Internet protocol 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 prices which are significantly less than the
price of a standard international call.
Delta Three operates as a wholesale carrier for us and for other
international long distance resellers on a point-to-point basis. It also
operates as a retail carrier, servicing our network and marketing the use of
our network to residential customers in designated areas and to corporations.
Currently, most of the minutes sold by Delta Three are sold to us on a
wholesale basis.
Delta Three currently provides Internet protocol telephony service
from the U.S., Europe, Australia and Japan with termination capabilities to 38
points of presence around the world using RSL-NET.
As of the date of this prospectus, we are planning to offer up to 20%
of Delta Three's common stock to the public. Delta Three plans to file the
necessary documents with the SEC within the next month and to offer shares in
Delta Three to the public in the third quarter of 1999.
Marketing and Sales
Delta Three's strategy is initially to use wholesale contracts to
increase the volume on our network and then to add retail and corporate clients
onto the network, which it markets under its name. Delta Three is also focused
on providing high margin innovative value-added services in niche markets.
Delta Three uses its Internet website 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 us the ability to purchase minutes
wholesale at preferred rates.
Delta Three Network
The Delta Three network consists of Internet gateway servers,
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 Internet protocol
gateway server and instructs the gateway server to place a local call to the
telephone the customer has dialed. Once the local call is transported, the
gateway server converts the call into a form which can be routed over the
Internet and transfers the call to a second Internet gateway. The Internet
protocol gateway server may be connected by (1) the Internet accessed through
an Internet service provider, (2) capacity leased on a private intranet and (3)
leased private lines. By routing calls in this 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 Internet
protocol telephony gateways and application technology.
Competition
The telecommunications services markets are extremely competitive.
Prices for long distance calls are decreasing substantially in most of our
markets as a result of deregulation and technological advances. Competition for
customers is primarily on the basis of price and, to a lesser extent, on the
type and quality of services offered, and customer service. We attempt to
discount our services from the prices charged by the government-owned monopoly
or larger and more established 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 some
deregulated markets severe price competition has occurred, and as deregulation
progresses in other markets we may encounter severe price competition in those
markets.
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North America
United States. In the U.S., we compete with AT&T, Sprint, MCI WorldCom
and many other U.S.-based and foreign carriers, some of which have considerably
greater financial and other resources than us. Some of the larger U.S.-based
carriers have entered into joint ventures with foreign carriers to provide
international services. In addition, some 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 us.
Canada. Westel Telecommunications' principal competitor in British
Columbia is BC Telecom, the dominant local access and long distance provider in
British Columbia. We also face competition from national providers including
AT&T Canada and Sprint Canada, as well as the separate regional telephone
companies in other provinces of Canada. We also face increasing competition
from cable companies, such as Rogers Communications and Shaw Cable, cellular
service providers and personal communications service providers such as
Microcell Solutions, Mobility Canada and Clearnet.
Mexico. Our principal competitor in Mexico is Telmex. We also compete
with Avantel, a local Mexican affiliate of MCI Worldcom and Alestra, the local
Mexican affiliate of AT&T. In addition, we compete with local telecommunications
providers such as Protel, Bestel and Iustel.
Europe
We must compete with a variety of other telecommunications providers
in our European markets, including:
o government-owned and government-controlled telephone
monopolies, established competitors such as Cable & Wireless
and alliances such as AT&T's alliance with British Telecom,
that offer long distance services, local service in
conjunction with long distance services or packages of
value-added services in addition to local and long distance
services;
o international long distance resellers; and
o other carriers, including Colt Industries, Espirit Telecom,
Global Crossing, GTS, ICG, Pacific Gateway, Primus
Telecommunications, Quest, Star Telecommunications, and
Viatel, with similar business objectives to ours.
Austria. Our competitors in Austria include Telecom Austria, the
leading telecommunications provider, UTA and others, including local Austrian
affiliates of global carriers or alliances such as Global One and Swisscom. In
addition, we are competing with resellers in the Austrian market.
Belgium. Our primary competitor is Belgacom, a former government-owned
monopoly. We also compete with local Belgian affiliates of global carriers or
alliances, such as Global One and Unisource, local resellers, as well as
subsidiaries of other U.S. and European telecommunications companies, such as
WorldxChange and Cable & Wireless Telemart.
Denmark. Tele Danmark, the former government-owned provider, is our
main competitor in Denmark. In January 1998, the Danish government sold a
controlling interest in Tele Danmark to U.S.-based Ameritech. We also face
competition from various other carriers, primarily Telia (the Swedish
government-owned monopoly), 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 under interconnect agreements.
Recently, several of these carriers entered into agreements with Powercom, a
subsidiary of two Danish power suppliers, to offer telecommunications services
over Powercom's fixed line network, which has until this time 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
telecommunications services in all areas. Telia and Mobilix A/S both hold
mobile licenses, offer a variety of telecommunications services and have the
goal of eventually becoming full-scale operators.
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Finland. We compete in Finland primarily with Sonera Corporation. We
also face competition from Finnnet, Telia, Global One and Faciliacom, which are
in the process of constructing facilities-based networks and have been licensed
as public telephone operators.
France. Our principal competitor in France is France Telecom.
Competition also comes from Modulance Global r3 and TRF, who offer discount
long distance services to the largest commercial customers. Companies such as
MCI WorldCom, Colt, Siris, Cegetel and Bouygues are constructing fiber networks
in major metropolitan areas and are interconnected to France Telecom. We also
face competition from resellers, including Omnicom and Esprit. As deregulation
continues, alternative networks for domestic traffic are expected to come
on-line.
Germany. Facilities-based carriers, wireless network operators and
resellers all compete with us in the market for telecommunications services in
Germany; principal among them is Deutsche Telekom, the government-controlled
provider and former monopoly in Germany. We also face competition from newly
licensed operations like Arcor (Mannesmann and DBKom), O.telo (RWE and VEBA)
and VIAG Interkom (VIAG and British Telecom) that are building their own
facilities-based networks in Germany. Further competition comes from resellers,
including MCI WorldCom, call-back providers, such as TelePassport, and wireless
network operators, such as Mannesmann Mobilfunk and E-Plus Mobilfunk.
Italy. In Italy, Telecom Italia is our leading competitor. We also
compete with the local Italian affiliates of global carriers such as British
Telecom, Global One and MCI WorldCom. In addition, we compete with
telecommunications providers in the Italian market such as Infostrada, which is
a joint venture between Olivetti and Mannesmann, and Wind, which is a joint
venture among Deutsche Telecom, France Telecom and ENEL, the Italian energy
public utility.
The Netherlands. Telecom Netherlands, the government-owned former
monopoly in The Netherlands, is our main competitor in The Netherlands. We also
face competition from companies like MCI WorldCom, who are in the process of
constructing facilities-based networks and have been licensed as public
telephone operators. Mega-carrier alliances such as Concert and Global One also
provide competition in The Netherlands. Assuming deregulation occurs, it is
expected that alternative networks currently under construction will become
available to route and terminate voice traffic.
Portugal. We operate in Portugal through our 39% investment in Maxitel
Servicos e Gestao de Telecomunicacoes. Maxitel's largest competitor is Portugal
Telecom, the dominant supplier of telecommunications services in Portugal.
Maxitel also competes with the local Portuguese affiliates of global carrier
alliances such as Global One and with resellers.
Spain. Telefonica de Espana, the company that has traditionally
enjoyed a monopoly in providing telecommunications services in Spain, is our
main competitor. We also face competition from Retevision, an emerging public
telephone operator which was granted the second nationwide license to provide
voice telephony services, and which is in the process of building its own
network, and Uni2, which was awarded a third nationwide license to provide
voice telephony services, but has not yet started to operate. Retevision
started operations at the beginning of 1998. Cable operators have been
authorized to provide voice telephony services since January 1998. We also face
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.
Sweden. In Sweden, our largest competitor is Telia, the leading
telecommunications provider in Sweden. We also face competition from newly
licensed operations like Tele 2 and MCI WorldCom that are building their own
facilities-based networks in Sweden. Our reseller competitors include
Telenordia, Telecom Finland and Tele 8. Upon the completion of the construction
of new fiber networks, we will have alternative means of routing and
terminating calls.
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Switzerland. Our competitors in Switzerland include Swisscom, Diax,
Sunrise, GlobalOne, Colt, MCI WorldCom, Equant and other smaller resellers.
United Kingdom. We compete in the U.K. primarily with British Telecom
and Cable & Wireless. We also face 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. We also compete in the wireless service market with the four wireless
network operators, Vodafone, CellNet, Orange and One-to-One, as well as other
wireless service providers.
Latin America
Venezuela. We compete in Venezuela primarily with CANTV, the leading
telecommunications supplier in Venezuela. We also compete with local Venezuelan
affiliates of global carriers, such as British Telecom, Global One and Mercury,
regional competitors, such as Impsat, Texcom and Charter Communications, and
callback operators.
Asia/Pacific Rim
Australia. The two licensed general carriers in Australia are Telstra
Corporation, the former government-owned monopoly, and Cable & Wireless Optus.
Each of these competitors provides a bundle of services including mobile,
local, and domestic and international long distance. In addition, we face
competition from switch-based and switchless resellers such as AAPT, Primus,
WorldCom, One-Tel, Macquarie Corporate, Hutchison Telecommunications and
Vodatone.
Regulatory Environment
United States
Our 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 U.S. Some state regulatory authorities have jurisdiction
over telecommunications originating and terminating within the state. We cannot
be sure that (1) future changes in the law will not have a negative impact on
us, (2) domestic or international regulators or third parties will not raise
material issues with regard to our compliance or noncompliance with applicable
regulations or (3) regulatory activities will not have an adverse impact on us.
Federal. The FCC currently regulates us as a non-dominant carrier with
respect to our domestic and international long distance services as well as our
competitive local exchange services. Generally, the FCC has chosen not to
exercise its statutory power to regulate closely the charges, practices or
classifications of non-dominant carriers. Nevertheless, the FCC acts upon
complaints against these carriers for failure to comply with statutory
obligations or with the FCC's rules, regulations and policies. The FCC also has
the power to (1) impose more stringent regulatory requirements on us, (2)
change our regulatory classification, (3) impose monetary forfeiture and (4)
revoke our authority. In the current regulatory atmosphere, we believe that the
FCC is unlikely to take any of these actions with respect to our domestic
services offered. With respect to our international services, however, it is
possible that the FCC could classify us as dominant for providing services on
specific international routes on the basis of our foreign ownership and
affiliations or on the basis of a determination that we had the ability to
discriminate against U.S. competitors. In 1997, for example, the FCC classified
Sprint as a dominant carrier for providing U.S. international services on the
U.S.--France and U.S.--Germany routes in connection with investments in Sprint
by France Telecom and Deutsche Telekom.
Among domestic carriers, local exchange carriers are currently
classified as dominant carriers with respect to the local exchange services
they provide. No interstate, interexchange carriers, including regional Bell
operating companies 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, pricing restrictions
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that once applied to AT&T have been eliminated, likely making AT&T's prices
more competitive than ours. Although the FCC placed some conditions on AT&T's
reclassification to promote the development of vigorous competition in the
international services marketplace, most of those conditions expire by May
1999.
We have the authority to provide domestic, interstate
telecommunications services. We have also been granted authority by the FCC to
provide switched international telecommunications services through the resale
of switched services of U.S. facilities-based carriers, and, generally, to
resell international private lines not connected to the public switched
telephone network or which are connected to this network in the following
countries to which we are authorized to provide international service:
o Australia
o Austria
o Belgium
o Canada
o Denmark
o France
o Germany
o Hong Kong
o Ireland
o Italy
o Japan
o Luxembourg
o The Netherlands
o New Zealand
o Norway
o Sweden
o Switzerland
o U.K.
Additionally, we have the authority to provide international
telecommunications services by acquiring circuits on various undersea cables or
leasing satellite facilities. The FCC reserves the right to condition, modify
or revoke our domestic and international authority if we violate the
Communications Act or FCC regulations, rules or policies under the
Communications Act. Although we believe the probability to be remote, a
revocation by the FCC of our domestic or international authority or a refusal
by the FCC to grant additional international authority would negatively impact
us.
Both domestic and international non-dominant carriers must maintain
tariffs on file with the FCC. We must file tariffs containing detailed actual
rate schedules. In reliance on the FCC's past relaxed enforcement of tariff
filing requirements for non-dominant domestic carriers, we and most of our
competitors did not consistently maintain detailed rate schedules for domestic
offerings in their tariffs. Until the two year statute of limitations expires,
we could be held liable for damages for our past failure to file tariffs
containing actual rate schedules. We believe that this outcome is remote and
would not have a material adverse effect on our financial condition or results
of operations. We have always been required to include detailed rate schedules
in our international tariffs.
In February 1996, the Telecommunications Act was signed into law.
Under this law, the regional Bell operating companies are permitted to provide
long distance services in their own service areas in competition with us so
long as they satisfy a 14-point "checklist" for nondiscriminatory competitive
access to their local networks. The law includes safeguards against
anti-competitive conduct which could result from a regional Bell operating
company having access to all customers on our existing network as well as the
ability of the Bell operating companies to cross-subsidize their services and
discriminate against us. To date, the FCC has denied several applications for
in-region long distance authority filed by Bell operating companies.
Except with respect to transit agreements, authorizations for
international services held under Section 214 of the Communications Act, such
as those held by us, are limited to providing services or using facilities
between the U.S. and countries specified in the authorization. We hold all
necessary Section 214 authorizations for conducting our present business but
may need additional authority in the future. Additionally, carriers may not
lease private lines between the U.S. 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 U.S. carriers equivalent to
those available under U.S. law. The FCC has made that determination with
respect to the following countries:
o Australia
o Austria
o Belgium
o Canada
o Denmark
o France
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o Germany
o Hong Kong
o Ireland
o Italy
o Japan
o Luxembourg
o The Netherlands
o New Zealand
o Norway
o Sweden
o Switzerland
o U.K.
We are authorized to resell international private lines to these
points to provide basic services interconnected to the public switched
telephone network.
The FCC has adopted rules governing the offering of international
switched telecommunications services. These services typically involve a
bilateral, correspondent relationship between a carrier in the U.S. and a
carrier in the foreign country. Until recently, the U.S. 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 diverse
bargaining positions of the U.S. carriers, the FCC imposed requirements to try
to minimize the opportunities that dominant foreign telecommunications
providers would have to favor one U.S. carrier over another. These policies
include provisions of the International Settlement Policy, which requires (1)
the equal division of accounting rates, (2) non-discriminatory treatment of
U.S. carriers, and (3) that return minutes from a foreign carrier must be
proportional to the traffic that the U.S. 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. We have 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 U.S. 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 FCC's initiatives have had some measure of success. In the first
six months of 1998, the average accounting rate for calls originating from the
U.S. 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 more than 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.
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The FCC has recently eliminated the international settlements policy
and contract filing requirements for arrangements with foreign carriers that
lack market power. The FCC also eliminated the international settlements policy
for arrangements with all carriers on routes where rates to terminate U.S.
calls are at least 25% lower than the relevant settlement rate benchmark. In
recognition of the above reforms, the FCC also eliminated its policies allowing
alternative settlement arrangements.
An international agreement executed in February 1997 requires
signatories to open their telecommunications markets to competition. Consistent
with the commitments made by the U.S. under this 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 their 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 this international agreement.
Additionally, the FCC enforces requirements which derive from the
regulations of the International Telecommunications Union. These regulations
may further circumscribe the correspondent relationships described above. In
addition to settlement rates, these regulations govern aspects of transit
arrangements, where the originating carrier may contract with an interim
carrier in a second country to terminate service in a third country. We have
transit agreements with foreign carriers. These agreements may allow us to pay
less than the full accounting rate we would have to pay if we had a direct
operating agreement with the terminating country. However, we are unaware of
any instance in which a terminating country has objected with respect to any of
our traffic. If a terminating country objects in the future to these transit
arrangements, we may be required to secure alternative arrangements.
State. The intrastate long distance telecommunications operations and
our competitive local exchange operations are also subject to various state
laws. Currently, we are certified and tariffed or otherwise authorized to
provide intrastate, interexchange service in 49 states and the District of
Columbia. We are also certified or otherwise authorized to resell local
exchange service in 22 states.
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 (1) transfers of control of certified carriers,
(2) assignments of carrier assets, (3) carrier stock offerings, and (4) the
incurrence by carriers of some debt obligations. In some states, regulatory
approval may be required for acquisitions of telecommunications operations. In
the past, we have sought and successfully obtained regulatory approval for our
acquisitions.
Europe
EU member states are in various stages of deregulation. Historically,
deregulation in these countries occurred because the member states of the EU
decided to open up their own markets, as was the case in the U.K., Sweden and
Finland. More recently, deregulation has occurred because member states were
obligated to deregulate under a series of directives adopted by the EC to
liberalize and harmonize the provision of telecommunications services and
networks within the EU. An EC directive is addressed to the national
legislative body of each EU member state, calling for the legislative body to
implement the directive through the passage of national legislation. As of
January 1, 1998, ten of the 15 EU member states had enacted national measures
to give effect to the EU legislative framework. The ten states were Austria,
Belgium, Denmark, Finland, France, Germany, Italy, The Netherlands, Sweden, and
the U.K. Ireland and Spain liberalized their national markets on December 1,
1998; the remaining three member states, Greece, Luxembourg and Portugal, have
obtained extensions to the 1998 deadline.
In 1997, the EC issued an interconnect directive which was to be
implemented in member states by December 31, 1997 and requires the existing
government-owned monopolies to negotiate interconnection agreements with other
carriers on a non-discriminatory basis. The resulting connection, after
successful negotiation and implementation, will provide "Calling Line Identity,"
also known as ANI or PIC, which will allow our customers to access more easily
our local switch, for example, through prefix dialing instead of dial-in access.
It
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also will remove the local access fee levied in addition to our charge for the
call. After interconnection, rates charged by the government-owned monopoly for
the public switched telephone network portion of the call are expected to be
incurred by carriers at cost-oriented transparent rates and we expect that
carriers will be allowed to compete against the government-owned monopoly in
the domestic long distance market, as well as the international market.
The directive requires national regulatory authorities to ensure that
telecommunications providers that have significant market power to have
facilities in place to provide the above services by January 1, 2000. Providers
in countries which have been granted an additional transition period must comply
no later than two years after any later date agreed for full liberalization of
voice telephony services. However, the effective implementation of this or any
EC directive by member states is subject to substantial delay. In early 1999,
the following member states notified the EC that they had implementated
interconnection regulations: Austria, Belgium, Denmark, Finland, France,
Ireland, The Netherlands, and the U.K.
The EC also issued in 1997 a directive designed to harmonize licensing
procedures in the EU. Among other things, this licensing directive prevents
member states from limiting the number of new entrants unless required to
ensure efficient use of radio frequencies/numbers. This 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
this licensing directive by January 1, 1998. As described above, 12 member
states have enacted the 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 begin legal proceedings. This process
is time consuming. Accordingly, while a date has been set for the deregulation
of voice telephony services generally within the EU, the actual date on which
deregulation occurs could be months or years later.
There also may be practical considerations in implementing a
directive, which could result in a delay of its implementation, as there are
considerable doubts as to the readiness 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 these agreements are
negotiated and implemented, substantial ongoing disputes with the existing
government-owned monopolies 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, a full competition directive allowed alternative
entities to the government-owned monopolies to supply infrastructure, beginning
July 1, 1996. These alternative entities are typically utility and cable
television companies. This directive permits us to purchase cable capacity from
companies other than the local government-owned monopolies as other companies
build transmission facilities. To date, however, there has not been substantial
construction of these facilities by competitors to the government-owned
monopolies in many EU countries, although several member states have enacted
national legislation to adopt this directive.
Although interconnection frameworks have been implemented in most
countries in Europe, as discussed above, there are practical difficulties in
securing commercial agreements with the existing government-owned monopolies.
In European countries where an interconnection framework has not been
implemented, the current regulatory scheme, nevertheless, provides an
opportunity for us to provide a range of services immediately in these
countries, while putting in place adequate infrastructure to capitalize on
final deregulation when it occurs. We provide value-added services and, in some
EC countries at some point prior to interconnection, we 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 public
switched telephone network to our switches.
Latin America
Various countries in Latin America have taken initial steps towards
deregulation in the telecommunications market during the last few years. In
addition, various Latin American countries have completely or partially
privatized their national carriers, including Argentina, Brazil, Chile, Mexico,
Peru and Venezuela. Some countries also have competitive local and/or long
distance sectors. Some examples of Latin American deregulation, privatization
and competition are described below:
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o Chile has competitive operators in both sectors.
o Colombia has granted two long distance operating licenses to
local companies, ending the monopoly of Colombia's
government-owned telephone service provider.
o Venezuela has legalized value-added services and has targeted
January 1, 2000 as the date for deregulation.
o Brazil privatized its government-owned telephone service
provider in July 1998 and has established an independent
regulator to oversee its telecommunications industry.
o Mexico privatized its former government-owned telephone
service provider, Telmex, and Telmex's exclusive long
distance concession was modified in 1990 to allow other
participants to render long distance services as of August
1996. Additionally, since January 1997, Telmex has been
required to interconnect with the networks of competitors.
Competition in Mexico has been initiated and an independent
regulator has been established.
o Peru opened its market to competition in August 1998, ending
the monopoly of its government-owned telephone service
provider one year earlier than scheduled.
Asia/Pacific Rim
Deregulation is spreading throughout many of the major markets in Asia
and the Pacific Rim. In February 1997, a significant number of countries in
these regions signed an international agreement that requires them to open
their telecommunications markets to competition. Australia, the Philippines and
New Zealand have already opened their markets to full competition and Hong
Kong, Indonesia, Japan, South Korea and Malaysia have legalized the provision
of value-added services. Singapore licensed two new operators in 1998.
Employees
As of December 31, 1998, we employed approximately 2,500 people,
including officers, administrative and salaried selling personnel. We consider
our relationship with our employees to be good.
Properties
Our principal office is at Clarendon House, Church Street, Hamilton,
Bermuda.
We maintain executive offices at 767 Fifth Avenue, New York, New York,
where we occupy approximately 11,000 square feet under a lease which expires on
January 31, 2002. The lease provides for annual lease payments of $767,000.
We also maintain a 3,040 square foot office at 60 Hudson Street, New
York, New York which houses our 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.
We have entered into a lease to maintain a 14,000 square foot office
at 430 Park Avenue, New York, New York for RSL COM U.S.A.'s eastern U.S.
offices. The lease extends until June 29, 2001 and provides for annual lease
payments of $375,000.
We have entered into a lease to maintain 31,500 square feet of
additional office space for RSL COM U.S.A. at 360 West 31st Street, 21 Penn
Plaza, New York, New York. The lease extends until December 30, 2008 and
provides for annual lease payments of $472,500.
We maintain a 15,000 square foot office at 5550 Topanga Canyon
Boulevard, Woodland Hills, California which houses RSL COM U.S.A.'s western
offices. The lease for this space extends until January 15, 2003 and provides
for annual lease payments of $333,000.
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As a result of the acquisition of Westinghouse Communications, we
lease office space in Pittsburgh, Pennsylvania and various other sales offices
for annual total rent of approximately $1.8 million. The lease for the
principal office in Pittsburgh extends until July 31, 2008.
We maintain 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 after that date.
We maintain office space at Victoria House, London Square, Cross
Lanes, Guildford, Surrey, England, which is RSL COM 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.
We maintain additional office space for RSL COM 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 was rent free through April 1999.
In addition, we maintain offices with respect to our other foreign
operations, for which the aggregate total annual lease payments equal
approximately $4.7 million.
Through our direct and indirect subsidiaries, we also lease additional
office spaces for our operations.
Legal Proceedings
We are, from time to time, a party to litigation that arises in the
normal course of our business operations. We are not presently a party to any
of this type of litigation that we believe could reasonably be expected to have
a material adverse effect on our business or results of operations.
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MANAGEMENT
Directors and Executive and Other Officers
Information concerning our directors and executive and other officers
is set forth below:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Ronald S. Lauder 55 Director and Chairman of the board of directors
Itzhak Fisher 43 Director, Chief Executive Officer and President
Donald R. Shassian 43 Executive Vice President, Chief Financial Officer and
Treasurer
Jacob Z. Schuster 50 Director, Executive Vice President and Assistant Secretary
Richard E. Williams 48 Chief Executive Officer and President of RSL COM Europe
Adrian Coote 45 Managing Director of RSL COM Australia
Edmond J. Thomas 56 Chief Executive Officer and President of RSL COM U.S.A.
Karen van de Vrande 48 Vice President of Marketing
Nir Tarlovsky 32 Vice President of Business Development
Nesim N. Bildirici 32 Vice President of Mergers and Acquisitions
Mark J. Hirschhorn 34 Vice President of Finance, Global Controller and Assistant
Secretary
Ronald T. Mallcott 52 Vice President of Engineering
Andrew C. Shields 43 Vice President of International Carrier Relations
Elie C. Wurtman 29 Vice President of Emerging Technologies
Avery S. Fischer 32 Vice President of Legal Affairs and General Counsel
Michael Ashford 52 Secretary
Gustavo A. Cisneros 53 Director
Fred H. Langhammer 55 Director
Leonard A. Lauder 66 Director
Eugene A. Sekulow 67 Director
Nicolas G. Trollope 51 Director
</TABLE>
All directors hold office, subject to death, removal or resignation,
until the next annual general meeting of shareholders and thereafter until
their successors have been elected and qualified. Officers serve at the
pleasure of the board of directors, subject to any written arrangements with
us. See "Employment and Change-in-Control Arrangements." Below is some
information about our directors and executive officers.
Ronald S. Lauder, our co-founder, has served as non-executive chairman
of our board of directors since 1994 and is our principal and controlling
shareholder. He is also a founder and has served as the non-executive chairman
of the board of directors of Central European Media Enterprises, the leading
commercial television company in Central and Eastern Europe since 1994. Mr.
Lauder is a principal shareholder of The Estee Lauder Companies and has served
as chairman of Estee Lauder International and Chairman of Clinique Laboratories
since returning to the private sector from government service in 1987. From
1983 to 1986, Mr. Lauder served as Deputy
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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 The Estee Lauder Companies. He is chairman of the board of trustees of the
Museum of Modern Art, chairman of the Council of Presidents of American Jewish
Organizations, chairman of the International Public Committee of the World
Jewish Restitution Organization, president of the Jewish National Fund,
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, our co-founder, has been a director on our board of
directors, and our president and chief executive officer since inception in
1994. From 1992 to 1994, Mr. Fisher served as general manager of Clalcom, the
telecommunications subsidiary of Clal (Israel), Ltd., Israel's largest
investment corporation. Prior to joining Clalcom, from 1990 to 1992, Mr. Fisher
served as the special consultant to the president of BEZEQ, the Israel
Telecommunication Corp., 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, 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, and our
chief financial officer and treasurer since January 1999. From 1993 through
1998, Mr. Shassian served as senior vice president and chief financial officer
of Southern New England Telecommunications with management responsibility for
all of the financial, information technology and corporate development
activities of that company. From 1988 through 1993, Mr. Shassian served as a
partner at Arthur Andersen LLP, 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 LLP's
telecommunications industry practice group for North America. From 1977 through
1988, Mr. Shassian served in various other capacities at Arthur Andersen LLP,
providing audit and other business advisory services primarily to companies in
the telecommunications industry.
Jacob Z. Schuster has been a director on our board of directors,
executive vice president and assistant secretary since 1994. Mr. Schuster
served as our treasurer from 1994 through 1998 and had been our chief financial
officer from February 1997 until December 1998. From 1986 to 1992, Mr. Schuster
was a general partner and the treasurer of Goldman Sachs. Mr. Schuster has been
president and treasurer of RSL Management Corporation since November 1995 and
executive vice president of RSL Investments Corporation since March 1994. Mr.
Schuster joined Goldman Sachs in 1980, 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 COM Europe since August 1995. From 1992 through 1994, Mr.
Williams served as a director of IDB WorldCom, with responsibility for sales
and marketing. From 1990 to 1992, Mr. Williams served as managing director and
vice president of operations (Europe, Africa and Middle East) of WICAT Systems,
a computer systems company. From 1968 to 1990, Mr. Williams served in various
technical, research, sales, and management capacities at British Telecom, most
recently serving as a general manager from 1988 to 1990.
Adrian Coote has been managing director of RSL COM Australia since
October 1996. From May 1993 to October 1996, Mr. Coote served as director of
engineering and operations of Vodafone, 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 of sales, of British Telecom Australasia, responsible for introducing
and managing its private switching systems and global data networks. Before
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
COM U.S.A. 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. From 1994 until 1997, Mr. Thomas was executive vice president of
science and technology of Nynex and, from 1991 until 1994, he served as its
vice president of research and development.
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Mr. Thomas also served as Nynex's corporate director of advanced technology
from 1986 to 1991. From 1981 until 1986, Mr. Thomas held several positions at
New York Telephone. Prior to 1981, Mr. Thomas served in various capacities at
AT&T.
Karen van de Vrande has been our vice president of marketing 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 our vice president of business development
since April 1995 and served as a member of our board of directors from April
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
Clalcom, where he was responsible for oversight of the operations and budgets
of 150 of Clalcom's subsidiaries. While at Clalcom, he was also responsible for
the development of new international telecommunications ventures. Before 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 our vice president of mergers and
acquisitions since 1995 and served as a member of our board of directors from
April 1995 until March 1997. From August 15, 1993 to December 31, 1996, Mr.
Bildirici was employed by both us and R.S. Lauder, Gaspar & Co. Mr. Bildirici
was a managing director of R. S. Lauder, Gaspar & Co. from 1996 until recently.
Mr. Bildirici was an investment banker at Morgan Stanley from 1989 to 1991
prior to joining R.S. Lauder, Gaspar & Co. From 1991 to 1993, Mr. Bildirici was
a student at the Harvard Business School, where he received his MBA.
Mark J. Hirschhorn has been our vice president of finance since August
1997 and has been our global controller since January 1996. Mr. Hirschhorn has
also served as an assistant secretary since September 1996. From October 1987
to December 1995, Mr. Hirschhorn was employed by Deloitte & Touche LLP, most
recently as a senior manager specializing in emerging business and
multinational consumer product companies.
Roland T. Mallcott has been our vice president of engineering 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 (U.S.)
responsible for building and managing the British Telecom and Concert global
data and voice networks. Before 1991, Mr. Mallcott served in various network
engineering capacities for British Telecom.
Andrew C. Shields has been our 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 our vice president of emerging technologies
since April 1998. Mr. Wurtman co-founded Delta Three 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, a software security company. From September 1993 to
December 1994, Mr. Wurtman was engaged in a 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 our vice president of legal affairs and
general counsel since January 1999 and our legal counsel 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 has served as our secretary since May 1998 and since
1989 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, our Bermuda counsel.
Gustavo A. Cisneros has been a member of our board of directors since
March 1997. For more than the past 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 companies that own or are engaged in
a number of diverse commercial enterprises, principally in Venezuela, the U.S.,
Brazil, Chile and Mexico. Mr. Cisneros has also been the chairman of the board
of directors of Pueblo Xtra International, a holding company which owns all of
the common stock of Pueblo International, a company engaged in the business of
operating supermarkets and video rental outlets, since June 1993. Mr. Cisneros
is a member of the board of directors of each of Univision Communications Inc.,
a Spanish-language television broadcasting company, since May 1994, and
Spalding Holdings Corporation, a global manufacturer and marketer of branded
consumer products serving the sporting goods markets, since 1984. Mr. Cisneros
is also a member of the board of directors of Panamerican Beverages Company,
which bottles soft drink products for The Coca-Cola Company in diverse markets
in Latin America, including a substantial part of central Mexico, greater Sao
Paulo, Campinas and Santos in Brazil, most of Costa Rica and most of Colombia,
since 1996.
Fred H. Langhammer, a member of our board of directors since September
1997, has been president of The Estee Lauder Companies since 1995, chief
operating officer of The Estee Lauder Companies since 1985, and a director of
The Estee Lauder Companies since January 1996, and was its executive vice
president from 1985 until 1995. Mr. Langhammer joined The Estee Lauder
Companies in 1975 as president of its operations in Japan. In 1982, he was
appointed managing director of The Estee Lauder Companies' operations in
Germany. Prior to joining The Estee Lauder Companies, Mr. Langhammer was
general manager of Dodwell (Japan), a global trading company. He is a member of
the board of directors of each of RJR Nabisco, the operating subsidiaries of
which comprise tobacco and food companies, 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 member of our board of directors since
March 1997. Mr. Lauder is a principal shareholder and, since 1982, has served
as chief executive officer of The Estee Lauder Companies and was its president
from 1972 until 1995. He became chairman of the board of directors of The Estee
Lauder Companies in 1995 and has served on its board of directors since 1958.
Mr. Lauder formally joined The Estee Lauder Companies in 1958 after serving as
an officer in the U.S. 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 member of our board of directors since
September 1995. Until his retirement in December 1993, Mr. Sekulow served as
executive vice president--international of Nynex, having served as president of
Nynex International from 1985 to 1993. Prior to joining Nynex International,
Mr. Sekulow had served as president of RCA International since 1973. Mr.
Sekulow has been a member of the board of directors of USN Communications, a
competitive local exchange carrier, since 1995. Mr. Sekulow is also chairman of
the German American Chamber of Commerce, a member of the Council on Foreign
Relations, and an adjunct professor at Columbia University Graduate School of
Business. Mr. Sekulow previously served as a member of the U.S. State
Department Advisory Committee on International Communications and Information
Policy and on the State Department Task Force on Telecommunications in Eastern
Europe.
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Nicolas G. Trollope, a member of our board of directors 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 Central European
Media Enterprises since June 1994 and also serves as its vice president and
secretary. Mr. Trollope has served as secretary and a director of Delphi
International, which provides insurance services through a wholly owned
subsidiary, since September 1997.
Other than Ronald S. Lauder and Leonard A. Lauder, who are brothers,
no family relationship exists between any directors or executive officers.
Committees of the Board of Directors
The board of directors has an executive committee, a compensation
committee and an audit committee.
Executive Committee
The members of the executive committee are Ronald S. Lauder, Itzhak
Fisher, Jacob Z. Schuster, Fred H. Langhammer and Eugene A. Sekulow. All of the
current members, other than Mr. Langhammer, served on the executive committee
during 1998. Mr. Langhammer has served on the executive committee since March
1999. Mr. Andrew Gaspar, a former director who did not stand for re-election to
the board of directors in May 1998, also served as a member of the executive
committee. A majority of the members of the executive committee must approve an
action before any action can be taken by the executive committee. During the
period between meetings of our board of directors, the executive committee has
all powers and authority of the board of directors to manage business, except
that the executive committee, acting alone, cannot:
o amend our corporate governing documents;
o adopt an agreement of merger or consolidation or approve the
sale, lease or exchange of all or substantially all of our
property and assets; or
o approve or recommend dissolution to our shareholders.
Compensation Committee
The members of the compensation committee are Ronald S. Lauder,
Gustavo A. Cisneros and Eugene A. Sekulow. The compensation committee
determines executive compensation policies and guidelines for administering our
stock option and compensation plans.
Audit Committee
The members of the audit committee are Jacob Z. Schuster, Eugene A.
Sekulow and Fred H. Langhammer. During 1998 and a portion of 1999, Mr. Ronald
S. Lauder was a member of the audit committee. The audit committee is
responsible for:
o recommending independent accountants to audit our financial
statements;
o discussing the scope and results of audits with the
independent accountants;
o reviewing the functions of management and independent
accountants relating to our financial statements; and
o performing other related duties and functions as are deemed
appropriate by the audit committee and our board of
directors.
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Compensation of Executive Officers
SUMMARY COMPENSATION TABLE
The following table summarizes all plan and non-plan compensation
awarded to, earned by or paid to our chief executive officer and the four other
most highly compensated executive officers (referred to in this prospectus as
the "named executive officers") for the last three fiscal years. For more
information relating to the compensation of some of the named executive
officers, see "Employment and Change-in-Control Arrangements."
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
--------------------
AWARDS
--------------------
ANNUAL NUMBER OF SECURITIES
COMPENSATION UNDERLYING
NAME AND PRINCIPAL POSITION ------------------------ OPTIONS/
--------------------------- STOCK APPRECIATION
YEAR SALARY BONUS (1) RIGHTS
-------- ---------- ------------ --------------------
<S> <C> <C> <C> <C>
1998 $400,000 $650,000 --
Itzhak Fisher 1997 400,000 650,000 432,856
President and Chief Executive Officer.................. 1996 350,000 150,000 --
1998 $318,100 -- (3) 216,428
Richard E. Williams (2) 1997 240,000 $165,000 350,400(4)
President and Chief Executive Officer of RSL COM Europe 1996 172,000 50,000 --
1998 $350,000 $350,000 --
Jacob Z. Schuster 1997 350,000 100,000 --
Executive Vice President and Assistant Secretary(5).... 1996 -- -- --
1998 $250,000 $250,000 216,428
Nir Tarlovsky 1997 187,500 300,000 --
Vice President of Business Development................. 1996 178,000 75,000 --
1998 $250,000 $250,000 216,428
Nesim N. Bildirici (6) 1997 185,000 300,000 --
Vice President of Mergers and Acquisitions............. 1996 165,000 75,000 --
</TABLE>
- ---------------------
(1) Annual bonuses received are reported in the year earned and paid in the
first quarter of the following year upon receipt of the audit results
from the prior year.
(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 each of the periods covered.
(3) Mr. Williams' bonus for 1998 has not been determined at this time. Mr.
Williams' bonus for 1998 will be pro-rated on the basis of his average
base salary as in effect during the year.
(4) Under our agreement with Mr. Williams, Mr. Williams agreed to waive
all of his rights to receive options to purchase shares of RSL COM
Europe granted to him under an employment agreement between RSL COM
Europe and Mr. Williams in exchange for the grant of options to
purchase a total of 350,400 Class A common shares.
(5) Mr. Schuster is currently a member of our board of directors,
executive vice president and our assistant secretary and is president
and treasurer of RSL Management Corporation. In 1996, Mr. Schuster
received compensation only for his services to RSL Management. In 1997
and 1998, Mr. Schuster received compensation from RSL Management and
from us for services provided by him to each of RSL Management and us.
See "Compensation Committee Interlocks and Insider Participation."
Compensation paid to Mr. Schuster by us only is reported for 1997 and
1998 in connection with Mr. Schuster's employment with us as our chief
financial officer, executive vice president, treasurer and assistant
secretary. Mr. Schuster resigned as our chief financial officer and
treasurer in December 1998. Mr. Schuster continues to act as executive
vice president and assistant secretary and serves as a member of our
board of directors and executive committee.
(6) Mr. Bildirici is employed by us but, during 1996, was employed by both
us and R.S. Lauder, Gaspar & Co. For purposes of this prospectus, he
is treated as our employee only for the relevant periods.
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No other annual compensation, restricted stock awards, stock
appreciation rights or long-term incentive plan payouts or other compensation
were awarded to, earned by or paid to the named executive officers during any
of our last three fiscal years. While it is our policy to review performance
after the end of each year and grant options in the first quarter of the
following year, in light of our recent decision to increase the number of
employees eligible to receive options under our 1997 Stock Incentive Plan and
request shareholder approval of the increase in authorization, the 1998 grants
to named executive officers were limited to those persons whose employment
agreements were renegotiated in 1998, namely Messrs. Williams, Tarlovsky and
Bildirici. The shareholders will vote on an increase in eligible participants
under our 1997 Stock Incentive Plan and an increase in the shares subject to
this plan in June 1999. If the proposals presented to our shareholders at our
June 1999 annual general meeting are approved, all of our employees will be
eligible for grants of stock options under our 1997 Stock Incentive Plan and
8,100,000 Class A common shares will be subject to this plan, an increase of
5,000,000 shares.
Stock Option and Compensation Plans
1997 Performance Incentive Compensation Plan
We have established the 1997 Performance Incentive Compensation Plan
to enable us and our 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 our
performance. This plan is effective through and including the year 2000, unless
extended or earlier terminated by our board of directors. The compensation
committee may determine that any bonus payable under this plan be paid in cash,
in Class A common shares or in any combination of cash and shares, as long as
at least 50% of the bonus is paid in cash. In addition, this plan permits a
participant to elect to defer payment of his or her bonus on terms and
conditions established by our compensation committee. No more than 400,000
Class A common shares may be issued under this plan.
Under the 1997 Performance Incentive Compensation Plan, bonuses are
payable if we meet any one or more of the following performance criteria, which
are set annually by our compensation committee:
o amount of or increase in consolidated EBITDA (which consists
of loss from operations before depreciation and amortization);
o revenues;
o earnings per share;
o net income;
o gross profit margin;
o maximum capital expenditures;
o return on equity; and/or
o return on total capital.
With the exception of bonus amounts awarded for 1997, bonus amounts
are determined as follows:
o If 100% of our pre-established targets are achieved,
participants will generally be eligible to receive a bonus
equal to their base salary for the applicable year.
o If 120% of our pre-established targets are achieved, the
bonus potentially payable to participants will generally
equal twice their base salary for the applicable year.
o If 80% of our pre-established targets are achieved, the bonus
potentially payable to participants will generally equal 25%
of their base salary for the applicable year.
o In the case of the chief executive officer, the amount of
potential bonus will be 150% of his base salary if 100% of
the targets are achieved, 250% of his base salary if 120% of
the targets are achieved and 25% of his base salary if 80% of
the targets are achieved.
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o To the extent our results exceed 80% of our pre-established
targets but is less that 120% of the targets, the amount of
the bonus payable to participants will be adjusted
proportionately based on where the results fall within the
ranges set forth above.
o Bonuses will consist of two components: (1) 50% of the amount
determined pursuant to the formula described above will be
payable if the targets are achieved; (2) up to an additional
50% of the bonus amount will be payable in the compensation
committee's discretion.
Additionally, our 1997 Performance Incentive Compensation Plan permits
the compensation committee to grant discretionary bonuses to participants, even
if a bonus would not otherwise be payable under this plan, to recognize
extraordinary individual performance.
With respect to 1997 only, a cash bonus pool of $2,675,000 was
established by our board of directors and approved by our shareholders. We
achieved the specified performance targets set by our compensation committee
for 1997. Under the 1997 Performance Incentive Compensation Plan, $650,000 was
awarded to Mr. Itzhak Fisher. Of the balance of funds remaining in the bonus
pool, approximately $1,250,000 was awarded to our key employees and key
employees of our subsidiaries based upon the recommendation of Mr. Fisher and
as approved by our compensation committee and our board of directors, including
$997,500 paid to the other highest paid executive officers. The $775,000
balance of the $2,675,000 cash bonus pool was not paid out. Under this plan,
the awards were paid in 1998, promptly following the completion of the audit of
our 1997 financial statements. The compensation committee determined that all
of these bonuses for 1997 were to be paid in cash.
With respect to 1998, we achieved 100% of the pre-established targets
set by the compensation committee (after giving pro forma effect to adjustments
for acquisitions). Under the 1997 Performance Incentive Compensation Plan,
$650,000 was awarded to Mr. Itzhak Fisher. In addition, $1,835,000 was awarded
to our key employees and key employees of our subsidiaries based upon the
recommendation of Mr. Fisher and as approved by our compensation committee and
our board of directors, including $850,000 paid to the named executive officers
other than Mr. Williams whose bonus has not yet been determined. Under the terms
of this plan, the awards were paid in 1999, promptly following the completion of
the audit of our 1998 financial statements. The compensation committee
determined that all of these bonuses for 1998 were to be paid in cash.
Our chief executive officer's bonus compensation is based upon his
employment agreements with us and with RSL North America, which provide for Mr.
Fisher's participation in the 1997 Performance Incentive Compensation Plan, as
well as other long-term bonus compensation based on our stock performance over
time.
1995 Stock Option Plan
In April 1995, our board of directors authorized, and the shareholders
approved, the 1995 Stock Option Plan, which was later revised. Under this plan,
the compensation committee was authorized to grant options for up to 2,847,000
Class A common shares. As of December 31, 1998, we had granted options to
purchase 2,716,617 Class A common shares under this plan of which 760,996
were outstanding (and 392,770 were exercisable). In general, options granted
under this plan terminate on the tenth anniversary of the date of grant. We
developed the 1995 Stock Option Plan to provide incentives to our employees and
to attract new employees and non-employee directors. In connection with our IPO,
this plan was replaced by our other existing plans. We have not granted further
options under the 1995 Stock Option Plan since our IPO, and will not grant
further options under this plan.
1997 Stock Incentive Plan
The 1997 Stock Incentive Plan was adopted in conjunction with our IPO.
Under this plan, the compensation committee is authorized to grant options for
up to 3,100,000 Class A common shares. The purposes of our 1997 Stock Incentive
Plan are to foster and promote our long-term financial success and materially
increase shareholder value by (1) motivating superior performance by means of
performance-related incentives; (2) encouraging executive officers and other
key employees to acquire an ownership interest in us; and (3) enabling us
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<PAGE>
to attract and retain the services of an outstanding management team, as the
successful conduct of our operations depends on their judgment, interest and
special effort. If the proposals presented to our shareholders at our June 1999
annual general meeting are approved, all of our employees will be eligible for
grants of stock options under our 1997 Stock Incentive Plan and 8,100,000 Class
A common shares will be subject to this plan, an increase of 5,000,000 shares.
The compensation committee administers this plan, which provides for
the grant of:
o incentive and non-incentive stock options to purchase Class A
common shares;
o stock appreciation rights, which may be granted in tandem
with stock options, in addition to stock options, or on a
freestanding basis;
o restricted stock and restricted units;
o incentive stock and incentive units;
o deferred stock units; and
o stock in lieu of cash.
Under our 1997 Stock Incentive Plan, our compensation committee has
discretion at the time of grant or after the day a grant was made to change the
vesting schedule of an award granted to a participant. In March 1999, our
compensation committee determined that with respect to awards previously
granted and awards granted in the future, in the event of a change in control,
100% of awards granted will immediately become fully vested and exercisable or,
at the compensation committee's sole discretion, the award may be canceled in
exchange for a payment to a participant in cash of an amount equal to the
excess of the change in control price over the exercise price for the award as
long as, no cancellation, acceleration of exercisability or vesting will occur
with respect to an award granted under this plan if our compensation committee
determines prior to the occurrence of a change in control that the award will
be honored or assumed, or a new stock option will be substituted for the old
one (this honored, assumed or substituted option is referred to below as an
alternative option) by the participant's new employer (or the parent or a
subsidiary of this new employer) immediately following the change in control.
Our compensation committee also determined that if one of our
employees is involuntarily terminated by us, other than for cause, or
constructively terminated following a change in control, the alternative option
shall become immediately vested and exercisable as of the date of the
employee's termination, unless with respect to the change-in-control
transaction (a) initial discussions occurred on or prior to March 1, 2000 and
(b) our board of directors determines that it is intended that "pooling of
interests" accounting be available for a transaction giving rise to, or
directly related to, the change in control.
For purposes of the prior two paragraphs and the next paragraph, when
we say change in control, we mean the occurrence of:
o a sale or other disposition of our stock, or an issuance of
our stock as a result of which any "person" (as this term is
used in the Exchange Act), other than Ronald S. Lauder, is or
becomes the beneficial owner of more than 50% of the total
voting power of our company and those persons who are members
of our board of directors immediately prior to the closing of
that transaction constitute less than one half of the
membership of our board of directors immediately following
the closing of that transaction;
o any merger, consolidation or reorganization following which
those persons who are members of our board of directors
immediately prior to the closing of any merger, consolidation
or reorganization constitute less than one half of the
membership of the board of directors of the surviving entity
immediately following the closing of that transaction;
o a transaction in which more than 50% of the total value of
our assets and of our consolidated subsidiaries are
transferred and the transferee of those assets is not Mr.
Lauder or a company controlled by him; or
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<PAGE>
o our complete liquidation.
When we say change in control price above, we mean the highest price
per Class A common share paid in conjunction with any transaction resulting in
a change in control. This price is determined in good faith by our compensation
committee if any part of the offered price is payable other than in cash. In
the case of a change in control occurring solely by reason of a transaction in
which more than 50% of the total value of our assets are transferred (as
described above), change in control price means the highest fair market value
of our Class A common shares on any of the 30 trading days immediately prior to
the date on which the change in control occurs.
Under our 1997 Stock Incentive Plan, the maximum number of shares for
which options or stock appreciation rights may be granted to any one
participant in a calendar year is 500,000. As of December 31, 1998, we had
granted options to acquire a total of 1,093,020 Class A common shares and
164,250 shares of restricted stock which vest over three years under this plan.
We also granted restricted units and incentive units under this plan to some
employees which generally are convertible into Class A common shares or cash,
at our discretion. As of December 31, 1998, the approximate total number of
Class A common shares into which all outstanding restricted units and incentive
units may be converted, based on the valuations attributed to our subsidiaries
and the average closing price of our Class A common shares on September 30,
1998, is estimated to be 1,331,813 shares. As of December 31, 1998 the number
of Class A common shares into which vested and exercisable restricted units and
incentive units which may be converted, based on this same valuation, is
estimated to be 436,021 shares.
OPTION GRANTS IN 1998
The following table contains information about options to purchase
Class A common shares granted to the named executive officers during 1998. We
did not grant any stock appreciation rights to these executive officers in
1998.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------------------------
% OF TOTAL EXERCISE
NUMBER OF OPTIONS/SARs OR
SECURITIES GRANTED TO BASE
UNDERLYING EMPLOYEES PRICE
OPTIONS/SARS IN FISCAL PER EXPIRATION GRANT DATE
NAME GRANTED YEAR (1) SHARE DATE PRESENT VALUE(2)
- ---- --------------- -------------- ---------- -------------- -------------------
<S> <C> <C> <C> <C> <C>
Itzhak Fisher...................... -- -- -- -- --
Richard E. Williams................ 216,428 (3) 33.1% $22.00 11/13/05 $3,609,610
Jacob Z. Schuster.................. -- -- -- -- --
Nir Tarlovsky...................... 216,428 (4) 33.1% $22.00 11/13/05 $3,609,610
Nesim N. Bildirici................. 216,428 (4) 33.1% $22.00 11/13/05 $3,609,610
</TABLE>
- ---------------
(1) Reflects the percentage of total stock options granted to employees in
1998 only and excludes stock appreciation rights included in some of
the restricted units and incentive units granted to persons other than
the named executive officers under our 1997 Stock Incentive Plan.
(2) The grant date present value has been calculated as of each grant
date: November 13, 1998, using a variant of the Black-Scholes pricing
model. In applying this model, we assumed a three-month volatility of
123%, a 4.935% risk-free rate of return and a seven-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 our Class A
common shares on the date of exercise.
(3) Class A common shares issuable upon the exercise of an option granted
under our 1997 Stock Incentive Plan. The exercise price per share is
$22.00, and the option is exercisable in three equal installments on
August 31, 1999, August 31, 2000 and August 31, 2001.
(4) Class A common shares issuable upon the exercise of an option granted
under our 1997 Stock Incentive Plan. The exercise price per share is
$22.00, and the option is exercisable in three equal installments on
February 1, 1999, January 1, 2000 and January 1, 2001.
64
<PAGE>
FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table contains information about the exercise of stock
options during 1998 by the named executive officers. The table also shows the
value at December 31, 1998 of unexercised stock options held by the named
executive officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
NUMBER OF UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT OPTIONS AT
ACQUIRED ON VALUE FY-END FY-END(2)
NAME EXERCISE REALIZED (1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Itzhak Fisher........ 0 $0 0/432,856 $0/$3,246,420
Richard E. Williams.. 350,400 $9,765,799 0/216,428 $0/$1,623,210
Jacob Z. Schuster.... 0 $0 0/0 $0/$0
Nir Tarlovsky........ 192,127 $7,588,929 0/216,428 $0/$1,623,210
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 our Class A
common shares on the date of exercise (as quoted on The Nasdaq Stock
Market National Market System, 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 our Class A common shares on December 31,
1998 ($29.50 per share, as quoted on The Nasdaq Stock Market National
Market System, as published in The Wall Street Journal) and the option
exercise price.
Compensation of Directors
We believe that the interests of our non-employee directors should be
the same as our shareholders' interest. To this end, we encourage our
non-employee directors to invest in our Class A common shares and we compensate
these directors for their services to us by granting stock options and stock
awards. We also encourage our non-employee directors to hold their shares and
options as long as they are a member of our board of directors, except for
transfers for estate and tax planning and personal liquidity needs.
1997 Directors' Compensation Plan
We believe our 1997 Directors' Compensation Plan will help us attract,
maintain and motivate the best qualified directors and enhance a long-term
mutuality of interest between the directors and shareholders by granting the
non-employee directors shares and options to purchase our shares.
Under our 1997 Directors' Compensation Plan, on the day after each
annual general meeting of shareholders, each non-employee director is granted a
number of options to acquire a number of Class A common shares with a total fair
market value on the date of grant equal to $50,000. In the case of the
non-executive chairman of our board of directors, the number of options to
acquire a number of Class A common shares granted has a total fair market value
on the date of grant equal to $150,000 and with respect to a vice chairman of
our board of directors, a value of $75,000, as long as these persons do not
receive compensation for services other than as a non-executive chairman and
vice-chairman. Each option will have a 10-year term. The exercise price of the
options granted under this plan will initially equal the fair market value of
our Class A common shares on the date of grant and will be increased on the
first day of each calendar quarter by an amount, compounded annually, based on
the yield to maturity of U.S. Treasury Securities having a maturity
approximately equal to the term of these options. The options become exercisable
in five equal annual installments starting on the first anniversary of the date
of grant. In addition, on the date of the annual general meeting of shareholders
held in 1998 through 2007, we grant each non-employee director a number of Class
A common shares with a total fair market value on the date of grant equal to
$30,000. We may not grant more than 250,000 shares under this plan. As of
December 31, 1998, we granted options to acquire a total of 32,704 Class A
common shares under our 1997 Directors' Compensation Plan. As of December 31,
1998, 29,295 of these options were outstanding; 3,409 have been cancelled as a
result of one director's not standing for re-election to our board of directors.
65
<PAGE>
Employment and Change-in-Control Arrangements
Itzhak Fisher
Itzhak Fisher has employment agreements with both us and RSL North
America through December 31, 2002. Under these agreements, Mr. Fisher is chief
executive officer and president of both companies. Under our employment
agreement with Mr. Fisher, we have promised to use our best efforts to ensure
that Mr. Fisher continues to serve as a member of our board of directors and
our executive committee. Also, RSL North America has promised to use its best
efforts to ensure that Mr. Fisher continues to serve as a member of its board
of directors. Under the employment agreements, which were effective October 6,
1997:
o Mr. Fisher is entitled to receive a total base salary of
$400,000, increased by at least $50,000 on each January 1,
plus an additional amount based on the increase in the
consumer price index in the New York metropolitan area. Mr.
Fisher's aggregate base salary for 1999 is $450,000.
o Mr. Fisher's base salary must always be at least $50,000 more
than the base salary of any other executive officer of ours.
o Mr. Fisher is a participant in our 1997 Performance Incentive
Compensation Plan.
o Mr. Fisher is eligible to receive a cash bonus of $1,500,000
if the total return to our shareholders from the date of our
IPO to December 31, 2000 exceeds the return to common
shareholders of peer companies. Mr. Fisher is eligible to
receive an additional cash bonus of $1,000,000 if the total
return to our shareholders from the date of our IPO to
December 31, 2002 meets the same criteria.
o If Mr. Fisher's employment is terminated for any reason other
than by us for cause or by Mr. Fisher without good reason,
Mr. Fisher is entitled to a pro-rated bonus if the total
return objective is achieved through the date of the
termination.
o When our IPO closed, Mr. Fisher was granted an option under
our 1997 Stock Incentive Plan to purchase 432,856 Class A
common shares, which represented 1.0% of the then outstanding
common stock on a fully-diluted basis. Forty percent of this
option is exercisable on December 31, 2000, another 30% on
December 31, 2001 and the remaining 30% on December 31, 2002.
o If Mr. Fisher's employment is terminated by us without cause
or Mr. Fisher terminates his employment for good reason,
including in the event of a change in control, or by reason
of his death or disability, the entire option is immediately
exercisable.
o If Mr. Fisher's employment is terminated by us without cause,
or by Mr. Fisher for good reason, Mr. Fisher may receive
benefits and his base salary, in addition to any vested
benefits and previously earned but unpaid salary, for the
balance of the term of the employment agreements or for at
least 12 months, whichever is longer, plus an amount equal to
his bonus under our 1997 Performance Incentive Compensation
Plan for the prior year.
o If Mr. Fisher dies or becomes unable to perform his duties,
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' total base salary, reduced,
in the case of disability, by any disability benefits he
receives.
o 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.
o If Mr. Fisher's employment is terminated by us 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 is entitled
66
<PAGE>
to two demand registrations of his Class A common shares in
accordance with the terms of our registration rights
agreement with some but not all of our shareholders,
including Mr. Fisher.
Richard Williams
Richard Williams has an employment agreement with RSL COM Europe,
which began on August 14, 1998 and ends on August 31, 2001. Under this
agreement, Mr. Williams serves as president and chief executive officer of RSL
COM Europe. Under this employment agreement:
o Mr. Williams is entitled to receive a base salary
of (pound)238,000, increased on each September 1, beginning
September 1, 1999, by an amount equal to his base salary then
in effect, multiplied by the increase in the applicable cost
of living index during the prior year. Mr. Williams' base
salary is currently (pound)238,000. See "Executive
Compensation--Summary Compensation Table" which provides Mr.
Williams' base salary as converted to U.S. dollars.
o Mr. Williams' base salary, as adjusted for cost of living
increases, may be further increased at the option and in the
discretion of RSL COM Europe's board of directors.
o Mr. Williams is eligible to receive an annual bonus of up to
40% of his base salary based on acceptable performance as
determined by our chief executive officer and as approved by
our compensation committee, although the bonus could be
higher if the performance of RSL COM Europe exceeds targets
established annually by our board of directors. Mr. Williams'
bonus for 1998, once determined, will be pro-rated on the
basis of his average base salary as in effect during 1998.
o Mr. Williams was granted an option to purchase 216,428 Class
A common shares under our 1997 Stock Incentive Plan. Mr.
Williams' option is exercisable in three equal installments
on August 31, 1999, August 21, 2000 and August 31, 2001, as
long as Mr. Williams is employed by RSL COM Europe on that
date. Once any installment is exercisable, that installment
remains exercisable until the expiration, seven years from
the date of grant, subject to the limitations described
below.
o Mr. Williams' option is immediately terminated upon a
termination of Mr. Williams' employment by RSL COM Europe for
cause.
o This option is immediately exercisable in full if Mr.
Williams' employment with RSL COM Europe is terminated (1) by
RSL COM Europe other than for cause, (2) by Mr. Williams for
good reason or (3) by Mr. Williams' death or disability.
o Mr. Williams' option is immediately exercisable in full upon
a change in control. Mr. Williams' option, following any
termination of Mr. Williams' employment other than for cause,
remains exercisable for the lesser of two years and the
remaining term of his option.
o RSL COM Europe provides Mr. Williams with life insurance in
value of four times his base salary and he is entitled to
participate in a suitable personal pension program designated
by him and approved by the Board of Inland Revenue of the
U.K., equal to 12.5% of his base salary.
o If Mr. Williams' employment is terminated by RSL COM Europe
without cause or by Mr. Williams for good reason, Mr.
Williams is entitled to receive previously earned but unpaid
salary, vested benefits and a payment equal to his base
salary as in effect immediately prior to the termination
date.
o If Mr. Williams dies or becomes unable to perform his duties,
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' base salary, reduced, in the
case of disability, by any disability benefits he receives.
67
<PAGE>
o If Mr. Williams' employment is terminated for any other
reason, he is entitled to his earned salary and vested
benefits.
Nesim Bildirici
Nesim Bildirici has an employment agreement with us, which began on
January 1, 1998 and ends on December 31, 2000. Under this agreement, Mr.
Bildirici serves as our vice president of mergers and acquisitions. Under this
employment agreement:
o Mr. Bildirici is entitled to receive a base salary of
$250,000, increased on each January 1, beginning January 1,
1999, by an amount equal to his base salary then in effect,
multiplied by the increase in the applicable cost of living
index during the prior year. As a result, Mr. Bildirici's
base salary was increased to $254,000 for 1999. Mr.
Bildirici's base salary, as adjusted for cost of living
increases, may be further increased at the option and in the
discretion of our board of directors.
o Mr. Bildirici is a participant in our 1997 Performance
Incentive Compensation Plan.
o Mr. Bildirici was granted an option to purchase 216,428 Class
A common shares under our 1997 Stock Incentive Plan. Mr.
Bildirici's option is exercisable, in three equal
installments, as long as he is employed by us on the
applicable vesting date. Once any installment is exercisable,
that installment remains exercisable until the expiration,
seven years from the date of grant, except as described
below. One-third of Mr. Bildirici's option became exercisable
on February 1, 1999. The remaining installments are
exercisable on January 1, 2000 and January 1, 2001.
o Mr. Bildirici's option is immediately terminated upon a
termination of Mr. Bildirici's employment by us for cause.
o Mr. Bildirici's option is immediately exercisable in full if
Mr. Bildirici's employment with us is terminated (1) by us
other than for cause, (2) by Mr. Bildirici for good reason or
(3) by reason of Mr. Bildirici's death or disability.
o Mr. Bildirici's option is immediately exercisable in full
upon a change in control. Mr. Bildirici's option, following
any termination of Mr. Bildirici's employment, other than for
cause, remains exercisable for the lesser of two years and
the remaining term of his option.
o If Mr. Bildirici's employment is terminated by us without
cause or by Mr. Bildirici for good reason, Mr. Bildirici is
entitled to receive previously earned but unpaid salary,
vested benefits and a payment equal to his base salary as in
effect immediately prior to the termination date.
o If Mr. Bildirici dies or is unable to perform his duties, 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' base salary reduced, in the case
of disability, by any disability benefits he receives.
o If Mr. Bildirici's employment is terminated for any other
reason, he is entitled to his earned salary and vested
benefits.
Nir Tarlovsky
Nir Tarlovsky has employment agreements with both us and RSL North
America, each of which began on January 1, 1998 and ends on December 31, 2000.
Under these employment agreements, Mr. Tarlovsky serves as vice president of
business development of both companies. Under these employment agreements:
68
<PAGE>
o Mr. Tarlovsky is entitled to receive a total base salary of
$250,000, increased on each January 1, commencing January 1,
1999, by an amount equal to his base salary then in effect,
multiplied by the applicable cost of living index during the
prior year. As a result, Mr. Tarlovsky's total base salary
was increased to $254,000 for 1999. Mr. Tarlovsky's base
salary, as adjusted for cost of living increases, may be
further increased at the option and in the discretion of our
board of directors.
o Mr. Tarlovsky is a participant in our 1997 Performance
Incentive Compensation Plan.
o Mr. Tarlovsky was granted an option to purchase 216,428 Class
A common shares under our 1997 Stock Incentive Plan. Mr.
Tarlovsky's option is exercisable in three equal
installments, as long as Mr. Tarlovsky is employed by us on
the applicable vesting date, and once any installment is
exercisable, that installment remains exercisable until the
expiration, seven years from the date of grant, except as
described below. One-third of Mr. Tarlovsky's option became
exercisable on February 1, 1999. The remaining installments
are exercisable on January 1, 2000 and January 1, 2001. Mr.
Tarlovsky's option is immediately terminated upon a
termination of his employment for cause.
o Mr. Tarlovsky's option is immediately exercisable in full if
Mr. Tarlovsky's employment with us is terminated (1) by us
other than for cause, (2) by Mr. Tarlovsky for good reason or
(3) by reason of Mr. Tarlovsky's death or disability.
o Mr. Tarlovsky's option is immediately exercisable in full
upon a change in control. Mr. Tarlovsky's option, following
any termination of Mr. Tarlovsky's employment, other than for
cause, remains exercisable for the lesser of two years and
the remaining term of his option.
o If Mr. Tarlovsky's employment is terminated by either us or
RSL North America without cause or by Mr. Tarlovsky for good
reason, Mr. Tarlovsky is entitled to receive previously
earned but unpaid salary, vested benefits and a payment equal
to his base salary as in effect immediately prior to the
termination date.
o If Mr. Tarlovsky dies or is unable to perform his duties, 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' total base salary reduced, in the
case of disability, by any disability benefits he receives.
o If Mr. Tarlovsky's employment is terminated for any other
reason, he is entitled to his earned salary and vested
benefits.
Donald Shassian
Donald Shassian also has an employment agreement with us, which began
on January 1, 1999 and ends on December 31, 2002. Under this agreement, Mr.
Shassian serves as executive vice president and our chief financial officer.
Under this employment agreement:
o Mr. Shassian is entitled to receive a base salary of
$325,000, increased on each January 1, beginning January 1,
2000, by an amount equal to his base salary then in effect,
multiplied by the increase in the applicable cost of living
index during the prior year. Mr. Shassian's base salary, as
adjusted for cost of living increases, may be further
increased at the option and in the discretion of our board of
directors.
o Mr. Shassian is a participant in our 1997 Performance
Incentive Compensation Plan.
o Mr. Shassian was granted an option to purchase 250,000 Class
A common shares under our 1997 Stock Incentive Plan. Mr.
Shassian's option is exercisable in three equal installments
on January 1, 2000, January 1, 2001 and January 1, 2002, at
an exercise price of $28.25 per share, as long as Mr.
Shassian
69
<PAGE>
is employed by us on each vesting date, and once any
installment becomes exercisable, that installment remains
exercisable until the expiration, seven years from the date
of grant, except as described below.
o Mr. Shassian's option is immediately terminated upon a
termination of Mr. Shassian's employment for cause.
o Mr. Shassian's option is immediately exercisable in full if
his employment with us is terminated (1) by us other than for
cause, (2) by Mr. Shassian for good reason, including in the
event of a change in control, or (3) by reason of Mr.
Shassian's death or disability.
o Mr. Shassian's option, following any termination of his
employment other than for cause, remains exercisable for the
lesser of two years and the remaining term of his option.
o Mr. Shassian is entitled to receive additional grants of
options to purchase Class A common shares to the extent
approved by the compensation committee and our board of
directors. These future grants will be commensurate with Mr.
Shassian's position with us and with stock options awarded to
other senior executives.
o We provide Mr. Shassian with life insurance coverage of at
least $1,000,000.
o If Mr. Shassian's employment is terminated without cause or
by Mr. Shassian for good reason, including in the event of a
change in control, Mr. Shassian is entitled to receive (1)
previously earned but unpaid salary, (2) vested benefits, (3)
a payment equal to his base salary for the remainder of the
term but in no event less than 12 months, and (4) an amount
equal to Mr. Shassian's award, if any, under our 1997
Performance Incentive Compensation Plan for the year prior to
the year in which Mr. Shassian was terminated. In the case of
a termination by Mr. Shassian for good reason as a result of
a change in control, this payment under this plan will be
paid within five days after the termination date.
o If Mr. Shassian dies or is unable to perform his duties, 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' base salary reduced, in the case
of disability, by any disability benefits he receives.
o If Mr. Shassian's employment is terminated for any other
reason, he is entitled to his earned salary and vested
benefits.
Each of the employment agreements described above contains
noncompetition provisions which apply during the term of the relevant
employment agreement and for nine months after the employment period for
Messrs. Williams, Tarlovsky and Bildirici, and for one year after the
employment period for Messrs. Fisher and Shassian.
We have an agreement with Codan Services Limited, a corporate service
company, located in Bermuda, of which Michael Ashford, our secretary and a
resident of Bermuda, is a manager. Mr. Ashford serves as our secretary under
this agreement.
We have also entered into, or are in the process of entering into,
employment agreements with some of our other executive officers and the country
managers of most of our local operations in various countries.
70
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of our compensation committee are currently Ronald S.
Lauder, Gustavo A. Cisneros and Eugene A. Sekulow.
RSL Management Corporation, which is wholly owned by Ronald S. Lauder,
the chairman of our board of directors and principal and controlling
shareholder, subleases 11,000 square feet of office space to us for $767,000
per year. RSL Management subleases this space from The Estee Lauder Companies.
Ronald S. Lauder is a principal shareholder of The Estee Lauder Companies and
Leonard A. Lauder, one of our directors, is the chief executive officer of The
Estee Lauder Companies. Fred H. Langhammer, one of our directors, is the
president and chief operating officer of The Estee Lauder Companies. In
addition, RSL Management provided payroll and benefits services to us for an
annual fee of $6,000 through 1998, which we believe is less than these services
would cost if obtained from third parties. Ronald S. Lauder did not participate
in discussions relating to maintaining these services. Jacob Z. Schuster, a
member of our board of directors and executive vice president and assistant
secretary, is the president and treasurer of RSL Management. In 1996, Mr.
Schuster was compensated only for his services to RSL Management and this
compensation was paid by RSL Management. In 1997, Mr. Schuster received his
compensation from RSL Management and from us for respective services provided
by him to us and RSL Management. From January 1, 1998 until December 31, 1998,
Mr. Schuster devoted approximately 75% of his time to us and approximately 25%
of his time to RSL Management and was compensated by us and RSL Management on
that basis.
We provide telecommunications services to The Estee Lauder Companies
at rates comparable to rates of our preferred customers. In 1998, The Estee
Lauder Companies paid us approximately $38,900 for these services.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We do not intend to make any consulting or other arrangements with our
non-employee directors or their affiliates under which they would be
compensated in any way.
The law firm of Conyers, Dill & Pearman, of which Nicolas G. Trollope,
a member of our board of directors, is a partner, was our counsel in Bermuda
for 1998 and continues to be for 1999. Mr. Trollope is not paid for his
services as a member of our board of directors. We paid Conyers, Dill & Pearman
$90,000 in 1998.
We use Codan Services as our corporate service company in Bermuda.
Michael Ashford, our secretary, is a manager of Codan Services. Mr. Ashford
serves as our secretary under our service agreement with Codan Services. Our
agreement with Codan Services also provides that it will furnish us with
corporate administrative services including the services of a registered
office, maintenance of statutory records and registers and associated clerical
and secretarial services.
We loaned Andrew Shields, one of our executive officers, $100,000 in
1997 to relocate to another state at our 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 our shares with a total value of at least $100,000 or
Mr. Shield's employment is terminated. If Mr. Shields sells our shares or his
employment is terminated, the note is payable on demand.
71
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table contains information as of April 19, 1999 with
respect to the beneficial ownership of our common stock and with respect to
voting power by each director, by the named executive officers, and by all
directors and executive officers as a group and by each shareholder we know
beneficially owns more than 5% of any class of our outstanding voting
securities. Each of the shareholders identified in the table has sole voting
and investment power over the shares they beneficially own, except as otherwise
noted in the footnotes to this table. If all of the warrants covered by this
prospectus were exercised and 909,798 Class A common shares were issued upon
their exercise no individual's or group's overall percentage of voting power or
overall percentage ownership would change by more than one percent.
<TABLE>
<CAPTION>
Overall Voting Power and
Beneficial Ownership Ownership of Common Stock
------------------------------------------------------ ---------------------------
Class A common shares(1) Class B common shares
------------------------ ---------------------
% of
Voting %
Number Percent Number Percent Power(2) Ownership(2)
------ ------- ------ ------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Ronald S. Lauder (3)............ 3,657 (4) * 16,606,427 (5)(6) 62.2 56.5 31.0
Itzhak Fisher (3)............... -- -- 4,171,205 (7) 15.9 14.4 7.8
Leonard A. Lauder (3)........... 1,983 (8) * 5,733,176 (6)(9) 21.8 19.8 10.8
RSL Investments Corporation (3). -- -- 9,496,295 36.2 32.8 17.9
EL/RSLG Media, Inc. (3)......... -- -- 1,814,579 (6) 6.9 6.3 3.4
Jacob Z. Schuster (3)........... 41,656 (10) * 1,646,559 (10) 6.3 5.7 3.2
Gustavo A. Cisneros (11)........ 1,410,612 (12) 5.2 -- -- * 2.7
Coral Gate Investments Ltd. (11) 1,408,629 (13) 5.2 -- -- * 2.6
Nir Tarlovsky .................. 740,757 (14) 2.7 270,301 (15) 1.0 1.2 1.9
Nesim N. Bildirici ............. 619,642 (16) 2.3 87,958 * * 1.3
Eugene A. Sekulow .............. 45,783 (17) * -- -- * *
Fred H. Langhammer.............. 14,209 (18) * -- -- * *
Richard E. Williams............. 350,400 1.3 -- -- * *
Nicolas G. Trollope ............ 1,000 (19) * -- -- * *
All directors and executive
officers as a group
(20 persons)............... 3,548,872 (20) 13.0 26,705,215 (21) 100.0 91.9 56.1
Metro Holding AG (22)........... 3,214,284 18.7 -- * 1.1 6.0
Essex Investment Management
Company (23)............... 1,792,045 7.2 -- * * 3.4
Putnam Investments (24)......... 6,116,202 11.8 -- -- 2.1 11.5
Janus Capital Corporation (25).. 1,589,215 8.8 -- -- * 3.0
Neuberger Berman LLC (26)....... 1,154,600 6.4 -- -- * 2.2
</TABLE>
- ---------------
* Less than 1%.
(1) Except as otherwise noted in a footnote to this table, the foregoing
does not include (a) 26,245,315 Class A common shares issuable upon
the conversion of outstanding Class B common shares, (b) 459,900 Class
A common shares issuable upon the conversion of 459,900 Class B common
shares issuable pursuant to a warrant issued to Ronald S. Lauder,
which warrant became exercisable on October 3, 1997 at an exercise
price of $.00457 per share and expires on October 3, 2007, (c) 164,250
restricted Class A common shares granted under our 1997 Stock
Incentive Plan, (d) grants of equity interests in subsidiaries, which
upon exercise generally gives the recipient the right to receive cash
or to acquire Class A common shares, at our discretion and (e) roll-up
rights (as described under "Rights to Acquire Class A Common Shares").
Class B common shares are convertible at any time into Class A common
shares for no additional consideration on a share-for-share basis.
(2) Represents the percentage of total voting power and the total
percentage ownership of Class A common shares and Class B common
shares combined beneficially owned as of April 19, 1999 by each
identified shareholder and all directors and executive officers as a
group. The Class A common shares and the Class B common shares are the
only authorized classes of our capital stock with shares outstanding.
(3) The business address is 767 Fifth Avenue, New York, New York 10153.
(4) Includes 2,510 Class A common shares issuable to Ronald S. Lauder upon
the exercise of an equal number of currently exercisable options,
granted to Mr. Lauder under our 1997 Directors' Compensation Plan.
(Footnotes continued on following page)
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(Footnotes continued from previous page)
(5) Consists of (a) 9,496,295 Class B common shares owned by RSL
Investments Corporation, a corporation wholly owned by Ronald S.
Lauder, (b) 1,814,579 Class B common shares owned by EL/RSLG Media
(see note 6), (c) 907,290 Class B common shares owned by RAJ Family
Partners, of which Mr. Lauder is a limited partner and a shareholder
of the general partner, (d) 3,928,363 Class B common shares owned
directly by Mr. Lauder, and (e) 459,900 Class B common shares issuable
upon the exercise of a warrant issued to Mr. Lauder.
(6) 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 Media's outstanding common stock. Therefore, Ronald S.
Lauder and Leonard A. Lauder may each be deemed to beneficially own
all of the Class B common shares owned by EL/RSLG Media. Ronald S.
Lauder and Leonard A. Lauder each disclaim beneficial ownership of
some of these shares. However, these shares are only included once in
the computation of shares beneficially owned by directors and
executive officers as a group.
(7) Represents shares owned by Fisher Investment Partners, of which Itzhak
Fisher is the sole general partner and the Fisher 1997 Family Trust is
the sole limited partner. Mr. Fisher disclaims beneficial ownership of
these shares.
(8) Includes 836 Class A common shares issuable upon the exercise of an
equal number of currently exercisable options, granted to Leonard A.
Lauder under our 1997 Directors' Compensation Plan.
(9) Consists of (a) 2,658,056 Class B common shares owned directly by
Leonard A. Lauder, (b) 4,866 Class B common shares owned by Mr.
Lauder's wife, (c) 348,385 Class B common shares owned by LAL Family
Partners, of which Mr. Lauder is a general partner, (d) 1,814,579
Class B common shares owned by EL/RSLG Media (see note 6), and (e)
907,290 Class B common shares owned by LWG Family Partners, a
partnership whose managing partner is a corporation which is one-third
owned by Mr. Lauder. Mr. Lauder disclaims beneficial ownership of all
of the Class B common shares owned by his wife and some of the shares
owned by LWG Family Partners.
(10) Represents shares owned by Schuster Family Partners, of which Jacob Z.
Schuster is the sole general partner and the limited partners are some
of his children. Mr. Schuster disclaims beneficial ownership of these
shares.
(11) The business address of each of Gustavo A. Cisneros and Coral Gate
Investments is c/o Highgate Properties, 36 East 61st Street, New York,
New York 10021.
(12) Consists of (a) 836 Class A common shares issuable upon the exercise
of an equal number of currently exercisable options, granted to
Gustavo A. Cisneros under our 1997 Directors' Compensation Plan, (b)
1,147 Class A common shares issued to Mr. Cisneros under our 1997
Directors' Compensation Plan and (c) 1,408,629 Class A common shares
owned by Coral Gate Investments, an international business company
organized under the laws of the British Virgin Islands, which is
indirectly beneficially owned by Mr. Cisneros and his brother, Ricardo
Cisneros.
(13) Represents shares indirectly beneficially owned by Gustavo A. Cisneros
and his brother, Ricardo Cisneros. Mr. G. Cisneros disclaims
beneficial ownership of some of these shares.
(14) Consists of (a) 668,614 Class A common shares owned by Tarlovsky
Investment Partners, of which Nir Tarlovsky is the sole general
partner and the Tarlovsky 1997 Family Trust is the sole limited
partner and (b) 72,143 Class A common shares issuable upon the
exercise of an equal number of currently exercisable options granted
to Mr. Tarlovsky under our 1997 Stock Incentive Plan.
(15) Represents Class B common shares owned by Tarlovsky Investment
Partners.
(16) Consists of (a) 547,499 Class A common shares and (b) 72,143 Class A
common shares issuable upon the exercise of an equal number of
currently exercisable options granted to Mr. Bildirici under our 1997
Stock Incentive Plan.
(17) Consists of (a) 836 Class A common shares issuable upon the exercise
of an equal number of currently exercisable options, granted to Eugene
Sekulow under our 1997 Directors' Compensation Plan, (b) 1,147 Class A
common shares issued to Mr. Sekulow under our 1997 Directors'
Compensation Plan and (c) 43,800 Class A common shares issuable upon
the exercise of an equal number of currently exercisable options
granted to Mr. Sekulow under our 1995 Stock Option Plan.
(18) Consists of (a) 836 Class A common shares issuable upon the exercise
of an equal number of currently exercisable options, granted to Fred
Langhammer under our 1997 Directors' Compensation Plan, (b) 1,147
Class A common shares issued to Mr. Langhammer under our 1997
Directors' Compensation Plan and (c) 12,226 Class A common shares
owned directly by Mr. Langhammer.
(19) Represents shares owned by The Proverbs Trust, a Bermuda trust, of
which Mr. Trollope and his wife are the trustees and beneficiaries.
(20) Includes 302,470 Class A common shares issuable upon the exercise of
an equal number of currently exercisable options granted to directors
and executive officers as a group.
(21) Includes Class B common shares issuable upon the exercise of a warrant
issued to Ronald S. Lauder.
(22) Information as to the shares owned by Ligapart AG, a wholly owned
subsidiary of Metro Holding AG, is as of July 22, 1998, and is taken
from a Schedule 13G filed with the SEC on July 28, 1998. The address
of Metro Holding AG is Neuhofstrasse 4, CH-6340 Baar, Switzerland.
(Footnotes continued on next page)
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(Footnotes continued from previous page)
(23) Information as to the shares owned by Essex Investment Management
Company, an investment adviser registered under the Investment
Advisers Act, is as of December 31, 1998, and is taken from a Schedule
13G/A filed with the SEC on January 8, 1999. The address of Essex
Investment Management Company is 125 High Street, Boston,
Massachusetts 02110.
(24) Putnam Investments, which is a wholly owned subsidiary of Marsh &
McLennan Companies, wholly owns two registered investment advisers:
Putnam Investment Management, which is the investment adviser to the
Putnam family of mutual funds and The Putnam Advisory Company, which
is the investment adviser to Putnam's institutional clients. Both
subsidiaries have dispository power over the Class A common 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 has shared voting power over the shares held by the
institutional clients. Pursuant to Rule 13d-4 of the Securities
Exchange Act, Marsh & McLennan Companies and Putnam Investments have
disclaimed beneficial ownership of these shares. Information as to the
shares owned by Putnam Investments and its affiliates, is as of
December 31, 1998, and is taken from a Schedule 13G/A filed with the
SEC on February 11, 1999. The address of Putnam Investments is One
Post Office Square, Boston, Massachusetts 02109.
(25) Information as to the shares owned by Janus Capital Corporation, an
investment adviser registered under the Investment Advisers Act, is as
of December 31, 1998, and is taken from a Schedule 13G jointly filed
by Janus Capital Corporation and Thomas Bailey with the SEC on
February 12, 1999. Mr. Bailey owns approximately 12.2% of Janus
Capital Corporation and serves as its president and chairman of the
board of directors, and, accordingly, as a result of this ownership
and these positions may be deemed a beneficial owner of these shares.
The address of both Janus Capital Corporation and Mr. Bailey is 100
Fillmore Street, Denver, Colorado 80206.
(26) Information as to the shares owned by Neuberger Berman, is as of
December 31, 1998 and is taken from a Schedule 13G jointly filed by
Neuberger Berman and Neuberger Management with the SEC on February 12,
1999. Each of Neuberger Berman and Neuberger Management is (a) a
broker/dealer registered under the Securities Exchange Act, (b) an
investment adviser registered under the Investment Advisers Act and
(c) an investment company registered under the Investment Company Act.
The address of both companies is 605 Third Avenue, New York, New York
10158.
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DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock is qualified in its
entirety by reference to our Memorandum of Association and bye-laws. Copies of
our Memorandum of Association and bye-laws have been filed with the SEC.
In September 1997, in connection with our IPO, we revised our capital
structure to effect a 2.19-for-one stock split and to increase the number of
authorized common shares and of our preferred shares. As a result, we are
authorized to issue a total of 438,000,000 common shares, which may be issued as
Class A common shares or Class B common shares. We are also authorized to issue
65,700,000 preferred shares. We have in the past used and intend in the future
to use shares of our capital stock to pay for acquisitions.
Class A common shares
As of April 19, 1999, there were 101 registered Class A common
shareholders and 26,945,691 Class A common shares were issued and outstanding.
The Class A common shareholders are entitled to one vote per share and are
entitled to vote as a single class together with the Class B common
shareholders and the holders of preferred shares on all matters subject to
shareholder approval, except that the Class A common shareholders will vote as
a separate class on any matter requiring class voting under Bermuda corporate
law. The holders of the outstanding Class A common shares are entitled to
receive dividends as and when declared by our board of directors, on equal
footing with the Class B common shareholders, out of funds legally available
for dividend distribution after the payment of any dividends declared but
unpaid on any preferred shares then outstanding. The Class A common
shareholders have no preemptive or cumulative voting rights and no rights to
convert their Class A common shares into any other securities. On our
liquidation, dissolution or winding up, the Class A common shareholders are
entitled to receive on equal footing with the Class B common shareholders,
proportionately, our net assets remaining after preferential distribution to
holders of preferred shares and the payment of all creditors and liquidation
preferences, if any.
The legal documents governing our outstanding indebtedness contain
specific restrictive covenants which impose limitations on our ability to pay
dividends to our shareholders or make other distributions. For more
information, please see the section "Dividend Policy."
Transfer agent and registrar
Our transfer agent and registrar for the Class A common shares is
American Stock Transfer & Trust Company.
Class B common shares
As of April 19, 1999, there were 13 Class B common shareholders and
26,245,315 Class B common shares were issued and outstanding. The Class B
common shareholders are entitled to ten votes per share and are entitled to
vote as a single class together with the Class A common shareholders and
holders of preferred shares on all matters subject to shareholder approval,
except that the Class B common shareholders vote as a separate class on any
matter requiring class voting under Bermuda corporate law. The holders of the
outstanding Class B common shares are entitled to receive dividends as and when
declared by our board of directors on equal footing with the Class A common
shareholders, out of funds legally available for dividend distribution. The
Class B common shareholders can convert their Class B common shares on a
share-for-share basis into Class A common shares. Class B common shares may be
transferred only to other original Class B common shareholders or to members of
the family of the original holder by gift, devise or otherwise through laws of
inheritance, descent and distribution. In addition Class B common shares may be
transferred (1) to a trust established by the holder for the holder's family
members, (2) to corporations the majority of beneficial owners of which are or
will be owned by the Class B common shareholders and (3) from corporations or
partnerships which are the Class B common shareholders to their shareholders or
partners. Any other transfer of Class B common shares is void, although the
Class B common shares may be
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converted at any time into Class A common shares on a one-to-one basis and then
sold, subject to the conditions and restrictions imposed by U.S. federal
securities laws.
On our liquidation or winding up, the Class B common shareholders are
entitled to share, proportionately, on equal footing with the Class A common
shareholders, the assets remaining after payment of all debts and other
liabilities and after distribution in full of the preferential amounts to be
distributed to the holders of preferred shares.
Preferred shares
We are authorized to issue 65,700,000 preferred shares. No preferred
shares are currently outstanding.
Warrants
Shareholder warrants
As consideration for a standby facility and Mr. Ronald Lauder's
previous guarantee of a revolving credit facility, Mr. Lauder received a
warrant to purchase 459,900 Class B common shares. The exercise price, exercise
period and other terms of this warrant are similar to the terms of the warrants
described in the next section, other than with respect to the class of shares
which will be issued upon their exercise. The warrant issued to Mr. Lauder was
exercisable beginning on October 3, 1997. Mr. Lauder has waived his rights
under the warrant agreement governing the warrants to register under this
prospectus the Class A common shares issuable upon conversion of the Class B
common shares issuable upon the exercise of his warrant.
Warrants issued in debt offering
We issued a total of 300,000 warrants to the purchasers of units in an
offering in 1996. The warrants were issued under our warrant agreement with the
warrant agent.
Each warrant is evidenced by a certificate and currently entitles the
holder of the warrants to purchase 3.975 Class A common shares from us at an
exercise price of $.00457 per share, subject to adjustment as provided in the
warrant agreement governing the warrants. The warrants are exercisable at any
time prior to the close of business on October 3, 2007. Warrants that are not
exercised by October 3, 2007 will expire.
Some terms of the warrants
The warrant agreement contains provisions (to which there are some
exceptions) adjusting the exercise price and the number of Class A common
shares or other securities issuable upon exercise of a warrant in the event of:
o a division, consolidation or reclassification of our Class A
common shares;
o the issuance of rights, options, warrants or convertible or
exchangeable securities to all Class A common shareholders
entitling those holders to subscribe for or purchase Class A
common shares at a price per share which is lower than the
then current value of our Class A common shares;
o the issuance of Class A common shares at a price per share
that is lower than the then current value of our Class A
common shares, except for issuances in connection with an
acquisition, merger or similar transaction with a third
party;
o certain distributions to all Class A common shareholders of
evidences of indebtedness or assets; and
o in the discretion of our board of directors, in specific
circumstances.
In addition, in accordance with the warrant agreement, the Class A
common shares issuable upon exercise of the warrants are registered under a
registration statement on Form S-1. This prospectus is part of that
registration statement.
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Anti-takeover protections
The voting provisions of the Class B common shares and our ability to
issue preferred shares could substantially impede the ability of one or more
shareholders, acting together, to acquire sufficient influence over the
election of directors and other matters to effect a change in control or
management. As a result, these provisions may be deemed to have an
anti-takeover effect and may delay, defer or prevent a tender offer or takeover
attempt that a shareholder might consider in the shareholder's best interest,
including attempts that might result in a premium over the market price for the
Class A common shares held by shareholders.
Some provisions of Bermuda law
We have been designated as a non-resident under the Exchange Control
Act of 1972 by the Bermuda Monetary Authority whose permission for the issuance
of Class A common shares has been obtained. This designation allows us to
engage in transactions in currencies other than the Bermuda dollar. The
permission of this authority does not constitute a guarantee by this authority
as to our performance or our creditworthiness and in giving this permission,
the Bermuda Monetary Authority will not be liable for the correctness of any
opinions expressed in this prospectus.
The transfer of our Class A common shares between persons regarded as
resident outside Bermuda for exchange control purposes and the issuance of
Class A common shares after the completion of this offering to or by these
persons may be effected without specific consent under the Exchange Control
Act. Issues and transfers of shares involving any person regarded as resident
in Bermuda for exchange control purposes require specific prior approval under
the Exchange Control Act.
Non-Bermuda owners of Class A common shares are not restricted in the
exercise of the rights to hold or vote their shares. Because we have been
designated as a non-resident for Bermuda exchange control purposes there are no
restrictions on our ability to transfer funds in and out of Bermuda or to pay
dividends to U.S. residents who are holders of Class A common shares, other
than in respect of local Bermuda currency.
Under Bermuda law, share certificates are only issued in the names of
corporations, partnerships or individuals. In the case of an applicant acting
in a special capacity (for example, as a trustee), certificates may, at the
request of the applicant, record the capacity in which the applicant is acting.
Notwithstanding the recording of this type of special capacity, we are not
bound to investigate or incur any responsibility in respect of the proper
administration of the trust. We will not take notice of any trust applicable to
any of its shares whether or not we had notice of this trust.
As an "exempted company," we are exempt from Bermuda laws which
restrict the percentage of share capital that may be held by non-Bermudians
but, as an exempted company, we may not participate in some business
transactions including:
o the acquisition or holding of land in Bermuda (except that
required for our business and held by way of lease or tenancy
for terms of less than 21 years);
o the taking of mortgages on land in Bermuda to secure an
amount in excess of $50,000 without the consent of the
Minister of Finance of Bermuda;
o the acquisition of securities created or issued by, or any
interest in, any local company or business, other than
specific types of Bermuda government securities or another
"exempted company," partnership or other corporation resident
in Bermuda but incorporated abroad; or
o the carrying on of business of any kind in Bermuda, except in
furtherance of our business carried on outside Bermuda or
with the permission of, or under a license granted by, the
Minister of Finance of Bermuda.
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RIGHTS TO ACQUIRE CLASS A COMMON SHARES
We have granted to a number of minority shareholders of our
subsidiaries options, exercisable when specific events occur, to exchange their
shares in the respective subsidiaries for, in some circumstances, our Class A
common shares or, in other circumstances, cash. In addition, we have granted to
a number of these minority shareholders piggyback registration rights with
respect to the Class A common shares acquired pursuant to an exercise of their
rights, referred to as roll-up rights. Currently, roll-up rights are held by
minority shareholders of the following subsidiaries:
o RSL COM U.S.A. (and its subsidiary RSL COM PrimeCall)
o RSL COM Asia
o RSL COM Italy (and its subsidiaries Comesa and Multilink)
o RSL COM Latin America
o RSL COM Austria
o RSL COM Spain
o RSL COM Switzerland
o Telecenter Oy
o RSL COM Belgium
o PCM Communicaciones
In most cases, the outstanding roll-up rights become exercisable, without
further condition, in annual installments beginning upon expiration of a
specified period after their respective dates of grant. In addition,
exercisability of some of the roll-up rights may be accelerated upon public
offerings of our Class A common shares or our change of control. None of these
roll-up rights are currently exercisable, with the exception of minority
interest holders of RSL COM Latin America and RSL COM Austria. The number of
Class A common shares issuable upon exercise of the roll-up rights will be
based upon valuations of the minority interests and the Class A common shares
at the time of exercise and, consequently cannot be determined at this time,
but would likely be as a whole material. Based on preliminary valuation studies
of the relevant subsidiaries as of September 30, 1998 and an average of the
last reported sale prices of our Class A common shares on The Nasdaq Stock
Market National Market System during the 30-day period ending on September 30,
1998, the outstanding roll-up rights would have been exercisable on that date
for an estimate of between 2,500,000 and 2,750,000 Class A common shares.
We have also granted to some of our subsidiaries' employees incentive
units, which are options to acquire shares of these subsidiaries or similar
rights, some of which are currently exercisable, and the right to exchange
these incentive units for Class A common shares or cash, at our option. All
Class A common shares issuable upon exchange of these incentive units will be
issued under our 1997 Stock Incentive Plan. We believe that the number of Class
A common shares issuable upon exchange of currently exercisable incentive
units, based on the average closing price of the Class A common shares for the
30 day period prior to September 30, 1998, will be approximately 436,000.
SHARES ELIGIBLE FOR FUTURE SALE
As of April 19, 1999, we have 53,191,006 shares outstanding consisting
of 26,945,691 Class A common shares and a total of 26,245,315 Class B common
shares. Assuming that all of the remaining warrants covered by this prospectus
are exercised, we would have 27,855,489 Class A common shares outstanding. All
of the Class A common shares, including the shares issued under the warrant
agreement, other than those shares purchased by, or issued to, our affiliates,
are freely tradeable without restriction or further registration under U.S.
federal securities laws. All of the outstanding Class B common shares are
restricted securities and are subject to the volume and other resale limitations
of the U.S. federal securities laws.
The number of outstanding common shares listed above does not include:
o 1,876,931 Class A Common shares issuable upon the exercise of
outstanding stock options (as of December 31, 1998);
o 26,245,315 Class A common shares issuable upon the conversion
of outstanding Class B common shares;
o 459,900 Class B common shares issuable upon the exercise of
the warrant issued to Ronald S. Lauder and 459,900 Class A
common shares issuable upon the conversion of those Class B
common shares;
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o 909,798 Class A common shares issuable upon exercise of
unexercised warrants (other than the warrant issued to Mr.
Lauder);
o 164,250 shares of restricted stock, granted under our 1997
Stock Incentive Plan; or
o Class A common shares issuable upon exercise of roll-up
rights or incentive units.
Please refer to "Stock Option and Compensation Plans" and
"Compensation of Directors" under Management and "Certain Relationships and
Related Transactions," "Description of Capital Stock" and "Rights to Acquire
Class A Common Shares." Upon issuance or vesting of these shares issuable upon
the exercise of options, vesting of stock awards or exercise of incentive
units, other than shares issued to our affiliates, these shares will be
eligible for public sale without restriction. As required by the registration
rights agreement covering the warrants, we have registered under the Securities
Act the Class A common shares issuable upon exercise of the warrants and, upon
issuance, these shares, other than shares issued to our affiliates, will be
eligible for public sale without restriction. The shares issuable upon exercise
of the warrants issued to Ronald S. Lauder or roll-up rights are restricted
securities and subject to the volume and other resale limitations of the U.S.
federal securities laws.
In general, under U.S. federal securities laws, as currently in
effect, a person who is not deemed to be our affiliate and who is deemed to
have beneficially owned shares for at least one year, is entitled to sell,
within any three-month period, a number of shares that does not exceed the
greater of (1) one percent of the then outstanding number of our Class A common
shares or (2) the average weekly trading volume in Class A common shares during
the four calendar weeks prior to the filing of the required notice of the sale.
Sales under the U.S. federal securities laws may also be subject to manner of
sale provisions, notice requirements and the availability of our current public
information. A person who is not deemed to have been our affiliate during the
three months prior to a sale, and who has beneficially owned shares for at
least two years is entitled to sell these shares under U.S. federal securities
laws without regard to the volume limitation, manner of sale provisions, notice
requirements or public information requirements. However, affiliates continue
to be subject to these limitations.
We have entered into a registration rights agreement with (1) Ronald
S. Lauder, the chairman of our board of directors and our largest and
controlling shareholder, (2) ltzhak Fisher, our president and chief executive
officer, (3) the other Class B common shareholders, and (4) Coral Gate
Investments. Under this agreement, (1) Mr. Lauder has been granted three demand
registration rights exercisable at any time after April 4, 1998 and (2) Mr.
Fisher has been granted two demand registration rights exercisable after
termination of his employment with us, other than as a result of a qualified
severance event, such as a termination by us for cause or a termination by
Itzhak Fisher without good reason.
Ronald S. Lauder, Itzhak Fisher, the other Class B common
shareholders, Coral Gate Investments and additional holders of Class A common
shares as may be designated by both Mr. Lauder and Mr. Fisher have an unlimited
number of piggyback registration rights. These rights allow these holders to
include their Class A common shares in any registration statement filed by us,
subject to some limitations. Prior to the occurrence of a qualified severance
event, Mr. Fisher may not register any shares pursuant to the piggyback
registration rights if, after giving effect to the sale of those shares, Mr.
Fisher and his family members would hold less than 70% of our Class A common
shares held by them as a group as of the closing date of our IPO. Ronald S.
Lauder, Itzhak Fisher and the other Class B common shareholders may assign
their rights under the registration rights agreement to their family members.
Coral Gate Investments, Gustavo Cisneros and Ricardo Cisneros, the beneficial
owners of Coral Gate Investments, may assign their rights to their family
members. Also, Ronald S. Lauder and Itzhak Fisher may assign their rights to
lenders to whom they pledge any of their Class A common shares. We have agreed
to pay all expenses in connection with a registration by these selling
shareholders. However, we will not pay for legal expenses, underwriting
discounts and commissions of the selling shareholders and taxes payable by the
selling shareholders in connection with any registration pursuant to the
exercise of demand registration rights or piggyback registration rights under
the registration rights agreement. We have also agreed to indemnify the selling
shareholders against some liabilities, including liabilities arising under the
Securities Act.
We have has also granted to Metro Holding AG one demand registration
right exercisable after March 31, 2001 with respect to our Class A common
shares currently beneficially owned by Metro Holding.
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In addition, we have granted to a number of minority shareholders of
our subsidiaries piggyback registration rights with respect to Class A common
shares issuable upon exercise of their roll-up rights. In general, if we file
with the SEC a registration statement on Form S-3 under the Securities Act,
including a registration statement covering shares being sold by or for the
account of our shareholders, we will, at the option of any of these minority
shareholders who is then a registered owner of our Class A common shares,
register all or any portion of that person's shares together with our other
securities. In addition, on or after we become eligible to file a registration
statement on Form S-3, the minority shareholders in RSL COM Latin America have
demand registration rights with respect to our Class A common shares acquired
upon exercise of their roll-up rights.
U.S. FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of our U.S. counsel, Rosenman & Colin LLP, the
following correctly describes some of the material U.S. federal income tax
consequences to us and our subsidiaries of the ownership and disposition of our
Class A common shares by an initial U.S. and non-U.S. shareholder.
For purposes of this discussion, the term "U.S. shareholder" includes
a holder of Class A common shares that is:
o a U.S. citizen or resident;
o a U.S. corporation or other U.S. entity taxable as a
corporation;
o a trust, if a U.S. court is able to exercise primary
supervision over the administration of the trust and one or
more U.S. fiduciaries have the authority to control all
substantial decisions of the trust; and
o an estate that is subject to U.S. federal income tax on its
income, regardless of its source.
A "non-U.S. shareholder" is any shareholder other than a U.S. shareholder.
This discussion is based upon parts of the U.S. Internal Revenue Code
of 1986. In this section of the prospectus, when we refer to the term "Code," we
mean the U.S. Internal Revenue Code. This discussion is also based upon the
Code's legislative history, judicial authority, current administrative rulings
and practice, and existing and proposed treasury regulations, all as currently
in effect and existing. Future changes in the taxation law could alter or modify
the conclusions contained below, possibly on a retroactive basis. Future changes
in the taxation law could adversely affect a Class A common shareholder. This
discussion assumes that the Class A common shares will be held as capital assets
(as defined in section 1221 of the Code) by the holders of the Class A common
shares.
The following discussion generally does not address the tax
consequences to a person who holds or will hold, directly or indirectly, enough
shares to give the holder the right to exercise 10% or more of the total voting
power of our outstanding stock. Ten percent shareholders are advised to consult
their own tax advisors regarding the tax considerations incident to an
investment in our Class A common shares. In addition, this discussion does not
deal with all aspects of U.S. federal income taxation that might be relevant to
particular holders in light of their personal investment circumstances or
status. In addition, this discussion does not discuss the U.S. federal income
tax consequences to some types of holders that may be subject to special rules
under the U.S. federal income tax laws, such as:
o financial institutions;
o insurance companies;
o dealers in securities or foreign currency;
o tax-exempt organizations;
o foreign corporations or nonresident alien individuals; or
o persons whose functional currency is not the U.S. dollar.
Moreover, the effect of any applicable state, local or foreign or other tax
laws is not discussed.
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The following discussion is for general information only. Each
purchaser is strongly urged to consult with its own tax advisors to determine
the impact of its personal tax situation on the anticipated tax consequences,
including the tax consequences under state, local, foreign or other tax laws,
of the ownership and disposition of our Class A common shares.
Taxation Affecting Us and Our Subsidiaries
In general, we and our foreign (non-U.S.) subsidiaries are subject to
U.S. federal income tax only to the extent we and our foreign subsidiaries have
income which has its source in the U.S. or is effectively connected with a U.S.
trade or business. We anticipate that we and our foreign subsidiaries will
receive substantially all of our income and our foreign subsidiaries' income
from foreign sources, except for income from interest on pledged securities. We
expect that, with the exception of income from interest on pledged securities,
none of the income will be effectively connected with a U.S. trade or business.
As a result, we and our foreign subsidiaries should not be subject to material
U.S. federal income tax. However, our domestic (U.S.) subsidiaries are subject
to U.S. federal income tax on their worldwide income regardless of its source,
subject to reduction by allowable credits. Generally, distributions by these
U.S. subsidiaries to us or our foreign subsidiaries will be subject to U.S.
withholding taxes.
Taxation of U.S. Shareholders
A U.S. shareholder receiving a distribution on Class A common shares
generally will be required to include the distribution in gross income as a
taxable dividend to the extent this distribution is paid from our current or
accumulated earnings and profits as determined under U.S. federal income tax
principles. Distributions in excess of our earnings and profits generally will
first be treated, for U.S. federal income tax purposes, as a nontaxable return
of capital to the extent of the U.S. shareholder's basis in our Class A common
shares. The distributions will then be treated as gain from the sale or
exchange of a capital asset. Dividends received on the Class A common shares by
U.S. corporate shareholders will not be eligible for the corporate dividends
received deduction.
A U.S. shareholder will be entitled to claim a foreign tax credit with
respect to income received from us only for foreign taxes (such as withholding
taxes), if any, imposed on dividends paid to the U.S. shareholder. A U.S.
shareholder will not be entitled to claim a foreign tax credit with respect to
income received from us for taxes, if any, imposed on us or on any entity in
which we have made an investment. We do not anticipate, however, under current
Bermuda law that any withholding taxes would be imposed by Bermuda on
distributions made by us to a U.S. shareholder. See "Bermuda Tax
Considerations." For so long as we are a "U.S.-owned foreign corporation,"
distributions with respect to our Class A common shares that are taxable as
dividends generally will be treated as foreign source passive income (or, for
U.S. shareholders that are "financial service entities" as defined in the
treasury regulations, foreign source financial services income) or U.S. source
income for U.S. foreign tax credit purposes, in proportion to our earnings and
profits in the year of the distribution allocable to foreign and U.S. sources.
For this purpose, we will be treated as a U.S.-owned foreign corporation so
long as stock representing 50% or more of the voting power or our value is
owned, directly or indirectly, by U.S. shareholders.
Generally, gain or loss on the sale or exchange of our Class A common
shares is treated as U.S. source capital gain or loss. This capital gain or
loss generally is long-term capital gain or loss if the U.S. shareholder has
held the Class A common shares for more than one year at the time of the sale
or exchange. In the case of non-corporate taxpayers, long-term capital gain is
taxed at a maximum federal rate of 20%.
Various provisions contained in the Code impose special taxes in some
circumstances on U.S. or foreign corporations and their stockholders. The
following is a summary of some of these provisions which could have an adverse
impact on us and our U.S. shareholders.
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Personal Holding Companies
A corporation that is a personal holding company is subject to a 39.6%
tax on its undistributed personal holding company income, which is generally
U.S. taxable income with some adjustments, reduced by distributions to
shareholders. A corporation that is not a foreign personal holding company or a
passive foreign investment company, both discussed below, generally is a
personal holding company if:
o more than 50% of the stock, in terms of value, is owned,
directly or indirectly, by five or fewer individuals, without
regard to their citizenship or residence; and
o it receives 60% or more of gross income, as specifically
adjusted, from specific passive sources.
For purposes of the gross income test, a foreign corporation generally
only includes taxable income received from U.S. sources or income that is
effectively connected with a U.S. trade or business.
More than 50% of our outstanding shares and each of our corporate
subsidiaries, by value, is currently owned, directly or indirectly, by five or
fewer individuals. We anticipate that this will remain the case on a going-
forward basis. Since we anticipate that we will receive substantially all of
our U.S. source gross income from interest on our pledged securities, which we
believe may constitute undistributed personal holding company income for
personal holding company purposes, we may be subject to personal holding
company tax with respect to a taxable year in which we (1) are not treated as
either a foreign personal holding company or a passive foreign investment
company and (2) have held or continue to hold pledged securities. In prior
years, we believe that we were not subject to the personal company income tax
because we also were a foreign personal holding company, and we expect that this
will be the case going forward. On the other hand, if any of our foreign
corporate subsidiaries receive any income from U.S. sources, less than 50% of
any of this income can be expected to be from passive sources. Accordingly, we
believe that none of our subsidiaries will satisfy the income test described
above and therefore none of them will be classified as a personal holding
company. In addition, since we anticipate that our U.S. subsidiaries will
receive most or all of their income from non-passive sources, we further believe
that none of these subsidiaries will satisfy this income test and, therefore,
none of them will be classified as a personal holding company. We intend to
manage our affairs and the affairs of our subsidiaries so as to attempt to avoid
or minimize the imposition of the personal holding company tax, to the extent we
can do so in line with our business goals.
Foreign Personal Holding Companies
In general, if we or any of our foreign corporate subsidiaries are
classified as a foreign personal holding company, our or the foreign corporate
subsidiary's undistributed foreign personal holding company income (generally,
taxable income with some adjustments) will be imputed to all of the U.S.
shareholders who are deemed to hold our or the subsidiary's stock on the last
day of the applicable taxable year. This income will be taxable to those
persons as a dividend, even if we did not pay a cash dividend. U.S.
shareholders who dispose of their Class A common shares prior to the last day
of the applicable tax year generally will not be subject to U.S. federal income
tax under these rules.
A foreign corporation will be classified as a foreign personal holding
company if:
o five or fewer individuals, who are U.S. citizens or
residents, directly or indirectly, own more than 50% of the
corporation's stock (measured either by voting power or
value) (the "stockholder test"); and
o the corporation receives at least 60% of its gross income
(regardless of source), as specifically adjusted, from
specific passive sources (the "income test").
After a corporation becomes a foreign personal holding company, the
income test percentage for each subsequent taxable year is reduced to 50%.
Currently, five or fewer individuals who are U.S. citizens or
residents own a beneficial interest of more than 50% of the voting power of our
and our foreign corporate subsidiaries' outstanding Class A common shares for
purposes of the foreign personal holding company rules, and we believe that the
stockholder test will likely be met on a going-forward basis. In prior years, we
believe that we were a foreign personal holding company but that our
shareholders were not subject to these rules regarded imputed income because we
generated losses, not income. However, U.S. shareholders who acquire Class A
common shares from decedents will, in special circumstances, be denied the
step-up of the income tax basis for those Class A common shares to fair market
value at the date of death, which would otherwise have been available. Instead,
these shareholders will have a tax basis equal to the lower of the fair market
value or the decedent's basis.
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We believe, however, that we or any of our foreign corporate
subsidiaries, once profitable, will not be classified as a foreign personal
holding company because the income test then will not be satisfied by either of
us.
While we currently believe that we or any of our foreign corporate
subsidiaries will not be classified as a foreign personal holding company, once
profitable, it is possible that we or one or more of these subsidiaries would
meet the income test in a given taxable year and would qualify as a foreign
personal holding company for that year. If we conclude that we or any of our
foreign corporate subsidiaries would be classified as a foreign personal holding
company for any profitable taxable year, we intend to manage our affairs and the
affairs of our subsidiaries so as to attempt to avoid or minimize having income
imputed to the U.S. shareholders under these rules, to the extent we can do so
in line with our business goals.
Passive Foreign Investment Companies
We will be classified as a passive foreign investment company if:
o 75% or more of our gross income (taking into account under an
income "look-through" rule, our pro rata share of the gross
income of any company of which we are considered to own 25%
or more of the stock by value) in a taxable year is passive
income, or
o at least 50% of the average percentage of our assets (also
taken into account, under an asset "look-through" rule, the
pro rata share of the assets of any company of which we are
considered to own 25% or more of the stock by value) in a
taxable year produce or are held for the production of
passive income.
Passive income for purposes of the passive foreign investment company
rules generally includes dividends, interest and other types of investment
income and would include amounts received because of the investment of a
portion of the funds raised in some of our offerings. If we are a passive
foreign investment company at any time during a U.S. shareholder's holding
period, each U.S. shareholder (regardless of the percentage of stock owned)
would, upon some of our distributions and upon disposition of our Class A
common shares at a gain, be liable to pay tax plus an interest charge. The tax
would be determined by allocating this distribution or gain ratably to each day
of the U.S. shareholder's holding period for the Class A common shares. For
this purpose, the holding period would be deemed to include a U.S.
shareholder's holding period in the warrants which, if exercised, resulted in
the acquisition of Class A common shares. The amount allocated to years prior
to the taxable year of the distribution or disposition would be taxed at the
highest marginal rates for ordinary income for those years, if we were a
passive foreign investment company during those years. The U.S. shareholder
would also be liable for interest on the amount of the additional tax due with
respect to those prior years in which we were a passive foreign investment
company, including years in which a U.S. shareholder held warrants and for
which we were a passive foreign investment company. The amount allocated to the
current taxable year and any non-passive foreign investment company years would
be taxed in the same manner as other ordinary income earned in the current
taxable year.
Under special circumstances, if we were to become a passive foreign
investment company, distributions and dispositions in respect of shares in our
direct or indirect foreign corporate subsidiary may be attributed in whole or
in part to a U.S. investor. This U.S. investor may be taxed under the passive
foreign investment company rules with respect to these distributions or
dispositions.
If we were to become a passive foreign investment company, U.S.
shareholders who acquire Class A common shares from decedents could be denied
the step-up of the income tax basis for the Class A common shares to fair
market value at the date of death, which would otherwise have been available.
Instead, these shareholders could have a tax basis equal to the lower of the
fair market value or the decedent's basis.
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The above results may be eliminated, at least in part, if a U.S.
shareholder permanently elects to treat us as a qualified electing fund for
U.S. federal income tax purposes. A stockholder of a qualified electing fund is
required for each taxable year to include in income a pro rata share of the
ordinary income of the qualified electing fund as ordinary income and a pro
rata share of the net capital gain of the qualified electing fund as long-term
capital gain. In the case of non-corporate taxpayers, this is taxable at the
applicable long-term rate. If a U.S. shareholder in a passive foreign investment
company has made a qualified electing fund election in a year subsequent to the
year in which that investor acquired an interest (including a warrant) in the
passive foreign investment company, the U.S. shareholder must agree in the year
of the election to either (1) recognize gain equal to the U.S. shareholder's
unrealized appreciation in the stock or (2) assuming we are a controlled foreign
corporation (discussed below), include in income as a dividend his pro rata
share of our earnings and profits up to the first day of the tax year for which
the election was made, in each case subject to the tax consequences discussed
above for non-qualified electing funds-passive foreign investment companies.
This is done so that after that date any additional gain on the sale of stock in
the future generally will be characterized as capital gain and the denial of
basis step-up at death and the interest charge, as well as the other passive
foreign investment company tax consequences described above, would not continue
to apply.
A U.S. shareholder of a passive foreign investment company may,
instead of making a qualified electing fund election, also avoid the above
results by electing to "mark-to-market" the passive foreign investment company
stock as of the close of each taxable year so long as that stock is
"marketable." We anticipate that our Class A common shares are "marketable" for
this purpose. Under this election, the U.S. shareholder includes in income each
year as ordinary income, which is an amount equal to the excess, if any, of the
fair market value of the stock at the close of the year over the U.S.
shareholder's adjusted basis. If the stock declines in value during any year,
the U.S. shareholder is entitled to a deduction from ordinary income the excess
of the U.S. shareholder's adjusted basis over the stock's value at the close of
the applicable year but only to the extent of net mark-to-market gains
previously included in income. Any gain or loss on the sale of the stock of the
passive foreign investment company will be ordinary income or ordinary loss,
but only to the extent of the previously included net mark-to-market gains. In
the case of a U.S. shareholder who makes this mark-to-market election for the
stock of a passive foreign investment company as to which a qualified electing
fund election was not in effect during his period of ownership, a coordination
rule applies to ensure that the shareholder does not avoid the interest charge
for periods prior to this election. An election to mark-to-market applies to
the year for which the election is made and following years unless the stock of
the passive foreign investment company ceases to be marketable or the IRS
consents to the revocation of the election.
We intend to manage our business and the businesses of our
subsidiaries so as to continue to avoid personal foreign investment company
status. We will notify U.S. shareholders if we conclude that we will be treated
as a personal foreign investment company for any taxable year to enable U.S.
shareholders to consider whether to elect to treat us as a qualified electing
fund for U.S. federal income tax purposes or to make the mark-to-market
election. In addition, we will, at the request of a U.S. shareholder who elects
to have us treated as a qualified electing fund, comply with the applicable
information reporting requirements. Recently issued treasury regulations set
forth rules on the filing of a protective statement by a U.S. person who owns
stock in a foreign corporation which is reasonably believed by that person not
to be a passive foreign investment company. One purpose of this protective
statement is to enable the person to make a retroactive qualified electing fund
election if the foreign corporation is subsequently determined to be a passive
foreign investment company. Another purpose is to permit the IRS to make an
otherwise barred assessment of tax under the qualified electing fund rules. If
the IRS determines that we have been a passive foreign investment company,
generally, a U.S. shareholder who has not filed a protective statement may not
make a retroactive qualified electing fund election except with the IRS' consent
which may or may not be granted. Therefore, U.S. shareholders should consider
with their own U.S. tax advisors whether the filing of a protective statement
with respect to their interests in us (Class A common shares and warrants) is
advisable.
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Controlled Foreign Corporations
If 10% shareholders, who are also U.S. persons, own, in total,
directly or indirectly, more than 50% (measured by voting power or value) of
the shares of a foreign corporation, that foreign corporation is a controlled
foreign corporation. If a foreign corporation is characterized as a controlled
foreign corporation, then:
o some portion of the undistributed income of the foreign
corporation may be imputed to those 10% shareholders; and
o some portion of the gains recognized by those 10%
shareholders on the disposition of their shares in the
foreign corporation (which would otherwise qualify for
capital gains treatment) may be converted into ordinary
dividend income.
We are currently a controlled foreign corporation, and it is likely
that 10% shareholders who are also U.S. persons will continue to own or be
deemed to own more than 50% of the voting power of our outstanding common stock
(Class A common shares and Class B common shares) and, thus, that we will
continue to be characterized as a controlled foreign corporation. However,
these rules only apply with respect to those 10% shareholders. For taxable
years beginning after December 31, 1997, in the case of controlled foreign
corporations with publicly-traded shares, the asset test to determine whether
the controlled foreign corporation is a passive foreign investment company is
made on the basis of the relative fair market values of the applicable assets.
We expect to be publicly-traded for this purpose.
Taxation Of Non-U.S. Shareholders
For U.S. federal income tax purposes, a non-U.S. shareholder should
not be subject to tax on distributions made with respect to, and gains realized
from the disposition of, our Class A common shares unless the distributions and
gains are attributable to an office or fixed place of business maintained by
that non-U.S. shareholder in the U.S. A non-U.S. shareholder generally will not
be subject to U.S. federal income or withholding tax in respect of gain
recognized in the disposition of our Class A common shares.
U.S. Backup Withholding And Information Reporting
U.S. Shareholders
Under special circumstances, a U.S. shareholder who is an individual
may be subject to backup withholding at a 31% rate on dividends received on our
Class A common shares. This withholding generally applies only if the
individual U.S. shareholder:
o fails to furnish his or her taxpayer identification number to
the U.S. financial institution or any other person
responsible for the payment of dividends on our Class A
common shares;
o furnishes an incorrect taxpayer identification number;
o is notified by the IRS that the U.S. shareholder has failed
to properly report payments of interest and dividends and the
IRS has notified us that the U.S. shareholder is subject to
backup withholding; or
o fails, under special circumstances, to provide a certified
statement, signed under penalty or perjury, that the taxpayer
identification number provided is the U.S. shareholder's
correct number and that the U.S. shareholder is not subject
to backup withholding rules.
Amounts withheld under the backup withholding rules do not constitute
a separate U.S. federal income tax. Rather, any amounts withheld under the
backup withholding rules will be refunded or allowed as a credit against the
U.S. shareholder's U.S. federal income tax liability, if any, so long as the
required information or appropriate claim for refund is filed with the IRS.
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Non-U.S. Shareholders
Currently, U.S. information reporting requirements and backup
withholding do not apply to dividends on our Class A common shares paid to
non-U.S. shareholders at an address outside the U.S., provided that the payor
does not have definite knowledge that the payee is a U.S. person. As a general
matter, information reporting and backup withholding do not apply to a payment
of the proceeds of a sale effected outside the U.S. of our Class A common
shares by a foreign office of a foreign holder. However, information reporting
requirements (but not backup withholding) do apply to a payment of the proceeds
of a sale effected outside the U.S. of our Class A common shares through a
"U.S. broker." These requirements do not apply if the U.S. broker has
documentary evidence in its records that the non-U.S. shareholder is not a U.S.
person and has no actual knowledge that the evidence is false, or the non-U.S.
shareholder otherwise establishes an exemption.
For purposes of the above paragraph, when we say U.S. broker, we mean
a broker that:
o is a U.S. person;
o is a foreign person that derives 50% or more of its gross
income for certain periods from the conduct of a trade or
business in the U.S.; or
o is a controlled foreign corporation.
Payment by a broker of the proceeds of a sale of our shares effected
inside the U.S. is subject to both backup withholding and information
reporting. These payments will not be subject to this withholding and reporting
if the non-U.S. shareholder certifies under penalties of perjury that the
non-U.S. shareholder is not a U.S. person and provides the non-U.S.
shareholder's name and address or the non-U.S. shareholder otherwise
establishes an exemption. Any amounts withheld under the backup withholding
rules from a payment to a non-U.S. shareholder are allowed as a refund or a
credit against the non-U.S. shareholder's U.S. federal income tax, only if the
required information or appropriate claim for refund is furnished to the IRS.
The U.S. Treasury issued regulations on October 6, 1997 which, among
other things, alter the information reporting and backup withholding rules
applicable to non-U.S. shareholders by providing specific presumptions under
which a non-U.S. shareholder would be subject to backup withholding and
information reporting until we receive certification from that shareholder of
non-U.S. status. These regulations are generally effective with respect to
dividends paid after December 31, 1999. This discussion is not intended to be a
complete discussion of the provisions of these regulations, and prospective
shareholders are urged to consult their tax advisors with respect to the effect
that these regulations would have.
BERMUDA TAX CONSIDERATIONS
In the opinion of Conyers, Dill & Pearman, the following correctly
describes a summary of some of the material anticipated tax consequences of an
investment in our Class A common shares under current Bermuda tax laws. This
discussion does not address the tax consequences under non-Bermuda tax laws
and, accordingly, each prospective investor should consult its own tax advisors
regarding the tax consequences of an investment in our Class A common shares.
The discussion is based upon laws and relevant interpretation of current laws
in effect, all of which are subject to change.
Bermuda Taxation
Currently, there is no Bermuda:
o income tax;
o corporation or profits tax;
o withholding tax;
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o capital gains tax;
o capital transfer tax;
o estate duty; or
o inheritance tax
payable by us or our shareholders other than those who are ordinarily resident
in Bermuda. We are not subject to stamp or other similar duty on the issue,
transfer or redemption of our Class A common shares.
We have obtained an assurance from the Minister of Finance of Bermuda
under the Exempted Undertakings Tax Protection Act that, if there is enacted in
Bermuda any legislation imposing tax computed on profits or income or computed
on any capital assets, gain or appreciation or any tax in the nature of estate
duty or inheritance tax, this tax shall not be applicable to us or to our
operations, or to our shares or our other obligations until March 28, 2016
except as this tax applies to persons ordinarily resident in Bermuda and
holding shares or other of our obligations or any real property or leasehold
interests in Bermuda owned by us. No reciprocal tax treaty affecting us exists
between Bermuda and the U.S.
As an exempted company, we are liable to pay in Bermuda a registration
fee based upon our authorized share capital and the premium on our issued
shares at a rate not more than $25,000 per year.
LEGAL MATTERS
The validity of the Class A common shares offered under this
prospectus have been passed upon for us by our counsel, Conyers, Dill &
Pearman, Hamilton, Bermuda. The information provided in the sections "Service
of Process of and Enforcement of Liabilities," "Bermuda Tax Considerations" and
"Description of Capital Stock--Some Provisions of Bermuda Law," have been
passed upon by Conyers, Dill & Pearman and are stated in this prospectus on
their authority. The information provided in the section "U.S. Federal Income
Tax Considerations" has been passed upon by Rosenman & Colin LLP, New York, New
York.
Robert L. Kohl and Mark D. Fischer, members of Rosenman & Colin LLP,
in total beneficially own 1,100 Class A common shares, and Mr. Kohl has an
option to purchase up to 1,433 Class A common shares. These shares have a total
fair market value of approximately $74,700 at December 31, 1998 (based on the
closing sale price of our Class A common shares on that date, as quoted on The
Nasdaq Stock Market National Market System).
There is no minimum amount which in the opinion of our board of
directors must be raised by the offer of the Class A common shares in order to
provide for the matters referred to in Section 28 of The Companies Act 1981 of
Bermuda.
EXPERTS
The Consolidated Financial Statements as of December 31, 1997 and 1998
and for each of the three years in the period ended December 31, 1998, included
in this prospectus, have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein and have been so included
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
SERVICE OF PROCESS AND ENFORCEMENT OF LIABILITIES
We are a Bermuda company. Some of our directors and officers, and some
of the experts named in this prospectus, are not residents of the U.S. All or a
substantial portion of the assets of these persons are or may be located
outside the U.S. As a result, it may not be possible for investors to effect
service of process within the U.S. upon these persons or to enforce against
them judgments obtained in U.S. courts. We have been advised by our 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 U.S. 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 specific conditions and
exceptions.
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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, 1997 and December 31, 1998................................. F-3
Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 1996,
December 31, 1997 and December 31, 1998................................................................. F-4
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1996, December 31, 1997
and December 31, 1998................................................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, December 31, 1997 and
December 31, 1998....................................................................................... F-6
Notes to Consolidated Financial Statements................................................................ F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS REPORT
To the Shareholders of
RSL Communications, Ltd.
We have audited the accompanying consolidated balance sheets of RSL
Communications, Ltd., a Bermuda corporation, and its subsidiaries (together, the
"Company"), as of December 31, 1998 and 1997, and the related consolidated
statements of operations and comprehensive loss, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. Our
audits also included the consolidated financial statement schedules listed in
the Index at Item 16(b) in part II. These consolidated financial statements and
the consolidated financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and the consolidated financial statement
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the consolidated financial position of the Company and
its subsidiaries at December 31, 1998 and 1997 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such consolidated financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly, in all material respects,
the information set forth therein.
DELOITTE & TOUCHE LLP
New York New York
February 19, 1999
F-2
<PAGE>
RSL COMMUNICATIONS, LTD.
CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents....................................................... $144,894 $ 367,823
Accounts receivable--net........................................................ 70,610 181,845
Marketable securities--available for sale....................................... 13,858 98,637
Prepaid expenses and other current assets....................................... 16,073 77,772
-------- ----------
Total current assets.............................................................. 245,435 726,077
-------- ----------
Restricted marketable securities--held to maturity................................ 68,836 20,159
-------- ----------
Marketable securities--available for sale......................................... -- 12,911
-------- ----------
Property and equipment:
Telecommunications equipment.................................................... 63,998 300,647
Furniture, fixtures and other................................................... 21,583 68,861
-------- ----------
85,581 369,508
Less accumulated depreciation................................................... (13,804) (45,785)
-------- ----------
Property and equipment--net..................................................... 71,777 323,723
-------- ----------
Investment in unconsolidated subsidiaries......................................... -- 8,446
-------- ----------
Goodwill and other intangible assets--net of accumulated amortization............. 214,983 589,517
-------- ----------
Deposits and other assets......................................................... 4,633 33,760
-------- ----------
Total assets...................................................................... $605,664 $1,714,593
-------- ----------
-------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................................................ $ 94,149 $ 170,135
Accrued expenses................................................................ 49,965 191,234
Notes payable................................................................... 4,604 11,537
Deferred revenue................................................................ 5,368 23,647
Capital lease obligations--current portion...................................... 3,429 24,593
Other liabilities............................................................... 4,842 49,781
-------- ----------
Total current liabilities......................................................... 162,357 470,927
-------- ----------
Other liabilities--noncurrent..................................................... -- 20,807
-------- ----------
Long-term debt--less current portion.............................................. -- 12,643
-------- ----------
Senior notes--net................................................................. 296,500 998,868
-------- ----------
Capital lease obligations--less current portion................................... 20,108 77,864
-------- ----------
Total liabilities................................................................. 478,965 1,581,109
-------- ----------
Commitments and contingencies
Shareholders' equity:
Common Stock, Class A--par value $0.00457; 10,872,568 and 26,529,479 issued and
outstanding at December 31, 1997 and 1998, respectively....................... 49 121
Common Stock, Class B--par value $0.00457; 30,760,726 and 26,245,315 issued and
outstanding at December 31, 1997 and 1998, respectively....................... 141 120
Common Stock, Class C--par value $0.00457; 0 shares issued...................... -- --
Preferred Stock--par value $0.00457; 65,700,000 shares authorized, 0 shares
issued........................................................................ -- --
Warrants--Common Stock, exercise price of $0.00457................................ 5,544 5,544
Additional paid-in capital........................................................ 274,192 500,292
Accumulated deficit............................................................... (147,939) (367,163)
Accumulated other comprehensive loss.............................................. (5,288) (5,430)
-------- ----------
Total shareholders' equity........................................................ 126,699 133,484
-------- ----------
Total liabilities and shareholders' equity........................................ $605,664 $1,714,593
-------- ----------
-------- ----------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
RSL COMMUNICATIONS, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
($ AND SHARES IN THOUSANDS, EXCEPT LOSS PER SHARE)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Revenues.......................................................... $ 113,257 $ 300,796 $ 885,938
Operating costs and expenses:
Cost of services (exclusive of depreciation and amortization
shown separately below)...................................... 98,461 265,321 702,602
Selling, general and administrative expenses.................... 38,893 94,712 238,141
Depreciation and amortization................................... 6,655 21,819 75,445
---------- ---------- ----------
144,009 381,852 1,016,188
---------- ---------- ----------
Loss from operations.............................................. (30,752) (81,056) (130,250)
Interest income................................................... 3,976 13,826 16,104
Interest expense.................................................. (11,359) (39,373) (75,431)
Other income--net................................................. 470 6,595 739
Foreign exchange transaction loss................................. -- -- (11,055)
Minority interest................................................. (180) 210 6,079
Loss in equity interest of unconsolidated subsidiaries............ -- -- (3,276)
Income taxes...................................................... (395) (401) (1,334)
---------- ---------- ----------
Loss before extraordinary item.................................... (38,240) (100,199) (198,424)
Extraordinary item................................................ -- -- (20,800)
---------- ---------- ----------
Net loss.......................................................... (38,240) (100,199) (219,224)
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign exchange translation adjustment......................... (622) (4,666) 897
Unrealized loss on securities................................... -- -- (1,039)
---------- ---------- ----------
Comprehensive loss................................................ $ (38,862) $ (104,865) $ (219,366)
---------- ---------- ----------
---------- ---------- ----------
Loss per share of common stock before
extraordinary item.............................................. $ (5.13) $ (5.27) $ (4.52)
Extraordinary item per share of common stock...................... $ -- $ -- $ (0.47)
Net loss per share of common stock................................ $ (5.13) $ (5.27) $ (4.99)
Weighted average number of shares of common
stock outstanding............................................... 7,448 19,008 43,913
</TABLE>
See notes to consolidated financial statements.
F-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, 1996.......... -- $ -- 6,411 $ 29 9,244 $ 93 -- $ -- $ 15,083 $ (9,500)
Issuance of Warrants in
connection with 1996
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)
Initial Public Offering of
Class A Common Stock..... 8,280 38 -- -- -- -- -- -- 167,504 --
Issuance of Class A Common
Stock for acquisition of
certain minority
interests, warrants and
options exercised........ 2,593 11 -- -- -- -- -- -- 41,624 --
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)
Secondary offering of
Class A Common Stock..... 7,544 34 -- -- -- -- -- -- 169,955 --
Issuance of Class A Common
Stock for acquisition of
certain minority
interests, distribution
rights, warrants and
options exercised........ 3,596 17 -- -- -- -- -- -- 56,249 --
Conversion of Class B
Common Stock in exchange
for Class A Common
Stock.................... 4,516 21 (4,516) (21) -- -- -- -- -- --
Change in minority
interest from step
acquisition.............. -- -- -- -- -- -- -- -- (104) --
Foreign Currency
Translation
Adjustment............... -- -- -- -- -- -- -- -- -- --
Unrealized loss on
securities............... -- -- -- -- -- -- -- -- -- --
Net loss.................. -- -- -- -- -- -- -- -- -- (219,224)
------ ---- ------ ---- ------ ---- ------ ------ -------- ---------
BALANCE
December 31, 1998........ 26,529 $121 26,245 $120 -- $ -- 1,117 $5,544 $500,292 $(367,163)
------ ---- ------ ---- ------ ---- ------ ------ -------- ---------
------ ---- ------ ---- ------ ---- ------ ------ -------- ---------
<CAPTION>
ACCUMULATED
OTHER DEFERRED
COMPREHENSIVE FINANCING
LOSS COSTS TOTAL
------------ --------- ---------
<S> <C> <C> <C>
BALANCE
January 1, 1996.......... $ -- $ -- $ 5,705
Issuance of Warrants in
connection with 1996
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
Initial Public Offering of
Class A Common Stock..... -- -- 167,542
Issuance of Class A Common
Stock for acquisition of
certain minority
interests, warrants and
options exercised........ -- -- 41,635
Conversion of Preferred
Stock in exchange for
Class B Common Stock..... -- -- --
Foreign Currency
Translation
Adjustment............... (4,666) -- (4,666)
Amortization of deferred
financing costs.......... -- 1,544 1,544
Net loss.................. -- -- (100,199)
------------ ------- ---------
BALANCE
December 31, 1997........ (5,288) -- 126,699
Secondary offering of
Class A Common Stock..... -- -- 169,989
Issuance of Class A Common
Stock for acquisition of
certain minority
interests, distribution
rights, warrants and
options exercised........ -- -- 56,266
Conversion of Class B
Common Stock in exchange
for Class A Common
Stock.................... -- -- --
Change in minority
interest from step
acquisition.............. -- -- (104)
Foreign Currency
Translation
Adjustment............... 897 -- 897
Unrealized loss on
securities............... (1,039) -- (1,039)
Net loss.................. -- -- (219,224)
------------ ------- ---------
BALANCE
December 31, 1998........ $ (5,430) $ -- $ 133,484
------------ ------- ---------
------------ ------- ---------
</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,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows used in operating activities:
Net loss.......................................................... $ (38,240) $ (100,199) $ (219,224)
Adjustments to reconcile net loss to net cash used in operating
activities, net of effects of purchase of subsidiaries:
Accretion of interest expense on senior discount notes........ -- -- 25,706
Accretion of interest receivable on restricted marketable
securities.................................................. (1,562) (5,504) (2,727)
Depreciation and amortization................................. 6,655 21,819 75,445
Equity loss on investment in unconsolidated subsidiaries...... -- -- 3,276
Extraordinary loss............................................ -- -- 20,800
Foreign currency transaction (gain) loss...................... (788) -- 6,441
Loss on disposal of property and equipment.................... 368 -- --
Loss on sales of marketable securities........................ -- -- 367
Provision for losses on accounts receivable................... 2,830 10,908 9,043
Reversal of accrued liabilities............................... -- (7,000) --
Changes in assets and liabilities:
Increase in accounts receivable--net.......................... (17,034) (45,069) (49,321)
Increase in deposits and other assets......................... (3,249) (2,929) (48,869)
Increase in prepaid expenses and other current assets......... (925) (13,196) (65,842)
Increase in accounts payable and accrued expenses............. 44,243 56,354 123,813
Increase (decrease) in deferred revenue and other current
liabilities................................................. 4,279 (2,155) 38,018
Increase (decrease) in other long-term liabilities............ (7,052) (4,841) 322
---------- ---------- ----------
Net cash used in operating activities............................. (10,475) (91,812) (82,752)
---------- ---------- ----------
Cash flows used in investing activities:
Acquisition of subsidiaries..................................... (38,552) (77,813) (287,044)
Purchase of marketable securities............................... (82,529) -- (134,275)
Proceeds from maturities of marketable securities............... -- 26,492 23,684
Proceeds from sales of marketable securities.................... 14,701 27,675 35,757
Purchase of restricted marketable securities.................... (102,808) -- --
Proceeds from maturities of restricted marketable securities.... -- 41,038 29,141
Purchase of property and equipment.............................. (15,983) (36,357) (181,937)
Proceeds from sale of property and equipment.................... 171 144 5,236
---------- ---------- ----------
Net cash used in investing activities............................. (225,000) (18,821) (509,438)
---------- ---------- ----------
Cash flows provided by financing activities:
Proceeds from issuance of common and preferred stock and
warrants...................................................... 50,000 182,160 180,807
Underwriting fees and expenses.................................. -- (14,618) (10,131)
Proceeds from notes payable..................................... -- -- 1,306
Payment of notes payable........................................ (3,000) (3,348) --
Proceeds from issuance of Notes................................. 300,000 -- 791,992
Payment of offering costs....................................... (10,989) -- (10,940)
Proceeds from long-term debt.................................... 44,000 -- 13,386
Payment of long-term debt....................................... (45,598) (9,402) (1,548)
Retirement of 1996 Notes........................................ -- -- (127,493)
Premium paid for the retirement of 1996 Notes................... -- -- (16,662)
Principal payments under capital lease obligations.............. (382) (2,757) (5,241)
---------- ---------- ----------
Net cash provided by financing activities......................... 335,031 152,035 815,476
---------- ---------- ----------
Increase in cash and cash equivalents............................. 99,556 41,402 223,286
Effects of foreign currency exchange rates on cash................ (651) (576) (357)
Cash and cash equivalents at beginning of period.................. 5,163 104,068 144,894
---------- ---------- ----------
Cash and cash equivalents at end of period........................ $ 104,068 $ 144,894 $ 367,823
---------- ---------- ----------
---------- ---------- ----------
Supplemental disclosure of cash flows information:
Cash paid for:
Interest...................................................... $ 1,639 $ 41,285 $ 46,930
---------- ---------- ----------
---------- ---------- ----------
Supplemental schedule of noncash investing and financing
activities:
Assets acquired under capital lease obligations................. $ 7,897 $ 13,060 $ 65,728
---------- ---------- ----------
---------- ---------- ----------
Issuance of notes to acquire stock.............................. $ 9,328 $ -- $ --
---------- ---------- ----------
---------- ---------- ----------
Issuance of warrants for shareholder standby facility........... $ 1,544 $ -- $ --
---------- ---------- ----------
---------- ---------- ----------
Issuance of Class A Common Stock................................ $ -- $ 41,635 $ 54,524
---------- ---------- ----------
---------- ---------- ----------
Acquisition costs included in current liabilities............... $ -- $ 17,929 $ 1,900
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
1. BUSINESS DESCRIPTION
RSL Communications, Ltd. ("RSL"), a Bermuda corporation, is the successor
in interest to RSL Communications Inc., a British Virgin Islands corporation,
which is the successor in interest to RSL Communications, Inc., a Delaware
corporation. RSL, together with its direct and indirect subsidiaries are
referred to herein as the "Company." The Company is a global telecommunications
company which provides an array of international and domestic communications
services. The Company focuses on providing international long distance voice
services to small and medium-sized businesses in key markets. The Company
currently has revenue producing operations and provides services in the United
States, Canada, the United Kingdom, Austria, Belgium, Denmark, Finland, France,
Germany, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden,
Switzerland, Australia, Japan and Venezuela. In 1997, approximately 70% of the
world's international long distance telecommunications minutes originated in
these markets.
2. ACQUISITIONS
1998 Acquisitions
Telecenter OY
In January 1998, RSL COM Finland Oy, a subsidiary of the Company, purchased
90% of the equity of Telecenter OY, an independent sales agent in Finland. The
Company paid approximately $14.4 million and recorded approximately
$8.1 million as goodwill.
First Direct Communications Pty. Limited and Link Telecommunications Pty
Ltd.
In March 1998, RSL COM Australia Pty. Ltd. ("RSL Australia"), a subsidiary
of the Company, acquired the customer base of First Direct Communications Pty.
Limited and Link Telecommunications Pty Ltd., two switchless mobile
telecommunications resellers, for approximately $19.6 million and recorded the
same amount as a customer base.
Tele 2001
In May 1998, RSL COM Sweden AB, a subsidiary of the Company, purchased 100%
of the equity of Tele 2001, a Swedish Telecommunications reseller, for
approximately $1.0 million and recorded the same amount as goodwill.
Westinghouse Communications
In July 1998, the Company acquired the business of Westinghouse
Communications ("WestComm"), a division of CBS Corporation, for a cash purchase
price of approximately $91.2 million plus the assumption of certain liabilities
amounting to $38.3 million. WestComm provides both voice telephony and data
services to a customer base consisting primarily of small to medium size
businesses in the United States. In connection with this purchase, the Company
recorded approximately $129.5 million as goodwill.
Westel Telecommunications Ltd.
In July 1998, the Company acquired 100% of Westel Telecommunications Ltd.
("Westel") from British Columbia Railway Company for a cash purchase price of
approximately $37.6 million (the "Westel Acquisition"). Westel offers a broad
range of enhanced telecommunications services (including long distance, data,
private line and Internet access) to a customer base consisting primarily of
commercial and residential customers located in British Columbia. In connection
with this purchase, the Company recorded approximately $9.0 million as goodwill.
F-7
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
2. ACQUISITIONS--(CONTINUED)
MK Telecom Network Inc.
In connection with the Westel Acquisition and in compliance with the
Canadian Telecommunications Act (the "Telecom Act"), the Company agreed to
transfer (the "MK Network Transfer") Westel's "telecommunications facilities"
(as defined in the Telecom Act) to MK Telecom Network Inc. ("MK Network"), an
entity in which the Company owns a 46.7% beneficial interest, for a purchase
price of approximately $6.5 million, the net realizable value of the assets
transferred to MK Network (such assets were purchased in the Westel
acquisition). The MK Network Transfer was effective as of July 31, 1998. The
Company recorded its investment in MK Network as an equity investment which was
completed through a transfer of assets, which were recorded at the Company's
historical cost basis (which also approximates net realizable value). The assets
transferred consist of telecommunications microwave facilities. Neither Westel
nor MK Network and their respective owners are related parties.
Comesa
In July 1998, RSL COM Italia S.r.l. ("RSL Italy"), a subsidiary of the
Company, acquired 75% of the equity of Comesa, a telecommunications company
located in Northern Italy. The Company paid approximately $1.0 million and
recorded approximately $1.5 million as goodwill.
Geovox SARL
In July 1998, RSL COM France S.A., a subsidiary of the Company, purchased
100% of the equity of Geovox SARL, a prepaid calling card company operating in
Paris, France for approximately $1.9 million in cash plus the assumption of
certain liabilities amounting to $2.8 million. In connection with this purchase
the Company recorded approximately $4.7 million as goodwill.
TC Telecom GmbH
In July 1998, RSL COM Austria AG, a subsidiary of the Company, acquired
100% of the equity of TC Telecom GmbH, a telecommunications reseller located in
Austria, for approximately $1.1 million and recorded the same amount as
goodwill.
Motorola Tel.co
In August 1998, the Company acquired the business of Motorola Tel.co
("Motorola Tel.co") in the United Kingdom and Germany from Motorola Inc.
Motorola Tel.co resells wireless services and related products in these
countries to a base of over 350,000 subscribers. The Company paid approximately
$68.1 million plus the assumption of certain liabilities amounting to
$10.6 million and recorded approximately $78.7 million as goodwill.
One Step Billing Inc.
In October 1998, the Company acquired a customer base from One Step Billing
Inc. in the United States for approximately $15.1 million and recorded an equal
amount as customer base.
TDL
In December 1998, the Company acquired the business of TDL, a reseller of
telecommunications services based in the United Kingdom. The Company paid
approximately $2.1 million plus the assumption of certain liabilities amounting
to $1.7 million and recorded approximately $3.8 million as goodwill.
F-8
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
2. ACQUISITIONS--(CONTINUED)
Telegate Holding GmbH
In May 1998, the Company acquired a 49.86% ownership interest in Telegate
Holding GmbH ("Telegate Holding"), which holds a 54.55% ownership interest in
Telegate AG ("Telegate"), resulting in a 27.19% economic interest in Telegate.
Telegate is a directory information provider in Germany. In December 1998, the
Company increased its shareholdings in Telegate Holding to 50.2%, no additional
contribution was paid related to this increment. The Company paid $33.6 million
and recorded approximately $35.6 million as goodwill.
1997 Acquisitions/New Operations
Delta Three, Inc.
During 1997, the Company acquired a majority interest in Delta Three, Inc.
("Delta Three"). The Company paid approximately $8.8 million for approximately
72% ownership of Delta Three. The Company acquired an additional 28% interest
during 1998 for approximately $2.9 million in cash and $8.7 million through the
issuance of stock. In connection with this transaction, the Company recorded
approximately $15.4 million as goodwill.
Maxitel
In April 1997, RSL Com Europe Ltd ("RSL Europe") acquired a 30.4% interest
in Maxitel Servicos e Gestao de Telecommunicacoes, S.A. ("Maxitel"), a
Portuguese international telecommunications carrier for $2.1 million, and has
since increased its ownership interest in Maxitel to 39% in 1998 for an
additional $1.3 million. The total investment in Maxitel is approximately
$3.4 million.
Pacific Star Communications Limited
In April 1997, the Company acquired substantially all of the commercial
customer contracts of Pacific Star Communications Limited, an Australian based
company. The Company paid approximately $1.5 million in cash and recorded this
amount as a customer base.
Newtelco
In August 1997, RSL Europe purchased 90% of the stock of Newtelco Telekom
AG, an Austrian start-up telecommunications company for an $800,000 investment
in the company.
RSL Com Italia S.r.l
In August 1997, RSL Europe acquired 85% of the stock in RSL Italy, an
Italian telecommunications reseller. The Company paid approximately
$1.7 million for its investment in RSL Italy.
EZI Phonecard Holdings Pty. Limited
In October 1997, RSL Australia acquired 85% of EZI Phonecard Holdings Pty.
Limited for approximately $200,000 in cash and the assumption of net liabilities
of $1.3 million. In connection with this purchase, RSL Australia recorded
approximately $1.5 million as goodwill.
Call Australia Group
In October 1997, the Company through its wholly-owned subsidiary, RSL
Australia acquired 100% of the issued capital of each of Call Australia Pty.
Ltd., Associated Service Providers Pty. Limited, Digiplus Pty. Limited, Power
Serve Communications Consultants Pty. Limited, Talk 2000 Networks Pty. Limited
and Telephone Bill Pty. Limited (collectively the "Call Australia Group"),
leading Australian
F-9
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
2. ACQUISITIONS--(CONTINUED)
switchless resellers, for approximately $24.5 million. In 1998, the Company paid
a final payment of $1.0 million plus an assumption of liabilities of
approximately $2.9 million. In connection with this purchase, RSL Australia
recorded approximately $28.4 million as goodwill.
LDM Systems, Inc.
In October 1997, the Company acquired 100% of the outstanding common stock
of LDM Systems, Inc. ("LDM"). In connection with this acquisition, the Company
paid approximately $14.9 million in 1997 and recorded a purchase price
adjustment of approximately $4.0 million in 1998. In connection with this
transaction, the Company recorded approximately $18.9 million as goodwill.
Callcom AG fur TeleKommunikation
In December 1997, RSL Europe acquired a 78.5% interest in Callcom AG fur
TeleKommunikation ("RSL Switzerland") for $2.1 million in cash.
European Telecom S.A./N.V.
In December 1997, RSL Europe acquired 90% of European Telecom S.A./N.V.
("RSL Belgium") which in turn owns 100% of European Telecom SARL ("RSL
Luxemburg"). The Company paid approximately $18.6 million in 1997 and
$0.3 million in 1998 for this acquisition and recorded approximately
$19.1 million as goodwill.
1996 Acquisitions/New Operations
Certain Assets of Sprint in France and Germany
In May 1996, the Company acquired the net assets, principally
telecommunications equipment and facilities, constituting the international long
distance voice businesses of Sprint in France and Germany through its
wholly-owned subsidiaries RSL COM France S.A., a French corporation ("RSL
France"), and RSL COM Deutschland GmbH, a German limited liability company ("RSL
Germany"). Pursuant to the applicable asset purchase agreements, the Company
cannot disclose the purchase price of the net assets. In connection with this
transaction, the Company recorded approximately $7.9 million as goodwill.
Belnet Nederland B.V.
In October 1996, the Company acquired 38,710 shares of Belnet Nederland
B.V. ("Belnet/RSL"), representing 75% of the outstanding stock for
$10.0 million and the assumption of liabilities of $500,000. In 1997, the
Company acquired the remaining shares for approximately $7.3 million. In
connection with the purchase of Belnet/RSL, the Company recorded approximately
$15.6 million as goodwill.
Incom (UK) Limited
In August 1996, the Company acquired the assets and assumed certain limited
liabilities of Incom (UK) Limited ("Incom"), a United Kingdom reseller, for
$500,000 plus 3,954 non-voting shares of RSL COM North America, Inc. (formerly
known as International Telecommunications Group, Ltd.) ("RSL North America")
(the "Purchased Shares"). In addition, 3,333 voting shares of RSL North America
currently held by Incom were exchanged for an equal number of non-voting shares.
In connection with this acquisition, the Company recorded approximately
$3.8 million as goodwill.
F-10
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
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, accounts receivable and customer bases, and liabilities assumed based on
their estimated fair values at the dates of acquisition. The excess of the
purchase price over the estimated fair values of the net assets acquired has
primarily been recorded as goodwill, which is amortized over fifteen to twenty
years. The valuation of the Company's acquired assets and liabilities for the
1998 acquisitions are preliminary and as a result, the allocation of the
acquisition costs among the tangible and intangible assets may change.
The following presents the unaudited pro forma consolidated statements of
operations data of the Company for the years ended December 31, 1997 and 1998 as
though the acquisitions of Westinghouse, Westel, LDM, Call Australia Group, and
EZI had occurred on January 1, 1997. All other acquisitions had insignificant
operations prior to the date of acquisition. The unaudited pro forma
consolidated statements do not necessarily represent what the Company's results
of operations would have been had such acquisitions actually occurred on such
date.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
Revenues...................................................... $ 556,500 $ 1,015,422
--------- -----------
--------- -----------
Net loss...................................................... $(102,891) $ (223,588)
--------- -----------
--------- -----------
Net loss per share............................................ $ (5.41) $ (5.09)
--------- -----------
--------- -----------
</TABLE>
Marketing Agreement
In June 1998, the Company entered into a marketing and distribution
services agreement with Metro Holding AG ("Metro Holding"), the management
holding company for Metro AG, one of the largest retailers in Europe. Under this
agreement, Metro Holding will assist the Company in promoting, marketing,
selling and distributing the Company's services through Metro AG's wholesale and
retail operations in Europe. This arrangement is designed to provide the Company
access to Metro AG's extensive distribution network and customer base (which
includes a large number of small and medium-sized businesses) and is expected to
significantly accelerate the Company's penetration into key European markets. In
connection with its alliance with the Company, Metro Holding initially acquired
in April 1998 a 12.5% equity interest in RSL Europe. In June 1998, Metro Holding
converted all of its interest in RSL Europe into 1,607,142 shares of Class A
Common Stock (based on value for value) and purchased an equal number of
Class A Common Stock from certain shareholders of the Company. In the aggregate
at December 31, 1998, Metro Holding holds approximately 6.1% of the outstanding
stock of the Company, which it is required to hold until at least April 1, 2001.
The Company has recorded in the consolidated financial statements the issuance
of such equity at fair market value, $45 million, based on the quoted market
value of the Company's stock at the time of the transaction, and has recorded
the distribution rights as an intangible asset in a like amount which is being
amortized over the five-year life of the agreement.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation--The consolidated
financial statements include the accounts of RSL Communications, Ltd. and its
majority-owned subsidiaries from the date of acquisition or commencement of
operations.
F-11
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
For the year ended December 31, 1996 the Company has, since the Company's
acquisition or startup of its subsidiaries, recorded 100% of its subsidiaries'
operating losses, because all of the minority investments in each of its
entities had been reduced to zero. For the years ended December 31, 1997 and
1998, the Company has included 100% of its wholly owned subsidiaries' operating
losses and the Company has recorded minority interest, an asset representing the
Company's minority shareholder's proportionate share of operating losses for RSL
COM Australia Holding Pty. Limited, RSL COM Austria AG, RSL COM Italia S.r.l.,
RSL COM Latin America, RSL COM Mexico S.A., RSL Communications Spain, S.A., RSL
COM Schweiz AG, RSL COM Venezuela C.A., European Telecom S.A./N.V. and European
Telecom SARL. In the event additional capital in any such subsidiary is required
to fund operating losses, the minority shareholders of such subsidiary are
contractually obligated to invest, to the extent necessary to fund the
operations, based on their pro rata ownership of the total outstanding stock of
such subsidiary. If a shareholder does not invest its pro rata amount, then such
shareholder's equity interest will be diluted and the contributing shareholders'
equity in such subsidiary will be increased. The Company believes that all of
its minority shareholders have the financial wherewithal to meet its obligations
to the Company with respect to its proportionate share of operating losses. Each
of the Company's other subsidiaries' operating losses have been recorded in
full.
The Company has majority ownership of all of its subsidiaries except for
Maxitel and MK Network, for which the Company accounts for its investments under
the equity method of accounting. The Company accounts for its 39% investment in
Maxitel using the equity method.
During 1997, the Company formed a joint venture with entities controlled by
the Cisneros Group of Companies to pursue the Company's Latin American
expansion. The Company owns 51% of this joint venture and has, since the joint
venture's formation, consolidated 100% of this joint venture and recognized
minority interest for 49% of the operating losses of the joint venture. The
receivable for the minority shareholder's share of the joint venture loss of
$3.1 million is included in other assets.
Management Assumptions--The preparation of the consolidated financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities and the reported amounts of revenues and expenses. Such
estimates primarily relate to reserves recorded for doubtful accounts and
accruals for other claims. Actual results could differ from these estimates.
Foreign Currency Translation and Transaction--Local currencies are
considered the functional currencies of the Company's foreign operating
entities. Assets and liabilities of foreign entities have been translated into
United States dollars using the exchange rates in effect at the balance sheet
dates. Results of operations of foreign entities are translated using the
average exchange rates prevailing throughout the period. The Company utilizes a
net settlement process with its correspondents comprised of special drawing
rights ("SDRs"). SDRs are the established method of settlements among
international telecommunications carriers. The SDRs are valued based upon the
values of a basket of foreign currencies. Translation effects are accumulated as
part of other comprehensive loss in equity. Gains and losses from foreign
currency transactions are included in the consolidated statements of operations
and comprehensive loss. Foreign currency transaction losses for the year ended
December 31, 1998 were approximately $11,055,000, primarily as a result of the
increase in the Deutsche mark against the U.S. dollar in connection with the
Company's 1998 Deutsche mark denominated Senior Discount Notes.
Cash and Cash Equivalents--The Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents.
F-12
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Accounts Receivable--Accounts receivable are stated net of the allowance
for doubtful accounts of approximately $12,000,000 and $14,000,000 at
December 31, 1997 and 1998, respectively. The Company recorded bad debt expense
of approximately $2,800,000, $10,900,000 and $9,000,000 for the years ended
December 31, 1996, 1997 and 1998, respectively.
Accrued Expenses--Accrued expenses for the years ended December 31, 1997
and 1998 consist primarily of accrued interest, accrued acquisition costs and
accrued transmission costs.
Marketable Securities--Marketable securities consist principally of U.S.
Treasury bills, commercial paper and corporate notes with a maturity date
greater than three months when purchased. Available for sale securities are
stated at market and the held to maturity securities are stated at amortized
cost. Gains and losses, both realized and unrealized, are measured using the
specific identification method. Market value is determined by the most recently
traded price of the security at the balance sheet date. Marketable securities
are defined as either available for sale or held to maturity securities under
the provisions of SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," depending on the security.
Property and Equipment and Related Depreciation--Property and equipment are
stated at cost or fair value at the date of acquisition, and in the case of
equipment under capital leases, the present value of the future minimum lease
payments, less accumulated depreciation and are amortized over the remainder of
the life. Depreciation is calculated using the straight-line method over the
estimated useful lives of the depreciable assets, which range from three to
fifteen years. Improvements are capitalized, while repair and maintenance costs
are charged to operations as incurred. Depreciation expense was $3,462,000,
$9,794,000 and $32,439,000 for the years ended December 31, 1996, 1997 and 1998,
respectively.
Impairment of Assets--The Company's long-lived assets and identifiable
intangibles are reviewed for impairment whenever events or changes in
circumstances indicate that the net carrying amount may not be recoverable. When
such events occur, the Company measures impairment by comparing the carrying
value of the long-lived asset to the estimated undiscounted future cash flows
expected to result from the use of the assets and their eventual disposition. If
the sum of the expected undiscounted future cash flows is less than the carrying
amount of the assets, the Company would recognize an impairment loss. The
impairment loss, if determined to be necessary, would be measured as the amount
by which the carrying amount of the asset exceeds the fair value of the asset.
The Company determined that, as of December 31, 1997 and 1998, there had been no
impairment in the carrying value of the long-lived assets.
Goodwill and Related Amortization--Goodwill represents the excess of cost
over the fair value of the net assets of acquired entities, and is being
amortized using the straight-line method over fifteen to twenty years. The
Company periodically reviews the value of its goodwill to determine if an
impairment has occurred. The Company measures the potential impairment of
recorded goodwill by the undiscounted value of expected future cash flows in
relation to its net capital investment in the subsidiary. Based on its review,
the Company does not believe that an impairment of its goodwill has occurred as
of December 31, 1997 and 1998.
Other Intangible Assets--Other intangible assets acquired through purchase
acquisitions included distribution rights, customer bases and operating licenses
which are being amortized over lives ranging from two to five years using the
straight-line method. Deferred financing costs incurred in connection with the
Senior Notes are being amortized on a straight-line basis over ten years.
F-13
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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 revenue until such related
services are provided.
Other Liabilities--Other liabilities consists primarily of purchase
accounting adjustments in connection with the Westinghouse acquisition of
$24.7 million, value-added tax and others as of December 31, 1998.
Cost of Services--Cost of services is comprised primarily of transmission
costs.
Selling Expenses--Selling costs such as recurring commissions and marketing
costs are treated as period costs. Customer acquisition costs, primarily related
to the Company's cellular reseller business, are amortized over the average
lives of the contracts of approximately twelve months. Such costs are recorded
in selling, general and administrative expenses in the Company's consolidated
statements of operations and comprehensive loss.
Income Taxes--The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes". SFAS No. 109 establishes financial accounting and reporting
standards for the effect of income taxes that result from activities during the
current and preceding years. SFAS No. 109 requires an asset and liability
approach for financial reporting for income taxes. The Company's foreign
subsidiaries file separate income tax returns in the jurisdiction of their
operations. The Company's United States subsidiaries file stand-alone United
States income tax returns.
Loss per Common Share--In accordance with the Company's adoption of SFAS
No. 128, "Earnings Per Share", the loss per common share is calculated by
dividing the loss attributable to common shares by the weighted average number
of shares outstanding. Outstanding common stock options and warrants are not
included in the loss per common share calculation as their effect is anti-
dilutive. The adoption of SFAS No. 128, "Earnings Per Share" did not affect the
Company's method of computing the loss per common share.
Effects of Recently Issued Accounting Standards
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards for derivative instruments and hedging activities. Generally, it
requires that an entity recognize all derivatives as either an asset or
liability and measure those instruments at fair value, as well as identify the
conditions for which a derivative may be specifically designed as a hedge. SFAS
No. 133 is effective for fiscal years beginning after June 15, 1999. Management
is currently addressing the financial reporting measures that will be needed in
order to comply with this disclosure. The Company has not participated in any
hedging activities in connection with foreign currency exposure.
F-14
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Reclassification
Certain previously reported amounts have been reclassified to conform with
the current period presentation.
4. CONCENTRATION OF CREDIT RISK
The Company is subject to significant concentrations of credit risk which
consist principally of trade accounts receivable, cash and cash equivalents, and
marketable securities. The Company's U.S. subsidiaries sell a significant
portion of their services to other carriers and, as a result, maintain
significant receivable balances with certain carriers. If the financial
condition and operations of these customers deteriorate below critical levels,
the Company's operating results could be adversely affected.
The Company maintains its cash with high quality credit institutions, and
its cash equivalents and marketable securities are in high quality securities.
5. MARKETABLE SECURITIES
A summary of the Company's available for sale marketable securities at
December 31, 1997 and December 31, 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998
-------------------- ---------------------
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
--------- ------- --------- --------
<S> <C> <C> <C> <C>
Corporate Notes...................................... $ 2,500 $ 2,500 $ 6,651 $ 6,640
Medium-Term Notes.................................... -- -- 5,023 5,006
Commercial Paper..................................... 4,390 4,388 86,963 86,997
Federal Agency Notes................................. 6,968 6,973 -- --
------- ------- --------- --------
13,858 13,861 98,637 98,643
Mutual Funds--Long-Term.............................. -- -- 13,950 12,911
------- ------- --------- --------
$13,858 $13,861 $ 112,587 $111,554
------- ------- --------- --------
------- ------- --------- --------
</TABLE>
The Company has recorded its available for sale marketable securities at
the lower of amortized cost or market value. The difference between amortized
cost and market value has been recorded as unrealized loss on securities within
shareholders' equity.
The carrying value of the available for sale marketable securities by
maturity date at December 31, 1997 and December 31, 1998 is as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
Matures in one year........................................... $11,856 $ 98,637
Matures after one year through three years.................... 2,002 12,911
------- ---------
Total......................................................... $13,858 $ 111,548
------- ---------
------- ---------
</TABLE>
Proceeds from the sale of available for sale marketable securities for the
years ended December 31, 1996, 1997 and 1998 were $14,701,000, $27,675,000 and
$35,757,000, respectively. Gross gains (losses) of $56,000, $(2,000) and
$(367,000) were realized on these sales for the years ended December 31, 1996,
1997 and 1998.
F-15
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
5. MARKETABLE SECURITIES--(CONTINUED)
Securities classified as held to maturity, which are comprised of Federal
agency notes, are stated at amortized cost. Such securities are restricted in
order to make the first six scheduled interest payments on the 12 1/4% Senior
Notes (see Note 7). The held to maturity securities at December 31, 1997 and
1998 are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998
-------------------- --------------------
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Matures in one year.................................... $35,455 $35,522 $20,159 $20,723
Matures after one year through three years............. 33,381 33,377 -- --
------- ------- ------- -------
Total.................................................. $68,836 $68,899 $20,159 $20,723
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
6. INCOME TAXES
The Company has incurred losses since inception for both book and tax
purposes. The Company's Netherlands and Finland subsidiaries recorded income tax
expense of approximately $395,000, $401,000 and $1,334,000 for the years ended
December 31, 1996, 1997 and 1998, respectively. As of December 31, 1996, 1997
and 1998, the Company had net operating loss carryforwards generated primarily
in the United States and the United Kingdom of approximately $47,000,000,
$147,000,000 and $367,000,000, respectively. The net operating loss
carryforwards will expire at various dates beginning in 2009 through 2013 if not
utilized. The utilization of the net operating loss carryforwards is subject to
certain limitations.
In accordance with SFAS No. 109, the Company has computed the components of
deferred income taxes as of December 31, 1997 and 1998 as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1998
------------ ---------
<S> <C> <C>
Deferred tax assets............................................. $ 59,000 $ 147,000
Less valuation allowance........................................ (59,000) (147,000)
-------- ---------
Net deferred tax assets......................................... $ -- $ --
-------- ---------
-------- ---------
</TABLE>
The Company's net operating losses generated the deferred tax assets. At
December 31, 1997 and 1998, a valuation allowance of $59,000,000 and
$147,000,000, respectively, is provided as the realization of the deferred tax
assets are not assured.
7. NOTES PAYABLE AND LONG-TERM DEBT
Senior Notes
On October 3, 1996, RSL Communications PLC ("RSL PLC"), a wholly-owned
subsidiary of RSL Communications, Ltd. (apart from its subsidiaries, the
"Guarantor"), issued (the "Debt Offering") 300,000 Units, each consisting of an
aggregate of one $1,000 Senior Note (collectively, the "1996 Notes") due 2006
bearing interest at the rate of 12 1/4% and one warrant to purchase 3.975
Class A common shares which expire in ten years (collectively, the "Warrants").
The exercise price of such Warrants is $0.00457.
The value ascribed to the Warrants was $4,000,000. The unamortized discount
is recorded as a reduction against the face value of the 1996 Notes, and is
amortized over the life of the 1996 Notes.
F-16
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
7. NOTES PAYABLE AND LONG-TERM DEBT--(CONTINUED)
Such unamortized discount was $3,500,000 and $1,783,000 at December 31, 1997 and
December 31, 1998, respectively.
The 1996 Notes, which are guaranteed by the Guarantor, are redeemable, at
RSL PLC's option, subsequent to November 15, 2001, initially at 106.1250% of
their principal amount, declining to 103.0625% of their principal amount for the
calendar year subsequent to November 15, 2002, and at 100% of their principal
amount subsequent to November 15, 2003. The 1996 Notes, or a portion thereof,
may also be redeemed upon the consummation of a public equity offering which
yields proceeds in excess of a specified amount.
In April 1998, the Company used approximately $101.0 million of the net
proceeds from its initial public offering of shares of Class A Common Stock (the
"IPO") in 1997 to redeem (the "Equity Clawback") $90.0 million of the 1996 Notes
at a premium of $11.0 million, as permitted under the 1996 Indenture. In April
1998, the Company used approximately $43.1 million to redeem (the "Buyback")
$37.5 million of the 1996 Notes at a premium of $5.6 million, as permitted under
the 1996 Indenture. The redemption premiums, and part of the discount and
offering costs were expensed in the amount of $20.8 million in the second
quarter of 1998 as an extraordinary item.
In connection with the issuance of the 1996 Notes, the Company is required
to maintain restricted marketable securities in order to make the first six
scheduled interest payments on the 1996 Notes. Such restricted marketable
securities amounted to $68,836,000 and $20,159,000 at December 31, 1997 and
December 31, 1998, respectively.
On February 27, 1998, RSL PLC completed concurrent offerings (the "1998
U.S. Offerings") of $200.0 million principal amount of 9 1/8% Senior Notes due
2008 and $328.1 million principal amount at maturity ($200.0 million initial
accreted value) of 10 1/8% Senior Discount Notes due 2008 (together, the "1998
U.S. Notes"). The 1998 U.S. Offerings generated gross proceeds to the Company of
$400.0 million. On March 16, 1998, RSL PLC completed an offering (the "1998 DM
Offering," and together with the 1998 U.S. Offerings, the "1998 Offerings") of
182.0 million Deutsche mark denominated 10% Senior Discount Notes due 2008 (the
"1998 DM Notes," and together with the 1998 U.S. Notes, the "1998 Notes"). The
1998 DM Offering generated proceeds to the Company of $99.1 million.
In connection with the 1998 Offerings, RSL PLC entered into registration
rights agreements for the benefit of the holders of the 1998 Notes (the
"Registration Rights Agreements"), pursuant to which RSL PLC agreed to offer to
exchange the 1998 Notes for substantially identical notes registered under the
Securities Act. In May 1998, in accordance with the Registration Rights
Agreements, the Guarantor and RSL PLC offered for exchange the 1998 Notes for
substantially identical notes registered under the Securities Act. The Company's
Registration Statement on Form S-4 (Registration No.333-49857) filed with the
Commission with respect to such offering was declared effective by the
Commission on May 12, 1998.
In November 1998, RSL PLC issued (the "12% Notes Offering") $100 million
aggregate principal amount at maturity of 12% Senior Notes due 2008 (the "12%
Notes"). The 12% Notes generated gross proceeds to the Company of approximately
$94.5 million.
In December 1998, RSL PLC issued (the "10 1/2% Notes Offering" and,
together with the 12% Notes Offering, the "New Notes Offerings") $200 million
aggregate principal amount of 10 1/2% Senior Notes due 2008 (the "10 1/2% Notes"
and, together with the 12% Notes, the "New Notes"). The 10 1/2% Notes generated
gross proceeds to the Company of approximately $198.5 million.
F-17
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
7. NOTES PAYABLE AND LONG-TERM DEBT--(CONTINUED)
In connection with the New Notes Offerings, RSL PLC entered into
registration rights agreements for the benefit of the holders of the New Notes
(the "New Notes Registration Rights Agreements"), pursuant to which RSL PLC
agreed to offer to exchange the New Notes for substantially identical notes
registered under the Securities Act. In February and March of 1999, in
accordance with the New Notes Registration Rights Agreements, RSL and RSL PLC
offered for exchange the New Notes for substantially identical notes registered
under the Securities Act. The Company's Registration Statement on Form S-4
(Registration No. 333-70023) filed with the Commission with respect to such
offering was declared effective by the Commission on January 26, 1999.
The 1996 Notes, the 1998 Notes, and the New Notes are collectively referred
to herein as the "Notes." The Notes are fully and unconditionally guaranteed as
to payment of principal, interest and any other amounts thereof by the
Guarantor.
The indentures pursuant to which the Notes were issued contains certain
restrictive covenants which impose limitations on RSL and certain of its
subsidiaries ability to, among other things: (i) incur additional indebtedness,
(ii) pay dividends or make certain other distributions, (iii) issue capital
stock of certain subsidiaries, (iv) guarantee debt, (v) enter into transactions
with shareholders and affiliates, (vi) create liens, (vii) enter into
sale-leaseback transactions, and (viii) sell assets. Notwithstanding the
foregoing, these indentures do not impose restrictions on RSL's ability to
obtain funds by dividends or loans from its subsidiaries.
At December 31, 1997 and 1998, the Company was in compliance with the above
restrictive covenants.
Credit Facilities
At December 31, 1997 and 1998, the Company had a $7,500,000 and $5,000,000
revolving credit facility with a bank, respectively, (the "Revolving Credit
Facility"), the facility was guaranteed by the Company's Chairman in 1997 and
part of 1998. The facility is payable on June 30, 1999 and accrues interest at
the lender's prime rate per annum. Approximately $0 and $3.7 million of the
$7.5 million and $5.0 million commitments under the facility was utilized at
December 31, 1997 and 1998, respectively.
The Company, through LDM, has a $10.0 million revolving credit facility.
There was $3.6 million and $6.5 million utilized under this facility at
December 31, 1997 and December 31, 1998, respectively. This facility is payable
in full on September 30, 2000 and accrues interest at the prime rate (7.75% at
December 31, 1998) plus 2.5% per annum (10.25% at December 31, 1998).
The Company, through Telegate, has a $8.1 million revolving credit
facility. There was $2.6 million utilized under this facility at December 31,
1998. This facility is payable in annual payments through December 31, 2002 and
accrues interest at a variable interest rate not to exceed 5.5% per annum (4.3%
at December 31, 1998).
At December 31, 1998, Telegate had $12.6 million of revolving credit
facilities with various banks that accrue interest at a rate of 6.5%, all of
which was available.
Telegate had various secured and unsecured 6% debentures consisting of
loans from its former shareholders of $3.2 million and $5.6 million,
respectively, as of December 31, 1998. These loans are payable in four
semiannual installments beginning June 30, 2001.
F-18
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
7. NOTES PAYABLE AND LONG-TERM DEBT--(CONTINUED)
Vendor Financing
At December 31, 1997 and 1998, RSL USA had a series of current notes
payable to different vendors in the amount of $976,000 and $587,000,
respectively, which bear interest at rates ranging from 8% to 14.5%.
One of the Company's primary equipment vendors has provided to certain of
the Company's subsidiaries an aggregate of $93 million in vendor financing
commitments to fund the purchase of additional equipment. At December 31, 1997
and 1998, approximately $34.2 million and $82.0 million were utilized,
respectively. Borrowings under this vendor facility accrue interest at a rate of
LIBOR plus either 5.25% or 4.5% per annum depending on the equipment purchased.
Long-term debt maturities at December 31, 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED
- ----------
<S> <C>
1999........................................................................... $ 11,537
2000........................................................................... 718
2001........................................................................... 5,029
2002........................................................................... 6,896
2003........................................................................... --
2004 and thereafter............................................................ 1,000,651
----------
Total.......................................................................... 1,024,831
Less Current Maturities........................................................ (11,537)
----------
Long-Term Debt $1,013,294
----------
----------
</TABLE>
At December 31, 1997, the 1996 Notes had a fair value of approximately
$330,000,000. At December 31, 1998, the Notes had a fair value of approximately
$937,014,000. The fluctuations in the fair value in 1997 and 1998 are primarily
due to changes in the interest rate environment. The remainder of the Company's
long-term debt had fair values which approximated their carrying amounts.
Interest expense on the above notes was approximately $10,457,000,
$37,136,000 and $70,860,000 for the years ended December 31, 1996, 1997 and
1998, respectively.
8. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets at December 31, 1997 and 1998 consist
of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1998
------------ --------
<S> <C> <C>
Goodwill......................................................... $210,282 $513,068
Customer Base.................................................... 3,245 49,822
Deferred Financing Costs......................................... 11,655 19,902
Distribution Right............................................... -- 47,281
Other Intangibles................................................ 3,331 13,837
-------- --------
228,513 643,910
Less Accumulated Amortization.................................... (13,530) (54,393)
-------- --------
Goodwill and Other Intangible Assets--Net........................ $214,983 $589,517
-------- --------
-------- --------
</TABLE>
F-19
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
8. GOODWILL AND OTHER INTANGIBLE ASSETS--(CONTINUED)
Amortization expense for the years ended December 31, 1996, 1997 and 1998
was $3,193,000, $9,980,000 and $43,006,000, respectively.
9. SHAREHOLDERS' EQUITY
Common Stock
During 1996, the Company issued 4,117,522 shares of Class B Common Stock
for cash aggregating $50,000,000.
On September 30, 1997, the Company revised its capital structure (the
"Recapitalization"), in part to (i) effect a 2.19-for-one stock split for each
outstanding share of each class of common shares and each outstanding share of
Preferred Stock, (ii) increase the number of authorized shares of its Class A
Common Stock and Class B Common Stock to an aggregate of 438,000,000 shares and
(iii) increase the number of authorized shares of its Preferred Stock to
65,700,000. The holders of the Class A Common Stock are entitled to one vote per
share, and the holders of the Class B Common Stock are entitled to ten votes per
share. During 1998, 4,515,411 shares were converted from Class B Common Stock in
exchange for Class A Common Stock.
On September 30, 1997, the Company commenced an initial public offering of
8,280,000 shares of its Class A Shares. The aggregate offering price of the
8,280,000 shares of Class A Common Stock sold in the equity offering to the
public was $182,160,000 (at $22.00 per share), with net proceeds to the Company
of $167,542,000.
On November 30, 1998, the Company commenced a secondary public offering of
7,544,278 shares of its Class A Shares. The aggregate offering price of the
7,544,278 shares of Class A Common Stock sold in the equity offering to the
public was $180,120,000 (at $23.875 per share), with net proceeds to the Company
of $169,989,000.
In June 1997, RSL North America's founder and former Chairman elected to
exchange his shares in RSL North America, a subsidiary of the Company, for
shares in the Company. Accordingly, the Company issued 1,457,094 of the Class A
Common Stock, par value $0.00457 per share, of the Company in exchange for
15,619 shares of common stock of RSL North America and recorded approximately
$32,575,000 as additional paid in capital and an equal amount as goodwill.
In March 1998, the Company registered 1,152,715 shares of Class A Common
Stock to be issued pursuant to the terms of the warrant agreement governing the
Warrants (the "Warrant Registration") and 300,000 shares of Class A Common Stock
to be sold by a corporation wholly owned by a former Vice Chairman of the
Company, and members of his family (the "Selling Shareholder") (which
necessarily assumes the conversion by the Selling Shareholder of an identical
number of shares of Class B Common Stock). The Warrant Registration was required
pursuant to a registration rights agreement entered into in connection with the
private offering (the "1996 Units Offering") of 300,000 units (the "Units") each
consisting of (i) $1,000 principal amount of 12 1/4% Senior Notes due 2006 and
(ii) one warrant to purchase 3.975 shares of Class A Common Stock of RSL (each a
"Warrant"). During 1998, the Company issued 274,726 shares of Class A Common
Stock upon the exercise of warrants.
In connection with the marketing and distribution services agreement
entered into with Metro Holding in June 1998, as mentioned in Note 2, the
Company issued 1,607,142 shares of Class A Common Stock.
F-20
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
9. SHAREHOLDERS' EQUITY--(CONTINUED)
During 1997 and 1998, the Company issued 712,142 and 1,232,339 shares of
Class A Common Stock upon the exercise of options, respectively. In addition,
during 1998, the company issued 54,750 shares of Class A Common Stock upon the
issuance of restricted stock.
During 1997 and 1998, in connection with the acquisition of certain
minority interests, the Company issued 411,105 and 428,272 shares of Class A
Common Stock, respectively.
Preferred Stock
During 1995, the Company issued 9,243,866 shares of its preferred stock to
the holders of its Class B Common Stock for cash of $13,354,000. The preferred
stock ranked senior to the Company's common stock as to dividends and a
liquidation preference of $1.00 per share. Each share was convertible at the
holder's option into 2.19 shares of Class B Common Stock. All preferred shares
were automatically converted into the Company's Class B Common Stock in 1997 as
the public offering yielded proceeds in excess of $25,000,000, in accordance
with the terms of the Preferred Stock agreement. Dividends, at the rate of 8%,
were cumulative. Upon conversion of the shares of the preferred stock, the
cumulative dividends were deemed to be canceled and waived upon conversion. The
cumulative amount of such dividends was approximately $16,000. As of
December 31, 1997 and 1998, there was no preferred stock outstanding.
10. CAPITAL LEASE OBLIGATIONS
Future minimum annual payments applicable to assets held under capital
lease obligations for years subsequent to December 31, 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED
- ----------
<S> <C>
1999............................................................................. $ 26,624
2000............................................................................. 24,281
2001............................................................................. 22,311
2002............................................................................. 18,245
2003............................................................................. 12,336
2004 and thereafter.............................................................. 21,491
--------
Total minimum lease obligations.................................................. 125,288
Less interest.................................................................... (22,831)
--------
Present value of future minimum lease obligations................................ 102,457
Less current portion............................................................. (24,593)
--------
Long-term lease obligations...................................................... $ 77,864
--------
--------
</TABLE>
The assets and liabilities under capital leases are recorded at the present
value of the minimum lease payments using effective interest rates ranging from
9% to 11% per annum.
Assets held under capital leases aggregated $26,632,000 and $76,087,000 at
December 31, 1997 and 1998, respectively. At December 31, 1997 and 1998, the
related accumulated depreciation was $2,557,000 and $4,895,000, respectively.
11. RELATED PARTY TRANSACTIONS
RSL Management Corporation ("RSL Management"), which is wholly owned by
Ronald S. Lauder, the Chairman of the Board of the Company and the principal
shareholder of the Company, subleases an aggregate of 11,000 square feet of
office space to the Company at an annual rent of $521,000 per
F-21
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
11. RELATED PARTY TRANSACTIONS--(CONTINUED)
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 Chairman and
Chief Executive Officer of Estee Lauder. Fred Langhammer, a director, is the
President and Chief Operating Officer of Estee Lauder. In addition, RSL
Management provides payroll and benefit services to the Company for an annual
fee of $6,000, $6,000 and $9,000 for the years ended December 31, 1996, 1997 and
1998, respectively.
The Company has employment contracts with certain of its executive
officers. These agreements expire beginning January 2000 through December 31,
2002 unless terminated earlier by the executive or the Company, and provide for
annual salaries, and bonuses based on the performance of the Company. Salary
expense for these officers was approximately $1,419,000, $1,555,000 and
$2,116,000 for the years ended December 31, 1996, 1997 and 1998, respectively.
The aggregate commitment for annual future salaries pursuant to the employment
agreements at December 31, 1998, excluding bonuses, is approximately $2,624,000,
$2,265,000, $1,375,000 and $925,000 for 1999, 2000, 2001, and 2002,
respectively.
12. EMPLOYEE BENEFIT PLANS
In 1996, the Company instituted a defined 401(k) contribution plan which
provides retirement benefits for most of its domestic employees. The Company's
contributions to the defined contribution plan, which are based on a percentage
of the employee's annual compensation subject to certain limitations, were not
significant for the years ended December 31, 1996, 1997 and 1998. The Company's
subsidiary, Telegate, established a defined benefit pension plan covering the
members of Telegate's board of directors effective December 31, 1998. Telegate
did not make any contributions to the plan nor did the plan pay any benefits in
the year ended December 31, 1998.
13. STOCK OPTION PLANS
1995 Stock Option Plan
In April 1995, the Company established an Incentive Stock Option Plan (as
amended and restated, the "1995 Plan") to reward employees, nonemployee
consultants and directors for service to the Company and to provide incentives
for future service and enhancement of shareholder value. The 1995 Plan is
administered by the Compensation Committee of the Board of Directors of the
Company (the "Committee"). The Committee consists of three members of the Board
of Directors. The Plan provides for awards of up to 2,847,000 shares of Class A
Common Stock of the Company.
The options granted in 1995 vest over a period of three years commencing on
the first anniversary of the date of grant such that the option holder may not
acquire more than 2% of the outstanding capital stock as of the date upon which
the related employment agreement expires. The options granted in 1996 vest in
one-third increments on each of the first, second and third anniversaries of the
grant date, unless a different vesting schedule is designated by the Committee.
Further, the options granted under the 1995 Plan terminate on the tenth
anniversary of the date of grant. A total of 2,716,617 options have been granted
under this plan. The Company will not grant further options under the 1995 Plan.
1997 Stock Incentive Plan
During 1997, the Company established the 1997 Stock Incentive Plan (the
"1997 Stock Plan") to attract and motivate key employees of the Company. The
1997 Stock Plan is administered by the Committee. The 1997 Stock Plan provides
for the grant of the incentive and non-incentive stock options,
F-22
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
13. STOCK OPTION PLANS--(CONTINUED)
stock appreciation rights, restricted stock, and various combinations thereof.
The maximum number of shares of Class A Common Stock available under the 1997
Stock Plan is 3,100,000, with no more than 500,000 options or stock appreciation
rights to be granted to any one participant in a calendar year. The options vest
over a three-year period and terminate on the seventh anniversary of the date of
grant, unless a different vesting schedule is designated by the Committee. As of
December 31, 1998, a total of 1,093,020 options and 164,250 shares of restricted
stock have been granted under this plan.
1997 Performance Incentive Compensation Plan
During 1997, the Company established the 1997 Performance Incentive
Compensation Plan (the "1997 Performance Plan") to reward employees for superior
performance. The 1997 Performance Plan is effective through and including the
year 2000, unless extended or earlier terminated by the Board of Directors.
Awards under the 1997 Performance Plan may be made to key employees recommended
by the Chief Executive Officer, selected by the Committee and approved by the
Board of Directors, and may be paid in cash, in shares of Class A Common Stock
or in any combination thereof, provided that at least 50% of such award is
required to be paid in cash. The 1997 Performance Plan provides for the grant of
up to 400,000 shares of Class A Common Stock. No shares have been granted under
the 1997 Performance Plan.
1997 Directors' Compensation Plan
During 1997, the Company adopted the 1997 Directors' Compensation Plan (the
"1997 Directors' Plan"). During the ten year term of the 1997 Directors' Plan,
each non-employee Director will be granted options to acquire a number of
Class A Common Stock with an aggregate fair market value on the date of grant
equal to $50,000, except for the Chairman and the Vice Chairman of the Board,
whose grants have a fair market value of $150,000 and $75,000, respectively. The
1997 Directors' Plan provides for the grant of up to 250,000 shares of Class A
Common Stock. The options vest over a five-year period, subject to certain
acceleration provisions. A total of 32,704 options have been granted under this
plan.
The exercise price of stock options granted under the 1997 Stock Plan, the
1997 Performance Plan and the 1997 Directors' Plan (collectively, the "1997
Plans") will equal the fair market value of the Class A Common Stock on the date
of the grant. The Company records stock option grants under the
F-23
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
13. STOCK OPTION PLANS--(CONTINUED)
1997 Plans based on the fair market value of the underlying security on the date
of grant. The Company used the expected life of the underlying security to
calculate the fair market value of such security.
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
OPTIONS EXERCISE PRICE EXERCISE PRICE
---------- --------------- --------------
<S> <C> <C> <C>
Outstanding at December 31, 1995................... 1,423,500 $ .000457 $.000457
Granted.......................................... 283,824 $ 1.60-2.06 $ 1.693
Exercised........................................ -- $ -- $ --
Rescinded/Canceled............................... -- $ -- $ --
---------- --------------- --------
Outstanding at December 31, 1996................... 1,707,324 $ .000457-2.06 $ 0.82
Granted.......................................... 1,459,195 $ .00457-26.15 $ 9.675
Exercised........................................ (712,142) $ .000457 $.000457
Rescinded/Canceled............................... -- $ -- $ --
---------- --------------- --------
Outstanding at December 31, 1997................... 2,454,377 $ .000457-26.15 $ 5.94
Granted.......................................... 675,822 $ .043-26.15 $ 21.974
Exercised........................................ (1,232,339) $.000457-18.625 $ 1.32
Rescinded/Canceled............................... (20,929) $ 12.142-22.00 $ 13.747
---------- --------------- --------
Outstanding at December 31, 1998................... 1,876,931 $ .000457-26.15 $ 14.655
---------- --------------- --------
---------- --------------- --------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED
SHARES AVERAGE
EXERCISABLE EXERCISE PRICE
----------- --------------
<S> <C> <C>
December 31, 1996......................................................... 177,701 $ 0.000457
December 31, 1997......................................................... 459,607 $ 0.44
December 31, 1998......................................................... 397,115 $ 4.11
</TABLE>
The following table summarizes information concerning the remaining options
granted under the 1995 Plan and the 1997 Plans outstanding as of December 31,
1998.
<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 PRICE LIFE EXERCISABLE PRICE
- --------------------------------------------- ----------- -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ .000457 174,293 $.000457 6.3 174,293 $.000457
$ .00457 178,478 $ .00457 8.4 32,478 $ .00457
$ .01 94,954 $ .01 8.8 47,477 $ .01
$ 1.60-$ 2.05 115,778 $ 1.76 7.3 29,200 $ 2.05
$12.142-$27.00 164,763 $ 12.27 7.7 85,668 $ 12.21
$18.26-$26.15 1,148,665 $ 22.01 6.6 27,999 $ 18.76
--------- -------
1,876,931 397,115
--------- -------
--------- -------
</TABLE>
At December 31, 1998, the company has authorized and reserved for future
grants approximately 1,843,000 shares of Class A Common Stock under the 1997
Stock Plan, 400,000 under the 1997 Performance Plan and 217,000 under the 1997
Directors' Plan.
SFAS Statement No. 123, "Accounting for Stock Based Compensation" ("SFAS
No. 123") was issued by the FASB in 1995 and if fully adopted, changes the
methods for recognition of costs on plans similar to those of the Company.
Adoption of the recognition provisions of SFAS No. 123 is optional;
F-24
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
13. STOCK OPTION PLANS--(CONTINUED)
however, pro forma disclosures as if the Company adopted the cost recognition
requirements under SFAS No. 123 are presented below.
Under SFAS No. 123, for options granted, the fair value at the date of
grant was estimated using the Black-Scholes option pricing model. The fair value
was estimated using the minimum value method. Under this method, a volatility
factor of approximately 0.6 was used for options granted on or after the date of
the initial public offering and the minimum value method was used for options
granted prior to the date of the initial public offering, as there was no market
for the Company's common stock in which to measure the stock price volatility.
The following weighted average assumptions were used in calculating the
fair value of the options granted in the years ended December 31, 1996, 1997 and
1998, respectively: risk-free interest rates between 4.54% and 5.95%; no
dividends are expected to be declared; expected life of the options are between
39 and 51 months, between 18 and 42 months and between 18 and 42 months,
respectively; and a maximum contractual life of 10 years.
For purposes of the pro forma disclosures, the estimated fair value of the
options granted is amortized to compensation expense over the options' vesting
period. The Company's pro forma information is as follows:
<TABLE>
<CAPTION>
($ IN THOUSANDS, EXCEPT LOSS PER
COMMON SHARE
AND WEIGHTED AVERAGE FAIR VALUE OF
OPTIONS GRANTED)
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1997 1998
-------- --------- ---------
<S> <C> <C> <C>
Net loss:
As reported.................................................. $(38,240) $(100,199) $(219,224)
Pro forma.................................................... $(38,315) $(118,176) $(224,197)
Net loss per common share:
As reported.................................................. $ (5.13) $ (5.27) $ (4.99)
Pro forma.................................................... $ (5.14) $ (6.22) $ (5.11)
Weighted average fair value of options granted during the
period....................................................... $ 0.26 $ 12.32 $ 7.36
</TABLE>
As of December 31, 1998, the Company has granted options to acquire an
aggregate of 1,093,020 shares of Class A Common Stock under the 1997 Plan and
164,250 shares of restricted stock under the 1997 Stock Plan to employees. The
Company also granted restricted units ("Restricted Units") under the 1997 Stock
Plan. All grants of Class A Common Stock and Restricted Units vest over a
three-year period and were made at the fair market value on the date of grant.
Restricted Units granted under the 1997 Plan to certain employees generally are
convertible into shares of Class A Common Stock or cash, at the Company's
discretion. As of December 31, 1998, the approximate total number of shares of
Class A Common Stock into which all outstanding Restricted Units may be
converted, based on the valuations attributed to the Company's subsidiaries and
the average closing price of the Class A Common Stock on December 31, 1998, is
estimated to be approximately 1,500,000. As of December 31, 1998, vested and
exercisable Restricted Units which may be converted, based on the valuations
attributed to the Company's subsidiaries and the average closing price of the
Class A Common Stock on December 31, 1998, is estimated to be 500,000.
F-25
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
14. COMMITMENTS AND CONTINGENCIES
At December 31, 1998, the Company was committed to unrelated parties for
the rental of office space under operating leases. Minimum annual lease payments
with respect to the leases is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
- ----------
<S> <C>
1999.............................................................................. $ 6,532
2000.............................................................................. 6,025
2001.............................................................................. 5,536
2002.............................................................................. 4,259
2003.............................................................................. 2,923
2004 and thereafter............................................................... 3,999
-------
$29,274
-------
-------
</TABLE>
Rent expense on the above leases for the years ended December 31, 1996,
1997 and 1998 was $2,276,000, $3,842,000, and $4,724,000, respectively.
The Company is committed to pay for transmission capacity under certain
operating leases. The minimum annual lease payments with respect to these
agreements is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
- ----------
<S> <C>
1999............................................................................. $ 95,000
2000............................................................................. 48,000
2001............................................................................. 13,000
2002............................................................................. 2,500
--------
$158,500
--------
--------
</TABLE>
The Company recorded expenses in connection with such commitments for the
years ended December 31, 1996, 1997 and 1998 of approximately $0, $9,100,000 and
$81,997,000, respectively.
At December 31, 1998, a subsidiary of the Company had commitments
outstanding for capital expenditures under purchase orders and contracts and for
minimum payments under non-cancelable contracts for marketing and EDP services
of approximately $2.6 million and $5.6 million, respectively.
Commitments and Contingencies--The Company is involved in various claims
that arose in the ordinary course of its acquired businesses, and certain claims
that arose in the ordinary course of its businesses. The expected settlements
from certain of these matters have been accrued and are recorded as Other
Liabilities. In management's opinion, the settlement of such claims would not
have a material adverse effect on the Company's consolidated financial position
or results of its operations.
In connection with the acquisition of one of its United States
subsidiaries, the Company recorded what management believed to be its best
estimate of the unfavorable portion related to certain transmission capacity
agreements. During 1997, the Company successfully amended such transmission
capacity agreements. The resulting settlement of approximately $7,000,000 was
recorded as Other Income--Net in the statements of operations and comprehensive
loss.
The Company is a party to separate stockholder agreements with certain
minority stockholders of its subsidiaries, pursuant to which the Company has
granted put rights with roll-up right provisions ("put rights"). These
agreements restrict the sale of the minority stockholders' interest to any
person or entity other than the Company and in certain cases require the Company
to purchase these interests in certain of the Company's subsidiaries. Certain of
the minority stockholders have the option to require the Company to purchase
their interests at any time in exchange for cash or Class A Common Stock (in
F-26
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
14. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
most instances, at the sole discretion of the Company) and have the right to
require the Company to purchase their interests in whole or in part at various
times through December 31, 2005 or upon cessation of such stockholder's
employment with the Company for any reason. Generally, the minority stockholder
remains employed by the Company and receives a salary and a performance based
bonus. The Company has issued put rights to substantially all of its
subsidiaries' minority stockholders at the time the Company acquired a majority
shareholding in the entity acquired or formed. Such put rights were issued to
create an incentive for the Company's minority shareholders to maximize the long
term value of their respective subsidiaries and to provide liquidity to the
shareholders at the time of exercise.
The Company's issuance of put rights did not at the time of grant provide
the recipient of such rights with any tangible value other than the right to put
their minority shares to the Company, in a value for value exchange (fair value
of the minority shares of the subsidiary for fair value of Class A Common Stock
or cash), in most instances, at the sole discretion of the Company. Solely for
the purpose of illustration, if all such options were in effect on December 31,
1998, the Company's aggregate purchase obligation is estimated to be
approximately $100 million.
Letters of Credit--The Company has outstanding letters of credit
aggregating $6,047,000 and $4,743,000 at December 31, 1997 and 1998,
respectively, expiring at various dates. Such letters of credit, which were
issued as deposits to vendors or security on leased premises, are fully secured
by marketable securities, certificates of deposit, and the Revolving Credit
Facility and are classified as current assets.
15. SIGNIFICANT CUSTOMER
For the years ended December 31, 1996, 1997 and 1998 no customer accounted
for more than 10% of the Company's revenues.
16. SEGMENT REPORTING AND GEOGRAPHIC INFORMATION
General Information
The Company has three reportable segments: North American, European and
Asian operations. The Company's reportable segments are strategic business units
that offer primarily identical products and services. They are managed
separately because each business within the units is naturally aligned to its
geographic neighbors. Similar operating segments that operate in different
countries are managed separately, and, in accordance with the provisions of SFAS
131, the Company has aggregated similar operating segments into its three
reportable segments.
(a) Information about Operating Profit or Loss and Total Assets
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on the profit or loss from operations.
The Company accounts for inter-segment sales and transfers as if the sales
or transfers were inter-company and accordingly, no profit or loss is included
among the segments. The Company does not systematically allocate assets or a
proportionate allocation of indebtedness to the divisions of the subsidiaries
constituting its consolidated group, unless the division constitutes a
significant operation. However, where a division of a subsidiary constitutes a
segment that does meet the quantitative thresholds of FAS 131, related
depreciable assets, along with other identifiable assets, are allocated to such
division.
F-27
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
16. SEGMENT REPORTING AND GEOGRAPHIC INFORMATION--(CONTINUED)
The data for each business segment is presented in the following table
according to geographical location of the operating facilities. General
corporate expenses are included within selling, general and administrative
expenses in the statements of operations and comprehensive loss.
The following table provides certain geographic data on the Company's
operations for the years ended December 31, 1996, 1997 and 1998 (in thousands).
<TABLE>
<CAPTION>
OPERATING
REVENUE INCOME (LOSS) TOTAL ASSETS
-------- ------------- ------------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
North America........................................................ $ 85,843 $ (11,702) $ 54,509
Europe............................................................... 27,414 (13,438) 50,147
-------- --------- --------
$113,257 $ (25,140) $104,656
-------- --------- --------
-------- --------- --------
YEAR ENDED DECEMBER 31, 1997
North America........................................................ $194,518 $ (26,119) $118,363
Europe............................................................... 73,653 (35,905) 106,746
Asia................................................................. 32,333 (3,191) 58,030
-------- --------- --------
$300,504 $ (65,215) $283,139
-------- --------- --------
-------- --------- --------
YEAR ENDED DECEMBER 31, 1998
North America........................................................ $449,974 $ (21,161) $425,519
Europe............................................................... 306,289 (59,391) 450,596
Asia................................................................. 128,881 (10,705) 90,073
-------- --------- --------
$885,144 $ (91,257) $966,188
-------- --------- --------
-------- --------- --------
</TABLE>
F-28
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
16. SEGMENT REPORTING AND GEOGRAPHIC INFORMATION--(CONTINUED)
(b) Reconciliations (in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1997 1998
-------- -------- ---------
<S> <C> <C> <C>
REVENUES
Total revenues for reportable segments................................. $113,257 $300,504 $ 885,144
Other operational segment revenue...................................... -- 292 794
-------- -------- ---------
Total consolidated revenues............................................ $113,257 $300,796 $ 885,938
-------- -------- ---------
-------- -------- ---------
OPERATING LOSS
Total operating loss for reportable segments........................... $(25,140) $(65,215) $ (91,257)
Other operational segment operating loss............................... -- (239) (2,416)
Unallocated amounts:
Operating loss of corporate headquarters............................ (5,612) (15,602) (36,532)
-------- -------- ---------
Total consolidated operating loss...................................... $(30,752) $(81,056) $(130,250)
-------- -------- ---------
-------- -------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1998
-------- ----------
<S> <C> <C>
ASSETS
Total assets for reportable segments................................................ $283,139 $ 966,188
Other operational segment assets.................................................... 875 30,371
Unallocated amounts:
Net assets of corporate headquarters............................................. 321,650 718,034
-------- ----------
Total consolidated assets........................................................... $605,664 $1,714,593
-------- ----------
-------- ----------
</TABLE>
17. SUMMARIZED FINANCIAL INFORMATION
The following presents summarized financial information of RSL
Communications PLC, a company incorporated in 1996 ("RSL PLC"), as of
December 31, 1997 and 1998 and for the years ended December 31, 1996, 1997 and
1998. RSL PLC is a 100% wholly owned subsidiary of the Company. RSL PLC had no
independent operations other than serving solely as a foreign holding company
for certain of the Company's U.S. and European operations. The Notes issued by
RSL PLC are fully and unconditionally guaranteed by the Company. The Company's
financial statements are, except for the Company's capitalization, corporate
overhead expenses, certain operations and available credit facilities, identical
to the financial statements of RSL PLC (in thousands).
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
Current Assets.......................................................... $ 212,568 $ 686,727
Non-current Assets...................................................... 324,118 877,696
Current Liabilities..................................................... 122,672 411,667
Non-current Liabilities................................................. 557,448 1,479,159
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997 DECEMBER 31, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Revenue............................................ $ 113,257 $ 266,142 $ 754,970
Loss Before Extraordinary Item..................... (34,309) (95,824) (169,372)
Extraordinary Item................................. -- -- (20,800)
Net Loss........................................... (34,309) (95,824) (190,172)
</TABLE>
F-29
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
18. SUPPLEMENTAL FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth selected unaudited quarterly financial
information for the years ended December 31, 1997 and 1998.
(IN THOUSANDS, EXCEPT LOSS PER SHARE)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
--------- --------- -------- --------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Revenues................................................... $ 42,168 $ 67,193 $ 83,243 $108,192
--------- --------- -------- --------
--------- --------- -------- --------
Net loss................................................... $ (19,147) $ (21,570) $(27,342) $(32,140)
--------- --------- -------- --------
--------- --------- -------- --------
Net loss per share of Common Stock......................... $ (1.82) $ (1.90) $ (2.28) $ (0.77)
--------- --------- -------- --------
--------- --------- -------- --------
Weighted average number of shares of Common Stock
outstanding.............................................. 10,541 11,378 11,998 41,633
--------- --------- -------- --------
--------- --------- -------- --------
YEAR ENDED DECEMBER 31, 1998
Revenues................................................... $ 131,635 $ 166,567 $265,916 $321,820
--------- --------- -------- --------
--------- --------- -------- --------
Loss before extraordinary item............................. $ (35,334) $ (41,176) $(58,941) $(62,973)
Extraordinary item......................................... -- (20,800) -- --
--------- --------- -------- --------
Net loss................................................... $ (35,334) $ (61,976) $(58,941) $(62,973)
--------- --------- -------- --------
--------- --------- -------- --------
Loss per share of Common Stock before extraordinary item... $ (0.85) $ (0.97) $ (1.34) $ (1.33)
--------- --------- -------- --------
--------- --------- -------- --------
Net loss per share of Common Stock......................... $ (0.85) $ (1.47) $ (1.34) $ (1.33)
--------- --------- -------- --------
--------- --------- -------- --------
Weighted average number of shares of Common Stock
outstanding.............................................. 41,777 42,295 44,124 47,392
--------- --------- -------- --------
--------- --------- -------- --------
</TABLE>
F-30
<PAGE>
BACK PAGE OF PROSPECTUS
[RSL logo]
<PAGE>
PART II
Item 15. Recent Sales of Unregistered Securities
The following discussion does not give effect to the recapitalization
effected by the Registrant in connection with its IPO.
In July 1996, RSL BVI was amalgamated into the Registrant.
Subsequently, the Registrant increased the number of authorized shares of each
of its common stock, par value $.01 per share (the "RSL Common Stock"), and
preferred stock, par value $.01 per share (the "RSL Preferred Stock"), to
20,000,000. Thereafter, the Registrant issued: (i) 59,306 shares of RSL Common
Stock to Ronald S. Lauder for aggregate consideration of $593.06; (ii) 1,097,837
shares of RSL Preferred Stock to Ronald S. Lauder for aggregate consideration of
$10,978.37; (iii) 2,013,179 shares of RSL Common Stock to Itzhak Fisher for
aggregate consideration of $12,000; (iv) 243,964 shares of RSL Preferred Stock
to Itzhak Fisher for aggregate consideration of $2,439.64; (v) 422,130 shares of
RSL Common Stock to R. S. Lauder Gaspar & Co., L.P. for aggregate consideration
of $4,221.30; (vi) 7,170,442 shares of RSL Preferred Stock to R. S. Lauder
Gaspar & Co., L.P. for aggregate consideration of $71,704.42; (vii) 419,770
shares of RSL Common Stock to the Schuster Family Partners I, L.P. for aggregate
consideration of $4,197.70; (viii) 365,945 shares of RSL Preferred Stock to the
Schuster Family Partners I, L.P. for aggregate consideration of $3,659.49; (ix)
13,179 shares of RSL Common Stock to Nir Tarlovsky for aggregate consideration
of $131.79; (x) 243,964 shares of RSL Preferred Stock to Nir Tarlovsky for
aggregate consideration of $2,439.64 and (xi) 121,714 shares of RSL Preferred
Stock to Nesim Bildirici for aggregate consideration of $1,217.14. The issuance
of such shares was exempt from registration under the Securities Act pursuant to
Section 4(2) thereof.
In September 1996, the Registrant's capital stock was reclassified as
follows: (i) the Class A common shares and Class B common shares were authorized
with the RSL Common Shares being converted into Class A common Shares; (ii) the
Registrant's authorized Class B common shares were reclassified as Class C
common shares with no changes to the rights of such shares; (iii) the authorized
Class A common shares were reclassified as Class B common shares with no changes
in the rights of such stock except that each Class B common share is entitled to
10 votes per share; and (iv) the new Class A common shares were authorized.
In September 1996, the Registrant issued to Ronald S. Lauder a warrant
to purchase 210,000 shares of the Registrant's Class B common shares in
consideration of a loan from Mr. Lauder to the Registrant in the aggregate
amount of $35 million. Additionally, the Registrant issued: (i) 940,073 shares
of the Registrant's Class B common shares to Lauder Gaspar Ventures LLC for
aggregate consideration of $25 million; (ii) 470,037 shares of the Registrant's
Class B common shares to Ronald S. Lauder for aggregate consideration of $12.5
million and (iii) 470,037 shares of the Registrant's Class B common shares to
Leonard A. Lauder for aggregate consideration of $12.5 million. The issuance of
such shares was exempt from registration under the Securities Act pursuant to
Section 4(2) thereof.
In May 1997, the Registrant issued to Mr. Charles M. Piluso 665,340
shares of the Registrant's Class A common shares in connection with the
Registrant's acquisition of 15,619 shares of common stock of International
Telecommunications Group held by Mr. Piluso. The issuance of such shares was
exempt from registration under the Securities Act pursuant to Section 4(2)
thereof.
The following discussion does give effect to the recapitalization effected
by the Registrant in connection with its IPO.
In October 1996, the Registrant and RSL Communications PLC, a wholly owned
subsidiary of the Registrant ("RSL PLC"), completed an offering of 300,000
units, each unit consisting of (i) $1,000 principal amount of 121/4% senior
notes due 2006 of RSL PLC (unconditionally guaranteed by the Registrant and (ii)
one warrant to purchase 3.975 Class A common shares. The placement agents for
this offering consisted of Morgan Stanley, Bear, Stearns and Dillion, Read. The
aggregate commissions were approximately $9.0 million. The units were not
registered under the Securities Act in reliance on Rule 144A of the Securities
Act and were sold only to "qualified institutional buyers" and to a limited
number of "institutional accredited investors."
II-1
<PAGE>
In connection with the IPO, the Registrant issued to certain members of
management and original shareholders of certain of the Registrant's subsidiaries
an aggregate of 411,105 Class A common shares in exchange for shares of certain
of the Registrant's subsidiaries held by such persons. The issuance of such
shares is exempt from registration under the Securities Act pursuant to Section
4(2) thereof.
In February 1998, RSL PLC completed an offering of $200.0 million 9 1/8%
senior notes due 2008 and $328.1 million of 10 1/8% senior discount notes due
2008 of RSL PLC and unconditionally guaranteed by the Registrant pursuant to an
indenture governing these notes. The placement agents for this offering
consisted of Goldman Sachs, Merrill Lynch, Chase Securities, J.P. Morgan and SBC
Warburg Dillon Read. The aggregate commissions were approximately $12.0 million.
The notes were sold to "qualified institutional buyers" in the U.S. and were not
registered under the Securities Act in reliance on Rule 144A of the Securities.
In March 1998, RSL PLC completed an offering of 296.0 million Deutsche
marks (approximately $99.1 million of proceeds at issuance) face amount at
maturity 10% senior discount notes due 2008 unconditionally guaranteed by the
Registrant pursuant to an indenture governing these notes. The placement agents
for this offering consisted of Goldman Sachs & Co. oHG and Merrill Lynch
International. The aggregate commissions were approximately $3.0 million. These
notes were sold outside the U.S. to non-U.S. persons in reliance on Regulation S
under the Securities Act and through their respective selling agents, Goldman
Sachs & Co. and Merrill Lynch & Co, and in the U.S. only to "qualified
institutional buyers" in reliance on Rule 144A under the Securities Act.
In April 1998, pursuant to an agreement and plan of merger between the
Registrant, Delta Three, Jacob Davidson and Pioneer Management Services, Delta
Three was merged into a wholly owned subsidiary of the Registrant. As a result
of this merger, the Registrant received (i) 1,750,000 shares of Delta Three,
(ii) paid to each Delta Three shareholder a total cash payment of $438,500 and
(iii) issued to each Delta Three shareholder 187,299 shares of the Registrant's
Class A common shares. The shares were issued pursuant to a private placement
exemption under Section 4(2) of the Securities Act.
In July 1998, the Registrant issued to Metro Holding AG 1,607,142 shares of
the Registrant's Class A common shares in exchange for 142,857 common shares of
RSL COM Europe, a subsidiary of the Registrant. The issuance of such shares was
exempt from registration under the Securities Act pursuant to Section 4(2)
thereof.
In October 1998, the Registrant issued to Arnold Goodstein 32,269 shares of
the Registrant's Class A common shares in exchange for 19.7375 shares of RSL COM
PrimeCall, a subsidiary of the Registrant. The issuance of such shares was
exempt from registration under the Securities Act pursuant to Section 4(2)
thereof.
In November 1998, the Registrant, through RSL Communications PLC, issued
$100 million aggregate principal amount at maturity of 12% senior notes due 2008
unconditionally guaranteed by the Registrant pursuant to an indenture governing
the 12% notes. The placement agent for this offering was Goldman Sachs. The
aggregate commissions were approximately $3.0 million. The 12% notes were sold
outside the U.S. to non-U.S. persons in reliance on Regulation S under the
Securities Act and in the U.S. only to "qualified institutional buyers" in
reliance on Rule 144A under the Securities Act.
In December 1998, the Registrant, through RSL Communications PLC, issued
$200 million aggregate principal amount at maturity of 10 1/2% senior notes due
2008 unconditionally guaranteed by the Registrant pursuant to an indenture
governing the 10 1/2% notes. The placement agents for this offering were Morgan
Stanley and Lehman Brothers. The aggregate commissions were approximately $2.1
million. The 10 1/2% notes were sold outside the U.S. to non-U.S. persons in
reliance on Regulation S under the Securities Act and in the U.S. only to
"qualified institutional buyers" in reliance on Rule 144A under the Securities
Act.
In January 1999, the Registrant issued to Paul G. Black Family Trust 25,000
Class A common shares in exchange for stock options to purchase 72.67 shares of
RSL COM U.S.A. The issuance of these shares was exempt from registration under
the Securities Act pursuant to Section 4(2) thereof.
II-2
<PAGE>
In February 1999, the Registrant issued to Serge Farman 9,490 Class A
common shares in exchange for 4.52 shares of RSL COM U.S.A. and options to
acquire 2.26 shares of RSL COM U.S.A. The issuance of these shares was exempt
from registration under the Securities Act pursuant to Section 4(2) thereof.
In March 1999, the Registrant issued to the members of a certain limited
liability company an aggregate of 35,963 Class A common shares as consideration
for their interests in such limited liability company. The issuance of these
shares was exempt from registration under the Securities Act pursuant to Section
4(2) thereof.
Item 16. Exhibits and Financial Statement Schedules
(a) The following Exhibits are included in this registration statement:
EXHIBIT
NUMBER DESCRIPTION
- -------- --------------------------------------------------------------
3.1 Certificate of Incorporation of RSL Communications, Ltd., issued
by the Bermuda Registrar of Companies on March 14, 1996
(incorporated by reference to Registrant's Registration Statement
on Form S-4 (Registration No.333-25749))
3.2 Memorandum of Association of RSL Communications, Ltd., filed with
the Bermuda Registrar of Companies on March 14, 1996 (incorporated
by reference to Registrant's Registration Statement on Form S-4
(Registration No.333-25749))
3.3 Bye-Laws of RSL Communications, Ltd. (as amended through September
2, 1997) (incorporated by reference to Registrant's Registration
Statement on Form S-1 (Registration No. 333-34281))
4.1 Form of Class A Common Share (incorporated by reference to
Registrant's Registration Statement on Form S-1 (Registration No.
333-34281))
5.1 Opinion of Conyers, Dill & Pearman (previously filed with
Registrant's Form S-1 (Registration No. 333-46125))
8.1 Opinion of Rosenman & Colin LLP (filed herewith)
10.1 Indenture, dated October 3, 1996, by and among RSL Communications
PLC, RSL Communications, Ltd. and The Chase Manhattan Bank, as
Trustee, containing, as exhibits, specimens of 12 1/4% Senior Notes
due 2006 (incorporated by reference to registrant's Registration
Statement on Form S-4 (Registration No.333-25749))
10.2 Note Deposit Agreement, dated October 3, 1996, by and among RSL
Communications PLC, RSL Communications, Ltd. and The Chase
Manhattan Bank, as Book Entry Depositary (incorporated by reference
to Registrant's Registration Statement on Form S-4 (Registration
No.333-25749))
10.3 Collateral Pledge and Security Agreement, dated October 3, 1996,
by and among RSL Communications PLC and The Chase Manhattan Bank,
as Trustee (incorporated by reference to Registrant's Registration
Statement on Form S-4 (Registration No.333-25749))
10.4 Note Deposit Agreement, dated as of February 27, 1998, among RSL
Communications PLC, RSL Communications, Ltd. and The Chase
Manhattan Bank, as Book-Entry Depositary (incorporated by reference
to Registrant's Registration Statement on Form S-1 (Registration
No. 333-46125))
10.5 Note Deposit Agreement, dated as of February 27, 1998, among RSL
Communications PLC, RSL Communications, Ltd. and The Chase
Manhattan Bank, as Book-Entry Depositary (incorporated by reference
to Registrant's Registration Statement on Form S-1 (Registration
No. 333-46125))
10.6 Indenture, dated as of February 27, 1998, by RSL Communications
PLC and RSL Communications, Ltd. to The Chase Manhattan Bank, as
Trustee (incorporated by reference to Registrant's Registration
Statement on Form S-1 (Registration No. 333-46125))
10.7 Indenture, dated as of February 27, 1998, by RSL Communications
PLC and RSL Communications, Ltd. to The Chase Manhattan Bank, as
Trustee (incorporated by reference to Registrant's Registration
Statement on Form S-1 (Registration No. 333-46125))
10.8 Note Deposit Agreement, dated as of March 16, 1998, by and
between RSL Communications PLC and The Chase Manhattan Bank, as
Book-Entry Depositary (incorporated by reference to Registrant's
Registration Statement on Form S-1 (Registration No. 333-46125))
II-3
<PAGE>
10.9 Indenture, dated as of March 16, 1998, by RSL Communications PLC
and RSL Communications, Ltd. to The Chase Manhattan Bank, as
Trustee (incorporated by reference to Registrant's Registration
Statement on Form S-1 (Registration No. 333-46125))
10.10 Warrant Agreement, dated October 3, 1996, between RSL
Communications, Ltd., as issuer, and The Chase Manhattan Bank, as
warrant agent (incorporated by reference to Registrant's
Registration Statement on Form S-4 (Registration No.333-25749))
10.11 Warrant Registration Rights Agreement, dated October 3, 1996,
between RSL Communications, Ltd., as issuer, and The Chase
Manhattan Bank, as warrant agent (incorporated by reference to
Registrant's Registration Statement on Form S-4 (Registration
No.333-25749))
10.12 Amendment to the Revolving Credit Facility, dated August 20, 1996,
from The Chase Manhattan Bank to RSL Communications, Inc.
(incorporated by reference to Registrant's Registration Statement
on Form S-4 (Registration No.333-25749))
10.13 Amendment to the Revolving Credit Facility, dated September 10,
1996, from The Chase Manhattan Bank to RSL Communications, Ltd.
(incorporated by reference to Registrant's Registration Statement
on Form S-4 (Registration No.333-25749))
10.14 Subordinated Promissory Note, dated September 10, 1996, from RSL
Communications, Ltd. to Ronald S. Lauder (incorporated by reference
to Registrant's Registration Statement on Form S-4 (Registration
No.333-25749))
10.15 Warrant for 210,000 shares of Class B Common Stock of RSL
Communications, Ltd. issued to Ronald S. Lauder on September 10,
1996 (incorporated by reference to Registrant's Registration
Statement on Form S-4 (Registration No.333-25749))
10.16 Standby Facility Agreement, dated October 1, 1996, by and between
RSL Communications, Ltd. and Ronald S. Lauder (incorporated by
reference to Registrant's Registration Statement on Form S-4
(Registration No.333-25749))
10.17** RSL Communications, Ltd.'s 1995 Amended and Restated Stock Option
Plan (incorporated by reference to Registrant's Registration
Statement on Form S-4 (Registration No.333-25749))
10.18 Memorandum of Agreement, dated July 30, 1996, between International
Telecommunications Corporation and Codetel (incorporated by
reference to Registrant's Registration Statement on Form S-4
(Registration No.333-25749))
10.19 General Purchase Agreement, dated September 14, 1995, between
Ericsson Inc. and International Telecommunications Corporation
(incorporated by reference to Registrant's Registration Statement
on Form S-4 (Registration No.333-25749))
10.20 Lease Agreement between AB LM Ericsson Finans and International
Telecommunications Corporation (incorporated by reference to
Registrant's Registration Statement on Form S-4 (Registration
No.333-25749))
10.21 Lease Agreement, dated April 10, 1996, between RSL COM Europe Ltd.
and AB LM Ericsson Finans (incorporated by reference to
Registrant's Registration Statement on Form S-4 (Registration
No.333-25749))
10.22 Lease Agreement, dated December 30, 1996, between RSL COM Europe
Ltd. and AB LM Ericsson Finans (incorporated by reference to
Registrant's Registration Statement on Form S-4 (Registration
No.333-25749))
10.23 Asset Purchase Agreement, dated as of May 8, 1996, by and between
RSL COM France S.A. and Sprint Telecommunications France Inc.
(incorporated by reference to Registrant's Registration Statement
on Form S-4 (Registration No.333-25749))
10.24 Asset Purchase Agreement, dated as of May 8, 1996, by and among
Siena Vermogensverwaltungs-GmbH, Sprint Telecommunication Services
GmbH and Sprint Fon Inc. (incorporated by reference to Registrant's
Registration Statement on Form S-4 (Registration No.333-25749))
10.25 Asset Purchase Agreement, August 12, 1996, by and between RSL COM
UK Limited and Incom (UK) Ltd. (incorporated by reference to
Registrant's Registration Statement on Form S-4 (Registration
No.333-25749))
10.26 Stock Purchase Agreement, dated July 3, 1996, between RSL
Communications Ltd., Charles Piluso and International
Telecommunications Group, Ltd. (incorporated by reference to
Registrant's Registration Statement on Form S-4 (Registration
No.333-25749))
II-4
<PAGE>
10.27 Stock Purchase Agreement, dated September 9, 1996, between RSL
Communications PLC, Richard Rebetti, Jr. and International
Telecommunications Group, Ltd. (incorporated by reference to
Registrant's Registration Statement on Form S-4 (Registration
No.333-25749))
10.28 Agreement and Plan of Reorganization, dated September 9, 1996,
among RSL Communications PLC, RSL Communications, Ltd. and Charles
Piluso (incorporated by reference to Registrant's Registration
Statement on Form S-4 (Registration No.333-25749))
10.29 Tax Agreement, dated September 9, 1996, between RSL Communications
PLC, RSL Communications, Ltd. and Charles Piluso (incorporated by
reference to Registrant's Registration Statement on Form S-4
(Registration No.333-25749))
10.30 Stock Purchase Agreement, dated September 22, 1995, by and between
RSL Communications, Inc. and Charles Piluso (incorporated by
reference to Registrant's Registration Statement on Form S-4
(Registration No.333-25749))
10.31 Stock Purchase Agreement, dated September 22, 1995, by and between
Richard Rebetti and RSL Communications, Inc. (incorporated by
reference to Registrant's Registration Statement on Form S-4
(Registration No.333-25749))
10.32 Amendment to the Stock Purchase Agreement, dated September 22,
1995, between and among International Telecommunications Group,
Ltd., International Telecommunications Corporation and RSL
Communications, Inc. (incorporated by reference to Registrant's
Registration Statement on Form S-4 (Registration No.333-25749))
10.33 Stock Purchase Agreement, dated March 10, 1995, between RSL
Communication, Inc., International Telecommunications Group, Ltd.
and International Telecommunications Corporation (incorporated by
reference to Registrant's Registration Statement on Form S-4
(Registration No.333-25749))
10.34 Indemnity Agreement, dated March 10, 1995, between and among
International Telecommunications Group, Ltd., International
Telecommunications Corporation and RSL Communications, Inc.
(incorporated by reference to Registrant's Registration Statement
on Form S-4 (Registration No.333-25749))
10.35 Sublease, dated July 18, 1996, between RSL Communications, Ltd.
and RSL Management Corporation (incorporated by reference to
Registrant's Registration Statement on Form S-4 (Registration
No.333-25749))
10.36 Lease, dated as of January 15, 1997, between Longstreet Associates
L.P. and RSL COM U.S.A., Inc. (incorporated by reference to
Registrant's Registration Statement on Form S-4 (Registration
No.333-25749))
10.37** Employment Agreement, dated January 31, 1997, between Roland T.
Mallcott and RSL Communications, Ltd. (incorporated by reference
to Registrant's Registration Statement on Form S-4 (Registration
No.333-25749))
10.38 Amendment of Lease, dated as of December 6, 1995, between Hudson
Telegraph Associates and International Telecommunications
Corporation (incorporated by reference to Registrant's Registration
Statement on Form S-4 (Registration No.333-25749))
10.39 Shareholders Agreement of RSL Communications, Latin America, Ltd.,
dated August 4, 1997, between and among RSL Communications, Latin
America, Ltd., RSL Communications, Ltd. and Coral Gates Investments
Ltd. (incorporated by reference to Registrant's Registration
Statement on Form S-1 (Registration No. 333-34281))
10.40* Delta Three, Inc. Services Agreement (incorporated by reference to
Registrant's Registration Statement on Form S-1 (Registration
No. 333-34281))
10.41** Employment Agreement, dated July 31, 1997, between Andrew C.
Shields and RSL Communications, Ltd. (incorporated by reference to
Registrant's Registration Statement on Form S-1 (Registration No.
333-34281))
10.42** RSL Communications, Ltd. 1997 Performance Compensation Incentive
Plan (incorporated by reference to Registrant's Registration
Statement on Form S-8 (Registration No. 333-40085))
10.43** RSL Communications, Ltd. 1997 Stock Incentive Plan (incorporated
by reference to Registrant's Registration Statement on Form S-8
(Registration No. 333-40085))
10.44 Lease Agreement, dated June 19, 1997 for property at 430 Park
Avenue, New York, New York (incorporated by reference to
Registrant's Registration Statement on Form S-1 (Registration No.
333-34281))
II-5
<PAGE>
10.45 Stock Purchase Agreement of Delta Three, Inc. (incorporated by
reference to Registrant's Registration Statement on Form S-1
(Registration No. 333-34281))
10.46** Employment Agreement, dated September 2, 1997, between Itzhak
Fisher and RSL Communications, Ltd. (incorporated by reference to
Registrant's Registration Statement on Form S-1 (Registration No.
333-34281))
10.47** Employment Agreement, dated September 2, 1997, between Itzhak
Fisher and International Telecommunications Group, Ltd.
(incorporated by reference to Registrant's Registration Statement
on Form S-1 (Registration No. 333-34281))
10.48** RSL Communications Ltd. 1997 Directors' Compensation Plan
(incorporated by reference to Registrant's Registration Statement
on Form S-8 (Registration No. 333-40085))
10.49 Registration Rights Agreement, dated September 2, 1997, among RSL
Communications, Ltd., Ronald S. Lauder, Itzhak Fisher and Coral
Gate Investments Ltd. (incorporated by reference to Registrant's
Registration Statement on Form S-1 (Registration No. 333-34281))
10.50 International Telecommunication Services Agreement, dated July 1,
1995, between International Telecommunications Corporation and
TELECOM Denmark (incorporated by reference to Registrant's
Registration Statement on Form S-1 (Registration No. 333-34281))
10.51 International Telecommunication Operating Agreement, dated July 15,
1995 between Telenor Carrier Services A.S. and International
Telecommunications Corporation (incorporated by reference to
Registrant's Registration Statement on Form S-1 (Registration No.
333-34281))
10.52 International Telecommunication Services Agreement, dated May 10,
1994, between Mercury Communications Limited and International
Telecommunications Corporation (incorporated by reference to
Registrant's Registration Statement on Form S-1 (Registration No.
333-34281))
10.53 Agreement Concerning Voice Distribution of International Telephony
Traffic, undated, between Unisource Carrier Services AG and
International Telecommunications Corporation (incorporated by
reference to Registrant's Registration Statement on Form S-1
(Registration No. 333-34281))
10.54 International Telecommunications Service Agreement, dated May 31,
1994, between Compania Dominicana De Telefonos, C. Por A. and
International Telecommunications Corporation (incorporated by
reference to Registrant's Registration Statement on Form S-1
(Registration No. 333-34281))
10.55 Second Supplementary Agreement to the UK-Netherlands 14 Cable
System Construction & Maintenance Agreement, effective February 18,
1997, among the parties on the Annex thereto (incorporated by
reference to Registrant's Registration Statement on Form S-1
(Registration No. 333-34281))
10.56 Fourth Supplementary Agreement to the ODIN Construction and
Maintenance Agreement, dated October 24, 1996, among the parties
on the Annex thereto (incorporated by reference to Registrant's
Registration Statement on Form S-1 (Registration No. 333-34281))
10.57 Second Supplementary Agreement to Antillas I Construction &
Maintenance Agreement, dated February 13, 1997, among the parties
on the Annex thereto (incorporated by reference to Registrant's
Registration Statement on Form S-1 (Registration No. 333-34281))
10.58 Canus I Cable System Indefeasible Right of Use Agreement and
Financing Agreement, dated June 4, 1996, between Optel
Communications, Inc. and International Telecommunications
Corporation (incorporated by reference to Registrant's Registration
Statement on Form S-1 (Registration No. 333-34281))
10.59 Cantat-3 Cable System Indefeasible Right of Use Agreement and
Financing Agreement, dated March 12, 1996, between Teleglobe
Cantat-3 Inc. and International Telecommunications Corporation
(incorporated by reference to Registrant's Registration Statement
on Form S-1 (Registration No. 333-34281))
10.60 PTAT-1 Submarine System Indefeasible Right of Use Agreement, dated
May 12, 1994, between Private Transatlantic Telecommunications
System, Inc. and International Telecommunications Corporation
(incorporated by reference to Registrant's Registration Statement
on Form S-1 (Registration No. 333-34281))
10.61 Third Supplementary Agreement to the TAT-12/TAT-13 Cable Network
Construction and Maintenance Agreement, dated October 17, 1995,
among the parties on the Annex thereto (incorporated by reference
to Registrant's Registration Statement on Form S-1 (Registration
No. 333-34281))
II-6
<PAGE>
10.62 Placement Agreement, dated as of September 30, 1996, by and among
RSL Communications PLC, RSL Communications, Ltd. and Morgan Stanley
& Co. Incorporated, Bear Stearns Co. Inc. and Dillon Read & Co.
Inc. (incorporated by reference to Registrant's Registration
Statement on Form S-4 (Registration No.333-25749))
10.63 Asset Purchase Agreement, dated as of April 23, 1998, by and
between CBS Corporation and RSL COM U.S.A., Inc. (incorporated by
reference to Registrant's Current Report on Form 8-K/A dated August
12, 1998))
10.64 Restated Umbrella Agreement, dated as of June 26, 1998, among
Motorola Limited, SA Motorola NV, Motorola Electronic GmbH,
Motorola SA and RSL Communications, Ltd. (incorporated by
reference to the Registrant's Current Report on Form 8-K dated
August 14, 1998)
10.65 Share Subscription, Share Option and Shareholders' Agreement,
dated June 10, 1998, among RSL COM Europe Ltd., RSL Communications,
Ltd. and Metro Holding AG (incorporated by reference to
Registrant's Registration Statement on Form S-1 (Registration No.
333-62325))
10.66 Marketing and Distribution Services Agreement, dated as of June 10,
1998, between RSL COM Europe Ltd. and Metro Holding AG
(incorporated by reference to Registrant's Registration Statement
on Form S-1 (Registration No. 333-62325))
10.67 Exchange Agreement, dated July 22, 1998, among Ligapart AG, Metro
Holding AG and RSL Communications, Ltd. (incorporated by reference
to Registrant's Registration Statement on Form S-1 (Registration
No. 333-62325))
10.68 Amended and Restated Share Subscription, Share Option and
Shareholders' Agreement, dated July 22, 1998, among RSL COM Europe
Ltd., RSL Communications, Ltd. and Metro Holding AG (incorporated
by reference to Registrant's Registration Statement on Form S-1
(Registration No. 333-62325))
10.69 Share Purchase Agreement, dated June 24, 1988, between British
Columbia Railway Company and RSL COM Holdings Canada, Inc.
(incorporated by reference to Registrant's Registration Statement
on Form S-1 (Registration No. 333-62325))
10.70 Note Deposit Agreement, dated November 9, 1998, among RSL
Communications PLC, RSL Communications, Ltd. and The Chase
Manhattan Bank, as Book-Entry Depositary (incorporated by reference
to Registrant's Registration Statement on Form S-1 (Registration
No. 333-62325))
10.71 Indenture, dated November 9, 1998, by RSL Communications PLC and
RSL Communications, Ltd. to The Chase Manhattan Bank, as Trustee
(incorporated by reference to Registrant's Registration Statement
on Form S-1 (Registration No. 333-62325))
10.72 Note Deposit Agreement, dated December 8, 1998, among RSL
Communications PLC, RSL Communications, Ltd., and The Chase
Manhattan Bank as Book-Entry Depository (incorporated by reference
to Registrant's Registration Statement on Form S-4 (Registration
No. 333-70023))
10.73 Indenture, dated December 8, 1998, by RSL Communications PLC and
RSL Communications, Ltd. to The Chase Manhattan Bank as Trustee
(incorporated by reference to Registrant's Registration Statement
on Form S-4 (Registration No. 333-70023))
10.74** Employment Agreement between RSL COM Europe, Ltd. and Richard
Williams, dated as of August 14, 1998 (incorporated by reference to
Registrant's Registration Statement on Form S-4 (Registration No.
333-70023))
10.75** Employment Agreement between RSL Communications, Ltd. and Donald
Shassian, dated as of January 1, 1999 (incorporated by reference
to Registrant's Registration Statement on Form S-4 (Registration
No. 333-70023))
10.76** Employment Agreement between RSL Communications, Ltd. and Nesim
Bildirici, dated as of January 1, 1998 (filed herewith)
10.77** Employment Agreement between RSL Communications, Ltd. and Nir
Tarlovsky, dated as of January 1, 1998 (filed herewith)
10.78** Employment Agreement between International Telecommunications Group
and Nir Tarlovsky, dated as of January 1, 1998 (filed herewith)
21.1 Subsidiaries of the Registrant (incorporated by reference to
Registrant's Registration Statement on Form S-1 (Registration No.
333-62325))
23.1 Consent of Deloitte & Touche LLP (filed herewith)
23.2 Consent of Conyers, Dill & Pearman (previously filed with
Registrant's Registration Statement on Form S-1 (Registration No.
333-46125))
23.3 Consent of Rosenman & Colin LLP (filed herewith and contained in
Exhibit 8.1)
24.1 Power of Attorney (previously filed with Registrant's Registration
Statement on Form S-1 (Registration No. 333-46125))
- ---------------------
II-7
<PAGE>
* Confidential treatment was granted by the SEC with respect to certain
information contained in this exhibit. The omitted information has
been separately filed with the SEC.
** Management contract or compensatory plan or arrangement required to be
identified pursuant to Item 14(a)3 of Form 10-K.
(b) Financial Statement Schedules:
Schedule I - Condensed Financial Information of RSL Communications
PLC (included at page S-1).
Schedule II - Schedule of Valuation Allowances of RSL
Communications, Ltd. (included at page S-4).
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
State of New York on May 3, 1999.
RSL COMMUNICATIONS, LTD.
By /s/ Itzhak Fisher
--------------------------------------
Itzhak Fisher
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Chairman of the Board; Director May 3, 1999
- ----------------------------------------
Ronald S. Lauder
/s/ Itzhak Fisher President; Chief Executive Officer; Director May 3, 1999
- ----------------------------------------
Itzhak Fisher
/s/ Donald Shassian Executive Vice President; Chief Financial May 3, 1999
- ---------------------------------------- Officer (Principal Financial and Accounting
Donald Shassian Officer)
* Executive Vice President; Treasurer; May 3, 1999
- ---------------------------------------- Director
Jacob Z. Schuster
* Director May 3, 1999
- ----------------------------------------
Gustavo Cisneros
* Director May 3, 1999
- ----------------------------------------
Leonard A. Lauder
* Director May 3, 1999
- ----------------------------------------
Nicolas G. Trollope
* Director May 3, 1999
- ----------------------------------------
Eugene Sekulow
* By: Itzhak Fisher as Attorney in Fact
<PAGE>
SCHEDULE I
CONDENSED FINANCIAL INFORMATION
RSL COMMUNICATIONS PLC
CONDENSED BALANCE SHEETS
As of December 31,
($ in thousands)
</TABLE>
<TABLE>
<CAPTION>
Assets 1997 1998
---- ----
<S> <C> <C>
Current Assets.......................................................... $ 212,568 $ 686,727
Restricted Marketable Securities........................................ 68,836 20,159
Property and Equipment--Net............................................. 64,649 278,646
Other Assets............................................................ 190,633 578,891
------- -------
Total.............................................................. $ 536,686 $1,564,423
========= ==========
Liabilities and Shareholder's Deficiency
Current Liabilities..................................................... $ 122,672 $ 411,667
Long-Term Debt.......................................................... 257,448 471,504
Senior Notes--Net....................................................... 300,000 1,007,655
Shareholders' Deficiency................................................ (143,434) (326,403)
--------- ---------
Total.............................................................. $ 536,686 $1,564,423
========= ==========
</TABLE>
See notes to consolidated financial statements of RSL Communications, Ltd.
S-1
<PAGE>
RSL COMMUNICATIONS PLC
CONDENSED STATEMENTS OF OPERATIONS
For the year ended December 31,
($ in thousands)
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Revenues........................................... $113,257 $266,142 $754,970
Cost of Services................................... 98,461 235,150 598,378
Expenses........................................... 41,619 100,118 253,735
------ ------- -------
Loss from Operations.......................... (26,823) (69,126) (97,143)
Interest Expense.............................. (7,384) (39,576) (75,129)
Interest Income............................... -- 13,565 15,333
Other Income (Expense)--Net................... 473 (375) 554
Foreign Exchange Transaction Loss............. -- -- (10,663)
Minority Interest............................. (180) 88 2,284
Loss in Equity Interest of Unconsolidated
Subsidiaries............................... -- -- (3,276)
Income Taxes ................................. (395) (400) (1,332)
----- ----- -------
Loss Before Extraordinary Item................ (34,309) (95,824) (169,372)
Extraordinary Item............................ -- -- (20,800)
--------- --------- ----------
Net Loss................................. $ (34,309) $ (95,824) $ (190,172)
========= ========= ==========
</TABLE>
See notes to consolidated financial statements of RSL Communications, Ltd.
S-2
<PAGE>
RSL COMMUNICATIONS PLC
CONDENSED STATEMENTS OF CASH FLOWS
For the year ended December 31,
($ in thousands)
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Net Loss................................................................ $ (95,824) $ (190,172)
Depreciation and amortization........................................... 20,270 65,748
Working capital change and other........................................ (15,909) 29,569
--------- -----------
Net cash used in operating activities.............................. (91,463) (94,855)
--------- -----------
Purchases of Property and Equipment..................................... (29,866) (142,953)
Acquisitions of Subsidiaries............................................ (50,814) (272,940)
Purchase of Marketable Securities....................................... -- (134,275)
Proceeds from Maturities of Marketable Securities....................... 26,492 23,684
Proceeds from Sales of Marketable Securities............................ 27,675 35,757
Proceeds of Restricted Marketable Securities............................ 41,038 29,141
Other................................................................... 144 4,324
--------- -----------
Net cash provided by (used in) investing activities................ 14,669 (457,262)
--------- -----------
Proceeds from notes payable............................................. -- 791,992
Retirement of 1996 Notes................................................ -- (127,493)
Premium--Paid for the Retirement of 1996 Notes.......................... -- (16,662)
Advances from Parent.................................................... 118,999 137,976
Offering Cost and Other................................................. (15,653) (4,720)
--------- -----------
Net cash provided by financing activities.......................... 103,346 781,093
--------- -----------
Net increase in cash............................................... 26,552 228,976
Effect of foreign currency on cash................................. (785) 819
Cash and cash equivalents at beginning of period................... 103,613 129,380
--------- -----------
Cash and cash equivalents at end of period......................... $129,380 $359,175
======== ========
</TABLE>
See notes to consolidated financial statements of RSL Communications, Ltd.
S-3
<PAGE>
SCHEDULE II
RSL COMMUNICATIONS, LTD.
SCHEDULE OF VALUATION ALLOWANCES
($ IN THOUSANDS)
<TABLE>
<CAPTION>
Balance at Charged to Costs Charged to Other Balance at
January 1, 1998 and Expenses Accounts Deductions December 31, 1998
--------------- ------------ -------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts $12,333 $9,043 -- $(7,381) $13,995
<CAPTION>
Balance at Charged to Costs Charged to Other Balance at
January 1, 1997 and Expenses Accounts Deductions December 31, 1997
--------------- ------------ -------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts $3,881 $10,908 -- $(2,456) $12,333
<CAPTION>
Balance at Charged to Costs Charged to Other Balance at
January 1, 1996 and Expenses Accounts Deductions December 31, 1996
--------------- ------------ -------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts $1,596 $2,830 -- $(545) $3,881
</TABLE>
S-4
<PAGE>
Exhibit 8.1
May 4, 1999
RSL Communications, Ltd.
Clarendon House
Church Street
Hamilton HM CX Bermuda
Gentlemen:
You have requested our opinion regarding the discussion of U.S. federal income
tax consequences under the heading "U.S. Federal Income Tax Considerations" in
the prospectus (the "Prospectus") that is included in the Post-Effective
Amendment No. 1 to Registration Statement on Form S-1 (Reg. No. 333-46125) of
RSL Communications, Ltd.
We have reviewed the Prospectus and such other materials as we have deemed
necessary or appropriate as a basis for our opinion described therein, and have
considered the applicable provisions of the Internal Revenue Code of 1986, as
amended, Treasury Regulations, pertinent judicial authorities, rulings of the
Internal Revenue Service, and such other authorities as we have considered
relevant to such opinion.
Based upon the foregoing, it is our opinion that the statements made under the
heading "U.S. Federal Income Tax Considerations" in the Prospectus set forth the
material U.S. federal income tax consequences of the offering described in the
Prospectus as of the date hereof.
We hereby consent to the use of our name under the heading "U.S. Federal Income
Tax Considerations" in the Prospectus and to the filing of this opinion as an
exhibit to the registration statement.
Very truly yours
ROSENMAN & COLIN LLP
By: /s/
---------------------------
A Partner
<PAGE>
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of January 1, 1998, by and
between RSL Communications, Ltd., a Bermuda corporation (the "Company"), and
Nesim Bildirici ("Executive").
W I T N E S S E T H:
WHEREAS, the Company desires to enter into an agreement,
effective as of January 1, 1998 (the "Commencement Date") to set out the terms
and conditions of Executive's employment by the Company from and after the
Commencement Date; and
WHEREAS, the Executive desires to continue in the employment
of the Company from and after the Commencement Date under those terms and
conditions;
NOW, THEREFORE, in consideration of the mutual covenants
herein contained, the Company and Executive hereby agree as follows:
1. Employment.
(a) Agreement to Employ. Upon the terms and subject to the conditions
of this Agreement, the Company hereby employs Executive, and Executive hereby
accepts continued employment by the Company.
(b) Term of Employment. The Company shall employ Executive for a term
(the "Term") commencing on the Commencement Date and ending December 31, 2000,
unless extended by a written agreement signed by both parties. The period
commencing on the Commencement Date and ending on the earlier of (i) the
expiration of the Term, or (ii) the date of Executive's termination of
employment pursuant to Section 5(a) shall be referred to as the "Employment
Period".
2. Position and Duties.
(a) In general. Executive shall be employed as Vice President-Mergers
and Acquisitions and shall perform such duties and services, consistent with
such position for
<PAGE>
the Company, as may be assigned to him from time to time by the Company's Chief
Executive Officer (the "CEO"). The duties of the Executive shall include serving
as an officer or director or otherwise performing services for any "Affiliate"
of the Company as requested by the Company. An "Affiliate" of the Company means
any entity that controls, is controlled by or is under common control with the
Company. Executive shall report to the President and CEO.
(b) Full-time employment. During the Employment Period, Executive shall
devote his full business time to the services required of him hereunder, except
for time devoted to services required by him to be performed for any "Affiliate"
of the Company, vacation time and reasonable periods of absence due to sickness,
personal injury or other disability, and shall use his best efforts, judgement,
skill and energy to perform such services in a manner consonant with the duties
of his position and to improve and advance the business and interests of the
Company. Executive shall not be engaged in any other business activity which, in
the reasonable judgment of the CEO, conflicts with the duties of the Executive
under this Agreement. Executive shall travel to such location or locations as
may be requested by the Company, or which Executive believes is necessary or
advisable, in the performance by Executive of his duties hereunder or to the
extent appropriate to improve and advance the interests of the Company and its
Affiliates. There is no formal disciplinary procedure, but Executive is expected
at all times to behave in a manner befitting his employment.
3. Compensation.
(a) Base Salary. During the Employment Period, the Company shall pay
Executive a base salary at the annual rate of US$250,000; provided that,
Executive's annual base salary shall be increased as of January 1 of each year,
commencing January 1, 1999, by an amount equal to the base salary then in
effect, multiplied by the percentage increase in the Cost of Living Index during
the preceding year. The "Cost of Living Index" means the consumer price index
for all urban consumers in the New York metropolitan area published by the
Department of Labor, or if such index is no longer available, such other
generally available index measuring changes in consumer purchasing power (in the
New York metropolitan area or nationally) designated by the Board of Directors.
Any delay in increase in Executive's annual base salary by reason of the
unavailability of any such index at the time any such increase shall otherwise
be due shall be made up by a lump sum payment promptly after the index becomes
available. Executive's salary, as adjusted for any increase in the Cost of
Living Index, may be further increased at the option and in the discretion of
the Board of Directors (such salary, as the same may be increased from time to
time, is referred to herein as the "Base Salary"). The Base Salary shall be
payable in such installments (but not less frequent than monthly) as the
salaries of other executives of the Company are paid.
2
<PAGE>
(b) Performance Incentive Plan. Executive shall participate in the
Company's 1997 Performance Incentive Plan. The discretionary portion of the
bonus shall be determined by the Compensation Committee. If the Company shall
amend or terminate the 1997 Performance Incentive Plan in a manner that would
reduce the opportunity of Executive to earn an incentive bonus as provided in
the 1997 Performance Incentive Plan, the Company shall provide a substitute
arrangement so that Executive's total bonus opportunity will not be materially
reduced.
(c) Stock Incentive Plan. The Company shall grant Executive an option
(the "Option") under the Company's 1997 Stock Incentive Plan to purchase 216,428
shares of the Company's Class A Common Stock at an exercise price of US$22.00
per share. The Option grant date shall be the date the Option grant is approved
by the Compensation Committee of the Board. The Option shall become exercisable
as set forth below, provided that Executive is employed by the Company on such
date, and once exercisable shall, except as otherwise provided below, remain
exercisable until the expiration of seven years from the date of grant. However,
the Option shall be immediately terminated upon a termination of Executive's
employment by the Company for Cause (as hereinafter defined):
Date First Exercisable Percentage Exercisable
---------------------- ----------------------
February 1, 1999 33-1/3%
Second Anniversary of the Commencement Date 66-2/3%
Third Anniversary of the Commencement Date 100%
The Option shall become immediately exercisable in full in the
event that Executive's employment with the Company is terminated: (i) by the
Company other than for Cause, (ii) by Executive for Good Reason or (iii) by
reason of the death or Disability of the Executive. Additionally, the Option
shall become immediately exercisable in full upon a Change in Control. The
exercisable portion of the Option shall, following any termination of
Executive's employment (other than for Cause), remain exercisable for the lesser
of two years and the remaining term of the Option.
4. Benefits, Perquisites and Expenses.
(a) Benefits. During the Employment Period, Executive shall be eligible
to participate in (i) each welfare benefit plan sponsored or maintained by the
Company, including, without limitation, each group life, hospitalization,
medical, dental, health, accident or disability insurance or similar plan or
program of the Company, and (ii) each pension, profit sharing, retirement,
deferred compensation or savings plan sponsored or
3
<PAGE>
maintained by the Company, in each case, whether now existing or established
hereafter, on the same basis as generally made available to other senior
officers of the Company.
(b) Perquisites. During the Employment Period, Executive shall be
entitled to five weeks' paid vacation annually and shall also be entitled to
receive such perquisites as are generally provided to other senior officers of
the Company in accordance with the then current policies and practices of the
Company.
(c) Business Expenses. During the Employment Period, the Company shall
pay or reimburse Executive for all reasonable expenses incurred or paid by
Executive in the performance of Executive's duties hereunder, upon presentation
of expense statements or vouchers and such other information as the Company may
require and in accordance with the generally applicable policies and procedures
of the Company.
(d) Indemnification. The Company shall indemnify Executive and hold
Executive harmless from and against any claim, loss or cause of action arising
from or out of Executive's performance as an officer, director or employee of
the Company or any of its subsidiaries or affiliates or in any other capacity,
including any fiduciary capacity, in which Executive serves at the request of
the Company to the maximum extent permitted by applicable law and the Company's
Memorandum of Association and Bye-Laws in effect on the date hereof. If any
claim is asserted against Executive with respect to which Executive reasonably
believes in good faith he is entitled to indemnification, the Company shall
either defend Executive or, at its option, pay Executive's legal expenses (or
cause such expenses to be paid) on a quarterly basis, provided that Executive
shall reimburse the Company for such amounts, plus simple interest thereon at
the 90-day United States Treasury Bill rate as in effect from time to time,
compounded annually, if Executive shall be found by a court of competent
jurisdiction not to have been entitled to indemnification.
5. Termination of Employment.
(a) Termination of the Employment Period. The Employment Period shall
end upon the earliest to occur of (i) a termination of Executive's employment on
account of Executive's death, (ii) a Termination due to Disability or
Retirement, (iii) a Termination for Cause, (iv) a Termination Without Cause, (v)
a Termination by Executive for Good Reason, (vi) a Termination by Executive
other than for Good Reason, or (vii) the expiration of the Term. The Company or
the Executive may initiate a termination in any manner permitted hereunder by
giving the other party written notice thereof (the "Termination Notice"). The
effective date (the "Termination Date") of any termination shall be deemed to be
the later of (i) in the case of a Termination Notice from Executive, 45 days
after the receipt by the Company of the Termination Notice, (ii) the
4
<PAGE>
date on which the Termination Notice is given, or (iii) the date specified in
the Termination Notice; provided, however, that in the case of the Executive's
death, the Termination Date shall be the date of death. Upon termination of his
employment for any reason, Executive will immediately resign from all positions
that he holds with the Company and its Affiliates.
(b) Payments Upon Certain Terminations.
(i) Termination Without Cause or Termination by Executive for
Good Reason. In the event that Executive's employment is terminated by the
Company Without Cause or by Executive for Good Reason, the Company shall pay
Executive his Earned Salary, Vested Benefits and a Severance Benefit (as such
terms are hereinafter defined). In addition, if Executive's employment
terminates pursuant to this subsection (i), the Company shall continue to
provide to Executive the welfare benefits (other than disability insurance)
referred to in Section 4, or substantially comparable benefits, until the
earlier of (x) the date on which Executive is eligible to obtain comparable
benefits from other employment or (y) the expiration of the Term.
(ii) Termination due to Death. In the event of the
termination of Executive's employment due to Executive's death, the Company
shall pay Executive's estate Executive's Earned Salary, Vested Benefits and a
lump sum payment equal to 12 months of Executive's Base Salary (at the rate in
effect on the date of his death).
(iii) Termination due to Disability or Retirement. In the
event of termination of Executive's employment by the Company due to Disability
or a Termination due to Retirement, the Company shall pay Executive his Earned
Salary and Vested Benefits, plus, in the event of termination due to Disability,
to the Executive or his estate his Base Salary at the Termination Date on a
monthly basis for 12 months following the month in which Executive's employment
is terminated. In the event that Executive's employment with the Company is
terminated due to Disability, Executive's benefits under this subsection (iii)
shall be reduced by the amount of any Company sponsored (and paid for)
disability benefits paid to Executive.
(iv) Termination by Executive Other Than for Good Reason.
In the event of a Termination by Executive other than for Good Reason, the
Company shall pay Executive his Earned Salary and Vested Benefits.
(v) Termination for Cause. In the event of a termination of
Executive's employment by the Company for Cause, the Company shall pay Executive
his Earned Salary and Vested Benefits.
5
<PAGE>
(c) Timing of Payments. Earned Salary shall be paid in a single lump
sum as soon as practicable, but in no event later than the earlier of 60 days
following the end of the Employment Period or the day such Earned Salary would
have been payable under the Company's normal payroll practices. Vested Benefits
shall be payable in accordance with the terms of the plan, policy, practice,
program, contract or agreement under which such benefits have accrued except as
otherwise expressly modified by this Agreement. Fifty percent (50%) of Severance
Benefits shall be paid within 30 days after the Termination Date and the
remaining 50% of the Severance Benefits shall be paid in equal monthly
installments during the eleven month period following the payment of the first
50% of Severance Benefits.
(d) Retention of monies owed. The Company may at any time during
Executive's employment or upon its termination for any reason deduct and retain
from any monies owed by it to Executive any sum properly paid by it or any
Affiliate to, on behalf or at the request of Executive or due to it from
Executive including, but not limited to, unauthorized expenses or excess
vacation.
(e) Definitions. The following capitalized terms have the following
meanings:
"Earned Salary" means any Base Salary earned, but unpaid, for
services rendered to the Company on or prior to the date on which the Employment
Period ends.
"Normal Retirement Age" means the first day of the month
following Executive attaining age 65.
"Severance Benefit" means an amount equal to Executive's
annual Base Salary as in effect immediately prior to the Termination Date.
"Termination due to Disability" means a termination of
Executive's employment by the Company because Executive has been incapable of
substantially fulfilling the positions, duties, responsibilities and obligations
set forth in this Agreement because of physical, mental or emotional incapacity
resulting from injury, sickness or disease for a period of (i) at least six
consecutive months or (ii) more than nine months in any twelve month period. Any
question as to the existence, extent or potentiality of Executive's disability
upon which Executive and the Company cannot agree shall be determined by a
qualified, independent physician selected by the Company and reasonably
acceptable to Executive. The determination of any such physician shall be final
and conclusive for all purposes of this Agreement. Executive or his legal
representative or any adult member of his immediate family shall have the right
to present
6
<PAGE>
to such physician such information and arguments as to Executive's
disability as he, she or they deem appropriate, including the opinion of
Executive's personal physician.
"Termination due to Retirement" means termination of
employment by Executive other than for Good Reason, or termination of
Executive's employment by the Company other than a Termination for Cause, on or
after Executive's Normal Retirement Age.
"Termination for Cause" means a termination of Executive's
employment by the Company due to (i) Executive's conviction of a felony or the
entering by Executive of a plea of nolo contendere with respect to a charged
felony, (ii) Executive's gross negligence, recklessness, dishonesty, fraud,
willful malfeasance or willful misconduct in the performance of the services
contemplated by this Agreement, (iii) a willful failure without reasonable
justification to comply with a reasonable written order of the Board of
Directors or the CEO; or (iv) a willful and material breach of Executive's
duties or obligations under this Agreement. Notwithstanding the foregoing, a
termination shall not be treated as a Termination for Cause unless the Company
shall have delivered a written notice to Executive stating that it intends to
terminate his employment for Cause and specifying the factual basis for such
termination, and the event or events that form the basis for the notice, if
capable of being cured, shall not have been cured within 30 days of the receipt
of such notice.
"Termination Without Cause" means any termination by the
Company of Executive's employment hereunder other than (i) a Termination due to
Disability, (ii) a Termination due to Retirement or (iii) a Termination for
Cause.
"Termination for Good Reason" means a termination of
Executive's employment by Executive within 90 days following (i) a reduction in
Executive's annual Base Salary or opportunity under the 1997 Performance
Incentive Plan below the levels contemplated by Sections 3(a) and (b), (ii) a
material reduction in Executive's positions, duties, responsibilities or
reporting lines from those described in Section 2 hereof, (iii) a material
breach of this Agreement by the Company or (iv) a relocation of Executive's
principal place of employment outside of the New York City metropolitan area.
Notwith standing the foregoing, a termination shall not be treated as a
Termination for Good Reason (x) if Executive shall have consented in writing to
the occurrence of the event giving rise to the claim of Termination for Good
Reason or (y) unless Executive shall have delivered a written notice to the
Company within 30 days of his having actual knowledge of the occurrence of one
of the events specified in clause (i), (ii), (iii) or (iv) above stating that he
intends to terminate his employment for Good Reason and specifying the factual
basis for such termination, and such event, if capable of being cured, shall not
have been cured within 30 days of the receipt of such notice. Following a
7
<PAGE>
"Change in Control", Executive shall not be deemed to have Good Reason under
clause (ii) above so long as he continues to have substantially the
responsibilities he had at the time of the Change in Control.
"Change in Control" means the occurrence of (i) a sale or
other disposition of stock of the Company, or an issuance of stock of the
Company as a result of which any "person" (as such term is used in section 13(d)
and 14(d) of the Securities Exchange Act of 1934), other than Ronald S. Lauder
("Lauder") is or becomes the beneficial owner of more than 25% of the total
voting power of the Company, and Lauder (x) beneficially owns a lesser
percentage of the total voting power of the Company than such other "person" and
(y) no longer has the right or ability by voting power, contract or otherwise to
elect or designate a majority of the Board of Directors, (ii) any merger,
consolidation or reorganization (a "Transaction") and Lauder no longer has the
right or ability by voting power, contract or otherwise to elect or designate a
majority of the Board of Directors, or (iii) more than 50% of the total value of
the assets of the Company and its consolidated subsidiaries are transferred and
the transferee of such assets is not Lauder or a company controlled by Lauder,
or (iv) a complete liquidation of the Company.
"Termination Without Good Reason" means any termination by
Executive of Executive's employment hereunder other than (i) a termination due
to Executive's death, (ii) a Termination due to Retirement, (iii) a Termination
for Good Reason, or (iv) a Termination due to Disability.
"Vested Benefits" means amounts which are vested or which
Executive is otherwise entitled to receive under the terms of or in accordance
with any plan, policy, practice or program of, or any contract or agreement
with, the Company, including the Option (to the extent provided in Section
3(c)), at or subsequent to the date of his termination without regard to the
performance by Executive of further services or the resolution of a contingency
and expenses incurred prior to termination of employment that are reimbursable
under Section 4(c).
(f) Full Discharge of Company Obligations. The amounts payable to
Executive pursuant to this Section 5 following termination of his employment
(including amounts payable with respect to Vested Benefits) shall be in full and
complete satisfaction of Executive's rights under this Agreement and any other
claims he may have in respect of his employment by the Company or any of its
subsidiaries. Such amounts shall constitute liquidated damages with respect to
any and all such rights and claims and, upon Executive's receipt of such
amounts, the Company shall be released and discharged from any and all liability
to Executive in connection with this Agreement or otherwise in connection with
Executive's employment with the Company and its subsidiaries and Affiliates,
other than Executive's rights to indemnification under Section 4(d).
8
<PAGE>
6. Agreement Not to Compete With Company
(a) During the Employment Period and for a period of nine
months thereafter (the "Applicable Period"), Executive shall not directly or
indirectly own, manage, operate, finance, join, control, advise, consult, render
services to, have an interest or future interest or participate in the
ownership, management, operation, financing or control of, or be employed by or
connected in any manner with any Competing Business (other than as a holder of
common stock of the Company, and not in excess of 1% of the outstanding voting
shares of any other publicly traded company). "Competing Business" means the
business of international long distance communication services engaged in by the
Company in any country where the Company or an Affiliate conducts such business
at any time during the Term. Any opportunity directly or indirectly related to
any business engaged in by the Company, its subsidiaries and Affiliates of which
Executive becomes aware during the Term shall be deemed a corporate opportunity
of the Company, and Executive shall promptly make such opportunity available to
the Company.
(b) If, during the period of nine months after expiration of
the Employment Period, Executive proposes to engage directly or indirectly in
what may be a Competing Business, Executive shall so notify the Company in a
writing which shall fully set forth and describe in detail the nature of the
activity which may be a competitive Business, the names of the companies or
other entities with or for whom such activity is proposed to be engaged in by
Executive or by an Affiliate of Executive (the "Section 6 Notice"). If, within
30 days after receipt by the Company of a Section 6 Notice, the Company shall
fail to notify Executive that it deems the proposed activity to be a Competitive
Business, then Executive shall be free to engage in the activities described in
the Section 6 Notice without violation of Section 6(a). If, however, the Company
notifies Executive that the proposed activities constitute a Competitive
Business, then (i) Executive shall not engage in such Competitive Business
during the nine month period following expiration of the Employment Period, and
(ii) the Company shall pay Executive, during such nine month period, in equal
monthly installments, an amount equal to his highest Base Salary; provided that
the amount payable under this Section 6(b) shall be reduced by the amount of
Severance Benefit that Executive is receiving for such period.
7. Confidential Information
(a) Without the prior written consent of the Company, Executive shall
not disclose at any time during the Employment Period or any time thereafter any
Confidential Information (as defined below) to any third person other than in
the course of fulfilling Executive's responsibilities under this Agreement
unless such Confidential Information has been previously disclosed to the public
by the Company or an Affiliate or
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is in the public domain (other than by reason of Executive's breach of the
provisions of this paragraph).
(b) "Confidential Information" is any non-public information pertaining
to the Company or an Affiliate, any of their businesses or the business or
personal affairs of Lauder or his family and how any of them conducts its or his
business or affairs. "Con fidential Information" includes not only information
disclosed by the Company or an Affiliate to Executive, but non-public
information developed, created or learned by Executive during the course of or
as a result of Executive's employment with the Com pany. "Confidential
Information" specifically includes non-public information and documents
concerning the Company's and its Affiliates' methods of doing business;
research, telecommunications technology, its actual and potential clients,
transactions and suppliers (including the Company's or an Affiliate's terms,
conditions and other business arrangements with them); client or potential
client or transaction lists and billing; ad vertising, marketing and business
plans and strategies (including prospective or pending licensing applications or
investments in license holders or applicants); profit margins, goals, objectives
and projections; compilations, analyses and projections regarding the Company,
its Affiliates or any of its clients or potential clients or their businesses;
trade se crets; salary, staffing, management organization or employment
information; information relating to members of the Board of Directors and
management of the Company or an Affiliate; files, drawings or designs;
information regarding product development, marketing plans, sales plans or
manufacturing plans; operating policies or manuals, business plans, financial
records or packaging design; or any other non-public financial, commercial,
business or technical information relating to the Company, an Affiliate, Lauder
or his family or non-public information designated as confidential or
proprietary that the Company, an Affiliate or Lauder may receive belonging to
others who do business with any of them.
(c) Nothing herein shall prevent the disclosure by Executive of any
information required by an order of a court having competent jurisdiction or
under subpoena from a government agency, provided that, if Executive receives a
request for the disclosure of any Confidential Information pursuant to court
process or by a government agency, Executive shall promptly (and at the latest
within five business days but not less than three days prior to the date
Executive is required to respond to the request) notify the Company of that
request and cooperate to the maximum extent authorized by law with the Company
in protecting the Company's and it Affiliates' interest in maintaining the
confidentiality of any Confidential Information. The Company will reimburse
Executive for reasonable out-of-pocket costs or expenses incurred by Executive
in connection with his cooperation with the Company and its Affiliates
hereunder.
8. No Disparaging Comments
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Each of the parties hereto agrees not to make disparaging or derogatory comments
about the other party, members of the Board or Affiliates, except to the extent
required by law, and then only after consultation with the other party to the
maximum extent possible in order to maintain goodwill for each of the parties.
9. Return of Company Property
Promptly (and at the latest within ten business days) following Executive's
termination of services, Executive shall:
(i) return to the Company all documents, records, notebooks,
computer diskettes and tapes and anything else containing the
Company's Con fidential Information (as defined above), and
any other property or Con fidential Information of the Company
or its Affiliates, including all copies thereof in Executive's
possession, custody or control, and
(ii) delete from any computer or other electronic storage medium
owned by Executive any of the proprietary or Confidential
Information of the Company or its Affiliates.
10. No Soliciting or Hiring Company Employees
During the Employment Period and for a twelve month period thereafter, Executive
shall not directly or indirectly induce any employee of the Company or any
Affiliate, other than Executive's secretary or personal assistant, to terminate
employment with such entity. Additionally, during the Employment Period and for
a six month period thereafter, Executive shall not directly or indirectly,
either individually or as owner, agent, employee, consultant or otherwise,
employ or offer employment to any person who is or was employed by the Company
or any Affiliate as an employee; provided, however, that Executive shall not be
deemed to have breached the provisions of this sentence in the event that
Executive had no prior knowledge of such hiring (or offer of employment).
11. Continuing Obligations Following Termination
Executive agrees that his obligations and restrictions with respect to
noncompetition, confidentiality, Company property, nondisparagement and
nonsolicitation, and the Company obligations to indemnify Executive under
Section 4(d), will continue to apply following the termination of Executive's
relationship regardless of the manner in which his relationship with the Company
is terminated, whether voluntarily, for Cause, for Good Reason, without Cause or
otherwise.
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12. Arbitration of All Disputes
(a) Any dispute, controversy or claim between the Executive and the
Company or any of its officers, directors, employees or shareholders (who are
expressly made third-party beneficiaries of this agreement) arising out of,
relating to or in connection with this agreement, or the breach, termination or
validity thereof, shall be finally resolved by binding and non-appealable
arbitration, before a single arbitrator selected by the procedure set forth
below, conducted in New York, New York.
(b) Either party may commence an arbitration proceeding by giving
written notice to the other party of its desire to arbitrate.
(c) The single arbitrator (the "Arbitrator") shall be selected from
among the New York City members of the New York Regional Panel of Distinguished
Neutrals (the "Panel") of the Center for Public Resources ("CPR") by mutual
agreement of the parties, or if the parties are unable to agree, by the
following means:
(A) The Company, on one hand, and Executive
on the other hand, shall simultaneously exchange lists each
containing the names of five members of their choice of the
Panel who have indicated a willingness to serve.
(B) If a single name appears on both lists,
that individual shall be appointed.
(C) If more than one name appears on both
parties' lists, the Arbitrator shall be selected from the
common names by mutual agree ment of the parties or by the
toss of a coin.
(D) If the lists contain no names in common,
each party shall strike four names from the other party's list
and the Arbitrator shall be selected from the remaining two
names by mutual agreement of the parties or by the toss of a
coin.
(E) If the CPR ceases to have a Panel or it
is otherwise impossible to select the Arbitrator from the
Panel as contemplated by this Agreement, the Arbitrator shall
be selected by the President of the CPR in the manner that the
President deems closest to satisfying the purposes of this
Section, or, if such person is unable to do so, by the
President of the Association of the Bar of the City of New
York.
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(d) The Arbitrator, after appropriate consultation with the parties,
shall (i) deter mine, in his or her sole discretion, the rules governing the
arbitration proceeding, including whether and to what extent the parties shall
have any right to pre-hearing discovery or other forms of disclosure, the manner
of presentation of arguments and/or evidence before or at any hearing, whether
and to what extent formal rules of evidence shall govern the proceeding and the
parties' rights following the proceeding, and (ii) be governed in exercising
such discretion by the goal of reaching a fair and reasonable decision in an
expeditious and efficient manner while endeavoring to streamline the process and
avoid undue litigation costs.
(e) The Arbitrator shall assess the costs of the proceeding (including
the prevailing party's reasonable attorney's fees) on any unsuccessful party to
the extent the Arbitrator concludes that such party is unsuccessful, unless he
or she concludes that (i) matters of equity or important considerations of
fairness dictate otherwise or (ii) in the case of Executive, the Arbitrator
determined that Executive acted reasonably and in good faith in pursuing all of
the claims asserted by him in such arbitration.
(f) The Arbitrator shall be required to state his or her decision in
writing and may, but shall not be required to, elaborate on the reasons for such
decision.
(g) The arbitrator(s) shall have the authority upon application by a
party to direct specific performance, including preliminary or interim specific
performance pending the final resolution of the arbitration, of any portion of
this agreement. The parties expressly consent to the jurisdiction and power of
any federal or state court in New York to enforce the terms of such a direction
upon application by a party. If the arbitrator(s) have not yet been appointed,
the parties may obtain injunctive or other appropriate relief from a court to
enforce the terms of this agreement pending the appointment of the arbitrator(s)
who shall thereafter have full power to continue, modify or vacate the terms of
any injunctive relief ordered by the court.
(h) Notwithstanding the terms of this agreement that provide that New
York law shall govern, the arbitration and the provisions in this agreement
dealing with arbitration shall be governed exclusively by the United States
(Federal) Arbitration Act, 9 U.S.C. ss.ss. 1-16, and judgment on or enforcement
of the award or any direction for specific performance rendered by the
arbitrators may be entered by any court having jurisdiction thereof or having
jurisdiction over the relevant party or assets of such party.
(i) If, notwithstanding the parties' agreement to arbitrate, any issue
is presented to a court for decision, the parties hereby waive any right to
trial by jury.
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(j) The parties agree that any dispute between the parties and the
arbitration itself shall be kept confidential and that the existence of the
arbitration and any element of it (including but not limited to any pleading,
brief or other document submitted or exchanged, any testimony or other oral
submission, and any award) shall not be disclosed except to the arbitrator(s),
the CPR Institute for Dispute Resolution, the parties, their counsel and any
person necessary to the conduct of the proceeding, except as may be lawfully
required in judicial proceedings relating to the arbitration or otherwise.
13. No Punitive or Emotional Damages
The parties hereto agree that neither the Executive nor the Company will be
entitled to seek or obtain punitive, exemplary or similar damages of any kind
from the other or, in the case of Executive, from the Company's officers,
directors, employees or shareholders, or to seek or obtain damages or
compensation for emotional distress, as a result of any dispute, controversy or
claim arising out of, relating to or in connection with this Agreement, or the
performance, breach, termination or validity thereof. Nothing herein shall
preclude an award of compensatory or punitive damages against any other third
party.
14. Injunctive Relief to Avoid Irreparable Injury
(a) Executive acknowledges and agrees that the individualized services
and capabilities that he will provide to the Company under this Agreement are of
a personal, special, unique, unusual, extraordinary and intellectual character.
(b) Executive acknowledges and agrees that because the international
telecommunications industry is globally integrated and that its constituent
companies are dependent for their survival on protection of their confidential
information which is highly advanced and technical and on carefully developed
knowledge of customer systems and requirements, the restrictions in this
agreement are reasonable to protect the Company's rights under this Agreement
and to safeguard the Company's and it Affiliates' Confidential Information.
(c) Executive acknowledges and agrees that the covenants and
obligations of Executive with respect to noncompetition, nonsolicitation,
confidentiality and Company property relate to special, unique and extraordinary
matters and that a violation of any of the terms of such covenants and
obligations will cause the Company and its Affiliates irreparable injury for
which adequate remedies are not available at law. Executive therefore agrees
that the Company shall be entitled to an order of specific performance,
injunction, restraining order or such other interim or permanent equitable
relief (without the requirement to post bond) restraining Executive from
committing any violation of the
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covenants and obligations contained in this Agreement. Executive acknowledges
and agrees that if any one or more of any part of such restrictions shall be
rendered or judged invalid or unenforceable, such restriction or part shall be
deemed to be severed from this Agreement and such invalidity or unenforceability
shall not in any way affect the validity of the remaining provisions.
(d) These injunctive remedies are cumulative and are in addition to any
other rights and remedies the Company may have at law or in equity.
(e) Executive represents that his economic means and circumstances are
such that the provisions of this Agreement, including the noncompetition,
nonsolicitation, confidentiality and Company property provisions, will not
prevent him from providing for himself and his family on a basis satisfactory to
him and them.
15. Automatic Amendment by Court Order
and Interim Enforcement
(a) If the Arbitrator(s) or a court determines that, but for the
provisions of this paragraph, any part of this agreement is illegal, void as
against public policy or otherwise unenforceable, the relevant part will
automatically be amended to the extent necessary to make it sufficiently narrow
in scope, time and geographic area to be legally enforceable. All other terms
will remain in full force and effect.
(b) If the Executive raises any question as to the enforceability of
any part or terms of this agreement, including, without limitation, the
provisions relating to noncompetition, nonsolicitation, confidentiality and
Company property, the Executive specifically agrees that he will comply fully
with this Agreement unless and until the entry of an arbitral award to the
contrary.
16. Notices
All notices and other communications required or permitted hereunder shall be
sufficiently given if (a) delivered personally, (b) sent by facsimile
transmission (with confirmation received), (c) sent by a nationally-recognized
air courier assuring overnight delivery, or (d) mailed (by registered or
certified mail, return receipt requested and postage prepaid) as follows:
if to the Executive, to the Executive at:
2264 Ocean Parkway
Brooklyn, New York 11223
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if to the Company, to the Company at
Clarendon House
Church Street
Hamilton HM CX
Bermuda
Fax: (441) 292-4720
Attention: Roger Burgess
with a copy to each of:
c/o RSL Communications, N. America, Inc.
Suite 4300
767 Fifth Avenue
New York, New York 10153
Fax: (212) 317-0600
Attention: Corporate Counsel
Debevoise & Plimpton
875 Third Avenue
New York, New York 10022
Fax: (212) 909-6836
Attention: Louis Begley, Esq.
or to such other address as shall be furnished by notice from time to time by
one party hereto to the other party. Any such communication shall be deemed to
have been given, (i) in the case of personal delivery, on the date of delivery,
(ii) in the case of delivery by air courier, on the first business day following
the day on which such communication was posted, and (iii) in the case of
mailing, on the third business day following the day on which such notice was
posted.
17. Sole and Entire Understanding; Amendments
The entire understanding and agreement between the Company and Executive have
been incorporated into this Agreement. There are no other agreements, promises,
representations, understandings or inducements by the Company to Executive or
Executive to the Company other than those specifically set forth in this
Agreement. This Agreement may not be altered, amended or added to except in a
single writing signed by the Company and the Executive.
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18. Waiver of Breach
A waiver or breach of any provision of this Agreement shall not constitute or
operate as a waiver of any other breach of such provision or of any other
provision, and any failure to enforce any provision hereof shall not operate as
a waiver of such provision or of any other provision.
19. Headings
The headings of sections in this Agreement are for convenience only, are not a
part of this Agreement and shall not affect the construction of the provisions
of this Agreement.
20. Arm's Length
(a) This Agreement was entered into at arm's length, without duress or
coercion, and is to be interpreted as an agreement between parties of equal
bargaining strength. Both the Company and the Executive agree that this
Agreement is clear and unambiguous as to its terms, and that no parol or other
evidence will be used or admitted to alter or explain the terms of this
Agreement, but that it will be interpreted based on the language within its four
corners in accordance with the purposes for which it is entered into.
(b) The parties hereto expressly agree that any rule or contractual
interpretation, as applied under California law or anywhere else, that would
allow parol or extrinsic evidence to attempt to show fraud in the inducement or
duress to contradict the plain, unambiguous terms of this Agreement shall not
apply to this Agreement and its performance and enforcement. This provision is a
material part of this Agreement and, should any party try to introduce evidence
contrary to this provision, any other party shall be entitle to consider it a
breach and to rescind this contract in full.
21. Successors and Assigns
(a) This Agreement will inure to the benefit of, and will be binding
upon, the Company, its successors and assigns and upon the Executive and his
heirs, successors and assigns; provided, however, that, because this is an
Agreement for personal services, the Executive cannot assign any of his
obligations under this Agreement to anyone else.
(b) This Agreement may be executed in counterparts, in which case each
of the two counterparts will be deemed to be an original and the final
counterpart shall be deemed to have been executed in New York, New York.
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22. New York Law Governs
Any questions or other matters arising under this Agreement, whether of
validity, interpretation, performance or otherwise, will therefore be governed
by and construed in accordance with the laws of the State of New York applicable
to agreements made and to be wholly performed in New York, without reference to
principles of conflicts or choice of law under which the law of any other
jurisdiction would apply.
IN WITNESS WHEREOF, this Agreement has been executed by
Executive and then by the Company in New York, New York, on the dates shown
below, but effective as of the date and year first above written.
Date: /s/
--------------------------
Executive
RSL COMMUNICATIONS, LTD.
Date: BY: /s/
----------------------
Title:
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EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of January 1, 1998, by and
between RSL Communications, Ltd., a Bermuda corporation (the "Company"), and Nir
Tarlovsky ("Executive").
W I T N E S S E T H:
WHEREAS, the Company and Executive are parties to an
Employment Agreement, dated as of April 1, 1995;
WHEREAS, the Company desires to enter into a new agreement,
effective as of January 1, 1998 (the "Commencement Date") to set out the terms
and conditions of Executive's employment by the Company from and after the
Commencement Date; and
WHEREAS, the Executive desires to continue in the employment
of the Company from and after the Commencement Date under those terms and
conditions;
NOW, THEREFORE, in consideration of the mutual covenants
herein contained, the Company and Executive hereby agree as follows:
1. Employment.
(a) Agreement to Employ. Upon the terms and subject to the conditions
of this Agreement, the Company hereby employs Executive, and Executive hereby
accepts continued employment by the Company.
(b) Term of Employment. The Company shall employ Executive for a term
(the "Term") commencing on the Commencement Date and ending December 31, 2000,
unless extended by a written agreement signed by both parties. The period
commencing on the Commencement Date and ending on the earlier of (i) the
expiration of the Term, or (ii) the date of Executive's termination of
employment pursuant to Section 5(a) shall be referred to as the "Employment
Period".
<PAGE>
2. Position and Duties.
(a) In general. Executive shall be employed as Vice President of
Business Development and shall perform such duties and services, consistent with
such position for the Company, as may be assigned to him from time to time by
the Company's Chief Executive Officer (the "CEO"). The duties of the Executive
shall include serving as an officer or director or otherwise performing services
for any "Affiliate" of the Company as requested by the Company. An "Affiliate"
of the Company means any entity that controls, is controlled by or is under
common control with the Company. Executive shall report to the President and
CEO.
(b) Full-time employment. During the Employment Period, Executive shall
devote his full business time to the services required of him hereunder, except
for time devoted to services required by him to be performed for any "Affiliate"
of the Company, vacation time and reasonable periods of absence due to sickness,
personal injury or other disability, and shall use his best efforts, judgement,
skill and energy to perform such services in a manner consonant with the duties
of his position and to improve and advance the business and interests of the
Company, provided, however, that Executive shall perform such services under
this Agreement outside the United States. Executive shall not be engaged in any
other business activity which, in the reasonable judgment of the CEO, conflicts
with the duties of the Executive under this Agreement. Executive shall travel to
such location or locations as may be requested by the Company, or which
Executive believes is necessary or advisable, in the performance by Executive of
his duties hereunder or to the extent appropriate to improve and advance the
interests of the Company and its Affiliates. There is no formal disciplinary
procedure, but Executive is expected at all times to behave in a manner
befitting his employment.
(c) Relocation. If Executive decides to relocate his principal
residence to Israel, the Company and Executive will negotiate in good faith to
determine any appropriate changes to Executive's positions and duties set forth
in this Agreement, or to other provisions of this Agreement (including changes
to the dates on which the Option granted to executive pursuant to Section 3(c)
shall become exercisable), to reflect such relocation.
3. Compensation.
(a) Base Salary. During the Employment Period, the Company shall pay
Executive a base salary at the annual rate of US$125,000; provided that,
Executive's annual base salary shall be increased as of January 1 of each year,
commencing January 1, 1999, by an amount equal to the base salary then in
effect, multiplied by the percentage increase in the Cost of Living Index during
the preceding year. The "Cost of Living
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Index" means the consumer price index for all urban consumers in the New York
metropolitan area published by the Department of Labor, or if such index is no
longer available, such other generally available index measuring changes in
consumer purchasing power (in the New York metropolitan area or nationally)
designated by the Board of Directors. Any delay in increase in Executive's
annual base salary by reason of the unavailability of any such index at the time
any such increase shall otherwise be due shall be made up by a lump sum payment
promptly after the index becomes available. Executive's salary, as adjusted for
any increase in the Cost of Living Index, may be further increased at the option
and in the discretion of the Board of Directors (such salary, as the same may be
increased from time to time, is referred to herein as the "Base Salary"). The
Base Salary shall be payable in such installments (but not less frequent than
monthly) as the salaries of other executives of the Company are paid.
(b) Performance Incentive Plan. Executive shall participate in the
Company's 1997 Performance Incentive Plan. The discretionary portion of the
bonus shall be determined by the Compensation Committee. If the Company shall
amend or terminate the 1997 Performance Incentive Plan in a manner that would
reduce the opportunity of Executive to earn an incentive bonus as provided in
the 1997 Performance Incentive Plan, the Company shall provide a substitute
arrangement so that Executive's total bonus opportunity will not be materially
reduced.
(c) Stock Incentive Plan. The Company shall grant Executive an option
(the "Option") under the Company's 1997 Stock Incentive Plan to purchase 216,428
shares of the Company's Class A Common Stock at an exercise price of US$22.00
per share. The Option grant date shall be the date the Option grant is approved
by the Compensation Committee of the Board. The Option shall become exercisable
as set forth below, provided that Executive is employed by the Company on such
date, and once exercisable shall, except as otherwise provided below, remain
exercisable until the expiration of seven years from the date of grant. However,
the Option shall be immediately terminated upon a termination of Executive's
employment by the Company for Cause (as hereinafter defined):
Date First Exercisable Percentage Exercisable
---------------------- ----------------------
February 1, 1999 33 1/3%
Second Anniversary of the Commencement Date 66 2/3%
Third Anniversary of the Commencement Date 100%
The Option shall become immediately exercisable in full in the
event that Executive's employment with the Company is terminated: (i) by the
Company other than for Cause, (ii) by Executive for Good Reason or (iii) by
reason of the death or Disability
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of the Executive. Additionally, the Option shall become immediately exercisable
in full upon a Change in Control. The exercisable portion of the Option shall,
following any termination of Executive's employment (other than for Cause),
remain exercisable for the lesser of two years and the remaining term of the
Option.
4. Benefits, Perquisites and Expenses.
(a) Benefits. During the Employment Period, Executive shall be eligible
to participate in (i) each welfare benefit plan sponsored or maintained by the
Company, including, without limitation, each group life, hospitalization,
medical, dental, health, accident or disability insurance or similar plan or
program of the Company, and (ii) each pension, profit sharing, retirement,
deferred compensation or savings plan sponsored or maintained by the Company, in
each case, whether now existing or established hereafter, on the same basis as
generally made available to other senior officers of the Company, provided that
if Executive is also entitled to any of such benefits under an agreement with an
Affiliate, the benefits shall be provided by the Company and its Affiliates to
Executive in a manner that avoids duplication. The Company may amend or
terminate any such plan in its discretion.
(b) Perquisites. During the Employment Period, Executive shall be
entitled to five weeks' paid vacation annually and shall also be entitled to
receive such perquisites as are generally provided to other senior officers of
the Company in accordance with the then current policies and practices of the
Company, provided that if Executive is also entitled to any such vacation or
perquisites under an agreement with an Affiliate, such vacation and/or
perquisites shall be provided by the Company and its Affiliates to Executive in
a manner that avoids duplication.
(c) Business Expenses. During the Employment Period, the Company shall
pay or reimburse Executive for all reasonable expenses incurred or paid by
Executive in the performance of Executive's duties hereunder, upon presentation
of expense statements or vouchers and such other information as the Company may
require and in accordance with the generally applicable policies and procedures
of the Company.
(d) Indemnification. The Company shall indemnify Executive and hold
Executive harmless from and against any claim, loss or cause of action arising
from or out of Executive's performance as an officer, director or employee of
the Company or any of its subsidiaries or affiliates or in any other capacity,
including any fiduciary capacity, in which Executive serves at the request of
the Company to the maximum extent permitted by applicable law and the Company's
Memorandum of Association and Bye-Laws in effect on the date hereof. If any
claim is asserted against Executive with respect to which
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Executive reasonably believes in good faith he is entitled to indemnification,
the Company shall either defend Executive or, at its option, pay Executive's
legal expenses (or cause such expenses to be paid) on a quarterly basis,
provided that Executive shall reimburse the Company for such amounts, plus
simple interest thereon at the 90-day United States Treasury Bill rate as in
effect from time to time, compounded annually, if Executive shall be found by a
court of competent jurisdiction not to have been entitled to indemnification.
5. Termination of Employment.
(a) Termination of the Employment Period. The Employment Period shall
end upon the earliest to occur of (i) a termination of Executive's employment on
account of Executive's death, (ii) a Termination due to Disability or
Retirement, (iii) a Termination for Cause, (iv) a Termination Without Cause, (v)
a Termination by Executive for Good Reason, (vi) a Termination by Executive
other than for Good Reason, or (vii) the expiration of the Term. The Company or
the Executive may initiate a termination in any manner permitted hereunder by
giving the other party written notice thereof (the "Termination Notice"). The
effective date (the "Termination Date") of any termination shall be deemed to be
the later of (i) in the case of a Termination Notice from Executive, 45 days
after the receipt by the Company of the Termination Notice, (ii) the date on
which the Termination Notice is given, or (iii) the date specified in the
Termination Notice; provided, however, that in the case of the Executive's
death, the Termination Date shall be the date of death. Upon termination of his
employment for any reason, Executive will immediately resign from all positions
that he holds with the Company and its Affiliates.
(b) Payments Upon Certain Terminations.
(i) Termination Without Cause or Termination by Executive for
Good Reason. In the event that Executive's employment is terminated by the
Company Without Cause or by Executive for Good Reason, the Company shall pay
Executive his Earned Salary, Vested Benefits and a Severance Benefit (as such
terms are hereinafter defined). In addition, if Executive's employment
terminates pursuant to this subsection (i), the Company shall continue to
provide to Executive the welfare benefits (other than disability insurance)
referred to in Section 4, or substantially comparable benefits, until the
earlier of (x) the date on which Executive is eligible to obtain comparable
benefits from other employment or (y) the expiration of the Term.
(ii) Termination due to Death. In the event of the
termination of Executive's employment due to Executive's death, the Company
shall pay Executive's
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estate Executive's Earned Salary, Vested Benefits and a lump sum payment equal
to 12 months of Executive's Base Salary (at the rate in effect on the date of
his death).
(iii) Termination due to Disability or Retirement. In the
event of termination of Executive's employment by the Company due to Disability
or a Termination due to Retirement, the Company shall pay Executive his Earned
Salary and Vested Benefits, plus, in the event of termination due to Disability,
to the Executive or his estate his Base Salary at the Termination Date on a
monthly basis for 12 months following the month in which Executive's employment
is terminated. In the event that Executive's employment with the Company is
terminated due to Disability, Executive's benefits under this subsection (iii)
shall be reduced by the amount of any Company sponsored (and paid for)
disability benefits paid to Executive.
(iv) Termination by Executive Other Than for Good Reason. In
the event of a Termination by Executive other than for Good Reason, the Company
shall pay Executive his Earned Salary and Vested Benefits.
(v) Termination for Cause. In the event of a termination of
Executive's employment by the Company for Cause, the Company shall pay Executive
his Earned Salary and Vested Benefits.
(c) Timing of Payments. Earned Salary shall be paid in a single lump
sum as soon as practicable, but in no event later than the earlier of 60 days
following the end of the Employment Period or the day such Earned Salary would
have been payable under the Company's normal payroll practices. Vested Benefits
shall be payable in accordance with the terms of the plan, policy, practice,
program, contract or agreement under which such benefits have accrued except as
otherwise expressly modified by this Agreement. Fifty percent (50%) of Severance
Benefits shall be paid within 30 days after the Termination Date and the
remaining 50% of the Severance Benefits shall be paid in equal monthly
installments during the eleven month period following the payment of the first
50% of Severance Benefits.
(d) Retention of monies owed. The Company may at any time during
Executive's employment or upon its termination for any reason deduct and retain
from any monies owed by it to Executive any sum properly paid by it or any
Affiliate to, on behalf or at the request of Executive or due to it from
Executive including, but not limited to, unauthorized expenses or excess
vacation.
(e) Definitions. The following capitalized terms have the following
meanings:
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"Earned Salary" means any Base Salary earned, but unpaid, for
services rendered to the Company on or prior to the date on which the Employment
Period ends.
"Normal Retirement Age" means the first day of the month
following Executive attaining age 65.
"Severance Benefit" means an amount equal to Executive's
annual Base Salary as in effect immediately prior to the Termination Date.
"Termination due to Disability" means a termination of
Executive's employment by the Company because Executive has been incapable of
substantially fulfilling the positions, duties, responsibilities and obligations
set forth in this Agreement because of physical, mental or emotional incapacity
resulting from injury, sickness or disease for a period of (i) at least six
consecutive months or (ii) more than nine months in any twelve month period. Any
question as to the existence, extent or potentiality of Executive's disability
upon which Executive and the Company cannot agree shall be determined by a
qualified, independent physician selected by the Company and reasonably
acceptable to Executive. The determination of any such physician shall be final
and conclusive for all purposes of this Agreement. Executive or his legal
representative or any adult member of his immediate family shall have the right
to present to such physician such information and arguments as to Executive's
disability as he, she or they deem appropriate, including the opinion of
Executive's personal physician.
"Termination due to Retirement" means termination of
employment by Executive other than for Good Reason, or termination of
Executive's employment by the Company other than a Termination for Cause, on or
after Executive's Normal Retirement Age.
"Termination for Cause" means a termination of Executive's
employment by the Company due to (i) Executive's conviction of a felony or the
entering by Executive of a plea of nolo contendere with respect to a charged
felony, (ii) Executive's gross negligence, recklessness, dishonesty, fraud,
willful malfeasance or willful misconduct in the performance of the services
contemplated by this Agreement, (iii) a willful failure without reasonable
justification to comply with a reasonable written order of the Board of
Directors or the CEO; or (iv) a willful and material breach of Executive's
duties or obligations under this Agreement. Notwithstanding the foregoing, a
termination shall not be treated as a Termination for Cause unless the Company
shall have delivered a written notice to Executive stating that it intends to
terminate his employment for Cause and specifying the factual basis for such
termination, and the event or events that form the basis for the notice, if
capable of being cured, shall not have been cured within 30 days of the receipt
of such notice.
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"Termination Without Cause" means any termination by the
Company of Executive's employment hereunder other than (i) a Termination due to
Disability, (ii) a Termination due to Retirement or (iii) a Termination for
Cause.
"Termination for Good Reason" means a termination of
Executive's employment by Executive within 90 days following (i) a reduction in
Executive's annual Base Salary or opportunity under the 1997 Performance
Incentive Plan below the levels contemplated by Sections 3(a) and (b), (ii) a
material reduction in Executive's positions, duties, responsibilities or
reporting lines from those described in Section 2 hereof; (iii) a material
breach of this Agreement by the Company, or (iv) any termination of the
Executive's employment with ITG due to a "Termination Without Cause" by ITG or a
"Termination With Good Reason by Executive", as those terms are defined in the
employment agreement between the Executive and ITG. Notwithstanding the
foregoing, a termination shall not be treated as a Termination for Good Reason
(x) if Executive shall have consented in writing to the occurrence of the event
giving rise to the claim of Termination for Good Reason or (y) unless Executive
shall have delivered a written notice to the Company within 30 days of his
having actual knowledge of the occurrence of one of the events specified in
clause (i), (ii), (iii) or (iv) above stating that he intends to terminate his
employment for Good Reason and specifying the factual basis for such
termination, and such event, if capable of being cured, shall not have been
cured within 30 days of the receipt of such notice. Following a "Change in
Control", Executive shall not be deemed to have Good Reason under clause (ii)
above so long as he continues to have substantially the responsibilities he had
at the time of t he Change in Control.
"Change in Control" means the occurrence of (i) a sale or
other disposition of stock of the Company, or an issuance of stock of the
Company as a result of which any "person" (as such term is used in section 13(d)
and 14(d) of the Securities Exchange Act of 1934), other than Ronald S. Lauder
("Lauder") is or becomes the beneficial owner of more than 25% of the total
voting power of the Company, and Lauder (x) beneficially owns a lesser
percentage of the total voting power of the Company than such other "person" and
(y) no longer has the right or ability by voting power, contract or otherwise to
elect or designate a majority of the Board of Directors, (ii) any merger,
consolidation or reorganization (a "Transaction") and Lauder no longer has the
right or ability by voting power, contract or otherwise to elect or designate a
majority of the Board of Directors, or (iii) more than 50% of the total value of
the assets of the Company and its consolidated subsidiaries are transferred and
the transferee of such assets is not Lauder or a company controlled by Lauder,
or (iv) a complete liquidation of the Company.
"Termination Without Good Reason" means any termination by
Executive of Executive's employment hereunder other than (i) a termination due
to Executive's
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death, (ii) a Termination due to Retirement, (iii) a Termination for Good
Reason, or (iv) a Termination due to Disability.
"Vested Benefits" means amounts which are vested or which
Executive is otherwise entitled to receive under the terms of or in accordance
with any plan, policy, practice or program of, or any contract or agreement
with, the Company, including the Option (to the extent provided in Section
3(c)), at or subsequent to the date of his termination without regard to the
performance by Executive of further services or the resolution of a contingency
and expenses incurred prior to termination of employment that are reimbursable
under Section 4(c).
(f) Full Discharge of Company Obligations. The amounts payable to
Executive pursuant to this Section 5 following termination of his employment
(including amounts payable with respect to Vested Benefits) shall be in full and
complete satisfaction of Executive's rights under this Agreement and any other
claims he may have in respect of his employment by the Company or any of its
subsidiaries. Such amounts shall constitute liquidated damages with respect to
any and all such rights and claims and, upon Executive's receipt of such
amounts, the Company shall be released and discharged from any and all liability
to Executive in connection with this Agreement or otherwise in connection with
Executive's employment with the Company and its subsidiaries and Affiliates,
other than Executive's rights to indemnification under Section 4(d).
6. Agreement Not to Compete With Company
(a) During the Employment Period and for a period of nine
months thereafter (the "Applicable Period"), Executive shall not directly or
indirectly own, manage, operate, finance, join, control, advise, consult, render
services to, have an interest or future interest or participate in the
ownership, management, operation, financing or control of, or be employed by or
connected in any manner with any Competing Business (other than as a holder of
common stock of the Company, and not in excess of 1% of the outstanding voting
shares of any other publicly traded company). "Competing Business" means the
business of international long distance communication services engaged in by the
Company in any country where the Company or an Affiliate conducts such business
at any time during the Term. Any opportunity directly or indirectly related to
any business engaged in by the Company, its subsidiaries and Affiliates of which
Executive becomes aware during the Term shall be deemed a corporate opportunity
of the Company, and Executive shall promptly make such opportunity available to
the Company.
(b) If, during the period of nine months after expiration of
the Employment Period, Executive proposes to engage directly or indirectly in
what may be a Competing
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Business, Executive shall so notify the Company in a writing which shall fully
set forth and describe in detail the nature of the activity which may be a
competitive Business, the names of the companies or other entities with or for
whom such activity is proposed to be engaged in by Executive or by an Affiliate
of Executive (the "Section 6 Notice"). If, within 30 days after receipt by the
Company of a Section 6 Notice, the Company shall fail to notify Executive that
it deems the proposed activity to be a Competitive Business, then Executive
shall be free to engage in the activities described in the Section 6 Notice
without violation of Section 6(a). If, however, the Company notifies Executive
that the proposed activities constitute a Competitive Business, then (i)
Executive shall not engage in such Competitive Business during the nine month
period following expiration of the Employment Period, and (ii) the Company shall
pay Executive, during such nine month period, in equal monthly installments, an
amount equal to his highest Base Salary; provided that the amount payable under
this Section 6(b) shall be reduced by the amount of Severance Benefit that
Executive is receiving for such period.
7. Confidential Information
(a) Without the prior written consent of the Company, Executive shall
not disclose at any time during the Employment Period or any time thereafter any
Confidential Information (as defined below) to any third person other than in
the course of fulfilling Executive's responsibilities under this Agreement
unless such Confidential Information has been previously disclosed to the public
by the Company or an Affiliate or is in the public domain (other than by reason
of Executive's breach of the provisions of this paragraph).
(b) "Confidential Information" is any non-public information pertaining
to the Company or an Affiliate, any of their businesses or the business or
personal affairs of Lauder or his family and how any of them conducts its or his
business or affairs. "Con fidential Information" includes not only information
disclosed by the Company or an Affiliate to Executive, but non-public
information developed, created or learned by Executive during the course of or
as a result of Executive's employment with the Com pany. "Confidential
Information" specifically includes non-public information and documents
concerning the Company's and its Affiliates' methods of doing business;
research, telecommunications technology, its actual and potential clients,
transactions and suppliers (including the Company's or an Affiliate's terms,
conditions and other business arrangements with them); client or potential
client or transaction lists and billing; ad vertising, marketing and business
plans and strategies (including prospective or pending licensing applications or
investments in license holders or applicants); profit margins, goals, objectives
and projections; compilations, analyses and projections regarding the Company,
its Affiliates or any of its clients or potential clients or their businesses;
trade se crets; salary, staffing, management organization or employment
information; informa-
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tion relating to members of the Board of Directors and management of the Company
or an Affiliate; files, drawings or designs; information regarding product
development, marketing plans, sales plans or manufacturing plans; operating
policies or manuals, business plans, financial records or packaging design; or
any other non-public financial, commercial, business or technical information
relating to the Company, an Affiliate, Lauder or his family or non-public
information designated as confidential or proprietary that the Company, an
Affiliate or Lauder may receive belonging to others who do business with any of
them.
(c) Nothing herein shall prevent the disclosure by Executive of any
information required by an order of a court having competent jurisdiction or
under subpoena from a government agency, provided that, if Executive receives a
request for the disclosure of any Confidential Information pursuant to court
process or by a government agency, Executive shall promptly (and at the latest
within five business days but not less than three days prior to the date
Executive is required to respond to the request) notify the Company of that
request and cooperate to the maximum extent authorized by law with the Company
in protecting the Company's and it Affiliates' interest in maintaining the
confidentiality of any Confidential Information. The Company will reimburse
Executive for reasonable out-of-pocket costs or expenses incurred by Executive
in connection with his cooperation with the Company and its Affiliates
hereunder.
8. No Disparaging Comments
Each of the parties hereto agrees not to make disparaging or derogatory comments
about the other party, members of the Board or Affiliates, except to the extent
required by law, and then only after consultation with the other party to the
maximum extent possible in order to maintain goodwill for each of the parties.
9. Return of Company Property
Promptly (and at the latest within ten business days) following Executive's
termination of services, Executive shall:
(i) return to the Company all documents, records, notebooks,
computer diskettes and tapes and anything else containing the
Company's Con fidential Information (as defined above), and
any other property or Con fidential Information of the Company
or its Affiliates, including all copies thereof in Executive's
possession, custody or control, and
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(ii) delete from any computer or other electronic storage medium
owned by Executive any of the proprietary or Confidential
Information of the Company or its Affiliates.
10. No Soliciting or Hiring Company Employees
During the Employment Period and for a twelve month period thereafter, Executive
shall not directly or indirectly induce any employee of the Company or any
Affiliate, other than Executive's secretary or personal assistant, to terminate
employment with such entity. Additionally, during the Employment Period and for
a six month period thereafter, Executive shall not directly or indirectly,
either individually or as owner, agent, employee, consultant or otherwise,
employ or offer employment to any person who is or was employed by the Company
or any Affiliate as an employee; provided, however, that Executive shall not be
deemed to have breached the provisions of this sentence in the event that
Executive had no prior knowledge of such hiring (or offer of employment).
11. Continuing Obligations Following Termination
Executive agrees that his obligations and restrictions with respect to
noncompetition, confidentiality, Company property, nondisparagement and
nonsolicitation, and the Company obligations to indemnify Executive under
Section 4(d), will continue to apply following the termination of Executive's
relationship regardless of the manner in which his relationship with the Company
is terminated, whether voluntarily, for Cause, for Good Reason, without Cause or
otherwise.
12. Arbitration of All Disputes
(a) Any dispute, controversy or claim between the Executive and the
Company or any of its officers, directors, employees or shareholders (who are
expressly made third-party beneficiaries of this agreement) arising out of,
relating to or in connection with this agreement, or the breach, termination or
validity thereof, shall be finally resolved by binding and non-appealable
arbitration, before a single arbitrator selected by the procedure set forth
below, conducted in New York, New York.
(b) Either party may commence an arbitration proceeding by giving
written notice to the other party of its desire to arbitrate.
(c) The single arbitrator (the "Arbitrator") shall be selected from
among the New York City members of the New York Regional Panel of Distinguished
Neutrals (the "Panel") of the Center for Public Resources ("CPR") by mutual
agreement of the parties, or if the parties are unable to agree, by the
following means:
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(A) The Company, on one hand, and Executive
on the other hand, shall simultaneously exchange lists each
containing the names of five members of their choice of the
Panel who have indicated a willingness to serve.
(B) If a single name appears on both lists,
that individual shall be appointed.
(C) If more than one name appears on both
parties' lists, the Arbitrator shall be selected from the
common names by mutual agree ment of the parties or by the
toss of a coin.
(D) If the lists contain no names in common,
each party shall strike four names from the other party's list
and the Arbitrator shall be selected from the remaining two
names by mutual agreement of the parties or by the toss of a
coin.
(E) If the CPR ceases to have a Panel or it
is otherwise impossible to select the Arbitrator from the
Panel as contemplated by this Agreement, the Arbitrator shall
be selected by the President of the CPR in the manner that the
President deems closest to satisfying the purposes of this
Section, or, if such person is unable to do so, by the
President of the Association of the Bar of the City of New
York.
(d) The Arbitrator, after appropriate consultation with the parties,
shall (i) deter mine, in his or her sole discretion, the rules governing the
arbitration proceeding, including whether and to what extent the parties shall
have any right to pre-hearing discovery or other forms of disclosure, the manner
of presentation of arguments and/or evidence before or at any hearing, whether
and to what extent formal rules of evidence shall govern the proceeding and the
parties' rights following the proceeding, and (ii) be governed in exercising
such discretion by the goal of reaching a fair and reasonable decision in an
expeditious and efficient manner while endeavoring to streamline the process and
avoid undue litigation costs.
(e) The Arbitrator shall assess the costs of the proceeding (including
the prevailing party's reasonable attorney's fees) on any unsuccessful party to
the extent the Arbitrator concludes that such party is unsuccessful, unless he
or she concludes that (i) matters of equity or important considerations of
fairness dictate otherwise or (ii) in the case of Executive, the Arbitrator
determined that Executive acted reasonably and in good faith in pursuing all of
the claims asserted by him in such arbitration.
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<PAGE>
(f) The Arbitrator shall be required to state his or her decision in
writing and may, but shall not be required to, elaborate on the reasons for such
decision.
(g) The arbitrator(s) shall have the authority upon application by a
party to direct specific performance, including preliminary or interim specific
performance pending the final resolution of the arbitration, of any portion of
this agreement. The parties expressly consent to the jurisdiction and power of
any federal or state court in New York to enforce the terms of such a direction
upon application by a party. If the arbitrator(s) have not yet been appointed,
the parties may obtain injunctive or other appropriate relief from a court to
enforce the terms of this agreement pending the appointment of the arbitrator(s)
who shall thereafter have full power to continue, modify or vacate the terms of
any injunctive relief ordered by the court.
(h) Notwithstanding the terms of this agreement that provide that New
York law shall govern, the arbitration and the provisions in this agreement
dealing with arbitration shall be governed exclusively by the United States
(Federal) Arbitration Act, 9 U.S.C. ss.ss. 1-16, and judgment on or enforcement
of the award or any direction for specific performance rendered by the
arbitrators may be entered by any court having jurisdiction thereof or having
jurisdiction over the relevant party or assets of such party.
(i) If, notwithstanding the parties' agreement to arbitrate, any issue
is presented to a court for decision, the parties hereby waive any right to
trial by jury.
(j) The parties agree that any dispute between the parties and the
arbitration itself shall be kept confidential and that the existence of the
arbitration and any element of it (including but not limited to any pleading,
brief or other document submitted or exchanged, any testimony or other oral
submission, and any award) shall not be disclosed except to the arbitrator(s),
the CPR Institute for Dispute Resolution, the parties, their counsel and any
person necessary to the conduct of the proceeding, except as may be lawfully
required in judicial proceedings relating to the arbitration or otherwise.
13. No Punitive or Emotional Damages
The parties hereto agree that neither the Executive nor the Company will be
entitled to seek or obtain punitive, exemplary or similar damages of any kind
from the other or, in the case of Executive, from the Company's officers,
directors, employees or shareholders, or to seek or obtain damages or
compensation for emotional distress, as a result of any dispute, controversy or
claim arising out of, relating to or in connection with this Agreement, or the
performance, breach, termination or validity thereof. Nothing herein shall
preclude an award of compensatory or punitive damages against any other third
party.
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14. Injunctive Relief to Avoid Irreparable Injury
(a) Executive acknowledges and agrees that the individualized services
and capabilities that he will provide to the Company under this Agreement are of
a personal, special, unique, unusual, extraordinary and intellectual character.
(b) Executive acknowledges and agrees that because the international
telecommunications industry is globally integrated and that its constituent
companies are dependent for their survival on protection of their confidential
information which is highly advanced and technical and on carefully developed
knowledge of customer systems and requirements, the restrictions in this
agreement are reasonable to protect the Company's rights under this Agreement
and to safeguard the Company's and it Affiliates' Confidential Information.
(c) Executive acknowledges and agrees that the covenants and
obligations of Executive with respect to noncompetition, nonsolicitation,
confidentiality and Company property relate to special, unique and extraordinary
matters and that a violation of any of the terms of such covenants and
obligations will cause the Company and its Affiliates irreparable injury for
which adequate remedies are not available at law. Executive therefore agrees
that the Company shall be entitled to an order of specific performance,
injunction, restraining order or such other interim or permanent equitable
relief (without the requirement to post bond) restraining Executive from
committing any violation of the covenants and obligations contained in this
Agreement. Executive acknowledges and agrees that if any one or more of any part
of such restrictions shall be rendered or judged invalid or unenforceable, such
restriction or part shall be deemed to be severed from this Agreement and such
invalidity or unenforceability shall not in any way affect the validity of the
remaining provisions.
(d) These injunctive remedies are cumulative and are in addition to any
other rights and remedies the Company may have at law or in equity.
(e) Executive represents that his economic means and circumstances are
such that the provisions of this Agreement, including the noncompetition,
nonsolicitation, confidentiality and Company property provisions, will not
prevent him from providing for himself and his family on a basis satisfactory to
him and them.
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15. Automatic Amendment by Court Order
and Interim Enforcement
(a) If the Arbitrator(s) or a court determines that, but for the
provisions of this paragraph, any part of this agreement is illegal, void as
against public policy or otherwise unenforceable, the relevant part will
automatically be amended to the extent necessary to make it sufficiently narrow
in scope, time and geographic area to be legally enforceable. All other terms
will remain in full force and effect.
(b) If the Executive raises any question as to the enforceability of
any part or terms of this agreement, including, without limitation, the
provisions relating to noncompetition, nonsolicitation, confidentiality and
Company property, the Executive specifically agrees that he will comply fully
with this Agreement unless and until the entry of an arbitral award to the
contrary.
16. Notices
All notices and other communications required or permitted hereunder shall be
sufficiently given if (a) delivered personally, (b) sent by facsimile
transmission (with confirmation received), (c) sent by a nationally-recognized
air courier assuring overnight delivery, or (d) mailed (by registered or
certified mail, return receipt requested and postage prepaid) as follows:
if to the Executive, to the Executive at:
Nir Tarlovsky
P.O. Box 461
Sikun Banim B, Sede
Wurberg, Israel
44935
if to the Company, to the Company at
Clarendon House
Church Street
Hamilton HM CX
Bermuda
Fax: (441) 292-4720
Attention: Roger Burgess
with a copy to each of:
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c/o RSL Communications, N. America, Inc.
Suite 4300
767 Fifth Avenue
New York, New York 10153
Fax: (212) 317-0600
Attention: Corporate Counsel
Debevoise & Plimpton
875 Third Avenue
New York, New York 10022
Fax: (212) 909-6836
Attention: Louis Begley, Esq.
or to such other address as shall be furnished by notice from time to time by
one party hereto to the other party. Any such communication shall be deemed to
have been given, (i) in the case of personal delivery, on the date of delivery,
(ii) in the case of delivery by air courier, on the first business day following
the day on which such communication was posted, and (iii) in the case of
mailing, on the third business day following the day on which such notice was
posted.
17. Sole and Entire Understanding; Amendments
The entire understanding and agreement between the Company and Executive have
been incorporated into this Agreement. There are no other agreements, promises,
representations, understandings or inducements by the Company to Executive or
Executive to the Company other than those specifically set forth in this
Agreement. This Agreement may not be altered, amended or added to except in a
single writing signed by the Company and the Executive. Coincident herewith,
Executive and ITG are entering into an Employment Agreement covering Executive's
services to ITG and its subsidiaries.
18. Waiver of Breach
A waiver or breach of any provision of this Agreement shall not constitute or
operate as a waiver of any other breach of such provision or of any other
provision, and any failure to enforce any provision hereof shall not operate as
a waiver of such provision or of any other provision.
19. Headings
The headings of sections in this Agreement are for convenience only, are not a
part of this Agreement and shall not affect the construction of the provisions
of this Agreement.
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20. Arm's Length
(a) This Agreement was entered into at arm's length, without duress or
coercion, and is to be interpreted as an agreement between parties of equal
bargaining strength. Both the Company and the Executive agree that this
Agreement is clear and unambiguous as to its terms, and that no parol or other
evidence will be used or admitted to alter or explain the terms of this
Agreement, but that it will be interpreted based on the language within its four
corners in accordance with the purposes for which it is entered into.
(b) The parties hereto expressly agree that any rule or contractual
interpretation, as applied under California law or anywhere else, that would
allow parol or extrinsic evidence to attempt to show fraud in the inducement or
duress to contradict the plain, unambiguous terms of this Agreement shall not
apply to this Agreement and its performance and enforcement. This provision is a
material part of this Agreement and, should any party try to introduce evidence
contrary to this provision, any other party shall be entitle to consider it a
breach and to rescind this contract in full.
21. Successors and Assigns
(a) This Agreement will inure to the benefit of, and will be binding
upon, the Company, its successors and assigns and upon the Executive and his
heirs, successors and assigns; provided, however, that, because this is an
Agreement for personal services, the Executive cannot assign any of his
obligations under this Agreement to anyone else.
(b) This Agreement may be executed in counterparts, in which case each
of the two counterparts will be deemed to be an original and the final
counterpart shall be deemed to have been executed in New York, New York.
22. New York Law Governs
Any questions or other matters arising under this Agreement, whether of
validity, interpretation, performance or otherwise, will therefore be governed
by and construed in accordance with the laws of the State of New York applicable
to agreements made and to be wholly performed in New York, without reference to
principles of conflicts or choice of law under which the law of any other
jurisdiction would apply.
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IN WITNESS WHEREOF, this Agreement has been executed by
Executive and then by the Company in New York, New York, on the dates shown
below, but effective as of the date and year first above written.
Date: /s/
----------------- ---------------------------
Executive
RSL COMMUNICATIONS, LTD.
Date: BY: /s/
----------------- ----------------------
Title:
-------------------
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EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of January 1, 1998, by and
between International Telecommunications Group, Ltd., a Delaware corporation
(the "Company"), and Nir Tarlovsky ("Executive").
W I T N E S S E T H:
WHEREAS, the Company and Executive are parties to an
Employment Agreement, dated as of April 1, 1995;
WHEREAS, the Company desires to enter into a new agreement,
effective as of January 1, 1998 (the "Commencement Date") to set out the terms
and conditions of Executive's employment by the Company from and after the
Commencement Date; and
WHEREAS, the Executive desires to continue in the employment
of the Company from and after the Commencement Date under those terms and
conditions;
NOW, THEREFORE, in consideration of the mutual covenants
herein contained, the Company and Executive hereby agree as follows:
1. Employment.
(a) Agreement to Employ. Upon the terms and subject to the conditions
of this Agreement, the Company hereby employs Executive, and Executive hereby
accepts continued employment by the Company.
(b) Term of Employment. The Company shall employ Executive for a term
(the "Term") commencing on the Commencement Date and ending December 31, 2000,
unless extended by a written agreement signed by both parties. The period
commencing on the Commencement Date and ending on the earlier of (i) the
expiration of the Term, or (ii) the date of Executive's termination of
employment pursuant to Section 5(a) shall be referred to as the "Employment
Period".
<PAGE>
2. Position and Duties.
(a) In general. Executive shall be employed as Vice President of
Business Development and shall perform such duties and services, consistent with
such position for the Company, as may be assigned to him from time to time by
the Company's Chief Executive Officer (the "CEO"). The duties of the Executive
shall include serving as an officer or director or otherwise performing services
for any "Affiliate" of the Company as requested by the Company. An "Affiliate"
of the Company means any entity that controls, is controlled by or is under
common control with the Company. Executive shall report to the President and
CEO. Executive's principal office shall be located in the New York Metropolitan
area.
(b) Full-time employment. During the Employment Period, Executive shall
devote his full business time to the services required of him hereunder, except
for time devoted to services required by him to be performed for any "Affiliate"
of the Company, vacation time and reasonable periods of absence due to sickness,
personal injury or other disability, and shall use his best efforts, judgement,
skill and energy to perform such services in a manner consonant with the duties
of his position and to improve and advance the business and interests of the
Company, provided, however, that Executive shall perform such services under
this Agreement within the United States. Executive shall not be engaged in any
other business activity which, in the reasonable judgment of the CEO, conflicts
with the duties of the Executive under this Agreement. Executive shall travel to
such location or locations as may be requested by the Company, or which
Executive believes is necessary or advisable, in the performance by Executive of
his duties hereunder or to the extent appropriate to improve and advance the
interests of the Company and its Affiliates. There is no formal disciplinary
procedure, but Executive is expected at all times to behave in a manner
befitting his employment.
(c) Relocation. If Executive decides to relocate his principal
residence to Israel, the Company and Executive will negotiate in good faith to
determine any appropriate changes to Executive's positions and duties set forth
in this Agreement, or to other provisions of this Agreement, to reflect such
relocation.
3. Compensation.
(a) Base Salary. During the Employment Period, the Company shall pay
Executive a base salary at the annual rate of US$125,000; provided that,
Executive's annual base salary shall be increased as of January 1 of each year,
commencing January 1, 1999, by an amount equal to the base salary then in
effect, multiplied by the percentage
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increase in the Cost of Living Index during the preceding year. The "Cost of
Living Index" means the consumer price index for all urban consumers in the New
York metropolitan area published by the Department of Labor, or if such index is
no longer available, such other generally available index measuring changes in
consumer purchasing power (in the New York metropolitan area or nationally)
designated by the Board of Directors. Any delay in increase in Executive's
annual base salary by reason of the unavailability of any such index at the time
any such increase shall otherwise be due shall be made up by a lump sum payment
promptly after the index becomes available. Executive's salary, as adjusted for
any increase in the Cost of Living Index, may be further increased at the option
and in the discretion of the Board of Directors (such salary, as the same may be
increased from time to time, is referred to herein as the "Base Salary"). The
Base Salary shall be payable in such installments (but not less frequent than
monthly) as the salaries of other executives of the Company are paid.
(b) Performance Incentive Plan. Executive shall participate in RSL
Communications, Ltd.'s 1997 Performance Incentive Plan. The discretionary
portion of the bonus shall be determined by the Compensation Committee of the
RSL Communications ("RSL Com") Board of Directors. If RSL Com shall amend or
terminate the 1997 Performance Incentive Plan in a manner that would reduce the
opportunity of Executive to earn an incentive bonus as provided in the 1997
Performance Incentive Plan, the Company shall provide a substitute arrangement
so that Executive's total bonus opportunity will not be materially reduced.
4. Benefits, Perquisites and Expenses.
(a) Benefits. During the Employment Period, Executive shall be eligible
to participate in (i) each welfare benefit plan sponsored or maintained by the
Company, including, without limitation, each group life, hospitalization,
medical, dental, health, accident or disability insurance or similar plan or
program of the Company, and (ii) each pension, profit sharing, retirement,
deferred compensation or savings plan sponsored or maintained by the Company, in
each case, whether now existing or established hereafter, on the same basis as
generally made available to other senior officers of the Company, provided that
if Executive is also entitled to any of such benefits under an agreement with an
Affiliate, the benefits shall be provided by the Company and its Affiliates to
Executive in a manner that avoids duplication. The Company may amend or
terminate any such plan in its discretion.
(b) Perquisites. During the Employment Period, Executive shall be
entitled to five weeks' paid vacation annually and shall also be entitled to
receive such perquisites
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as are generally provided to other senior officers of the Company in accordance
with the then current policies and practices of the Company, provided that if
Executive is also entitled to any such vacation or perquisites under an
agreement with an Affiliate, such vacation and/or perquisites shall be provided
by the Company and its Affiliates to Executive in a manner that avoids
duplication.
(c) Business Expenses. During the Employment Period, the Company shall
pay or reimburse Executive for all reasonable expenses incurred or paid by
Executive in the performance of Executive's duties hereunder, upon presentation
of expense statements or vouchers and such other information as the Company may
require and in accordance with the generally applicable policies and procedures
of the Company.
(d) Indemnification. The Company shall indemnify Executive and hold
Executive harmless from and against any claim, loss or cause of action arising
from or out of Executive's performance as an officer, director or employee of
the Company or any of its subsidiaries or affiliates or in any other capacity,
including any fiduciary capacity, in which Executive serves at the request of
the Company to the maximum extent permitted by applicable law and the Company's
Memorandum of Association and Bye-Laws in effect on the date hereof. If any
claim is asserted against Executive with respect to which Executive reasonably
believes in good faith he is entitled to indemnification, the Company shall
either defend Executive or, at its option, pay Executive's legal expenses (or
cause such expenses to be paid) on a quarterly basis, provided that Executive
shall reimburse the Company for such amounts, plus simple interest thereon at
the 90-day United States Treasury Bill rate as in effect from time to time,
compounded annually, if Executive shall be found by a court of competent
jurisdiction not to have been entitled to indemnification.
5. Termination of Employment.
(a) Termination of the Employment Period. The Employment Period shall
end upon the earliest to occur of (i) a termination of Executive's employment on
account of Executive's death, (ii) a Termination due to Disability or
Retirement, (iii) a Termination for Cause, (iv) a Termination Without Cause, (v)
a Termination by Executive for Good Reason, (vi) a Termination by Executive
other than for Good Reason, or (vii) the expiration of the Term. The Company or
the Executive may initiate a termination in any manner permitted hereunder by
giving the other party written notice thereof (the "Termination Notice"). The
effective date (the "Termination Date") of any termination shall be deemed to be
the later of (i) in the case of a Termination Notice from Executive, 45 days
after the receipt by the Company of the Termination Notice, (ii) the
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date on which the Termination Notice is given, or (iii) the date specified in
the Termination Notice; provided, however, that in the case of the Executive's
death, the Termination Date shall be the date of death. Upon termination of his
employment for any reason, Executive will immediately resign from all positions
that he holds with the Company and its Affiliates.
(b) Payments Upon Certain Terminations.
(i) Termination Without Cause or Termination by Executive
for Good Reason. In the event that Executive's employment is terminated by the
Company Without Cause or by Executive for Good Reason, the Company shall pay
Executive his Earned Salary, Vested Benefits and a Severance Benefit (as such
terms are hereinafter defined). In addition, if Executive's employment
terminates pursuant to this subsection (i), the Company shall continue to
provide to Executive the welfare benefits (other than disability insurance)
referred to in Section 4, or substantially comparable benefits, until the
earlier of (x) the date on which Executive is eligible to obtain comparable
benefits from other employment or (y) the expiration of the Term.
(ii) Termination due to Death. In the event of the
termination of Executive's employment due to Executive's death, the Company
shall pay Executive's estate Executive's Earned Salary, Vested Benefits and a
lump sum payment equal to 12 months of Executive's Base Salary (at the rate in
effect on the date of his death).
(iii) Termination due to Disability or Retirement. In the
event of termination of Executive's employment by the Company due to Disability
or a Termination due to Retirement, the Company shall pay Executive his Earned
Salary and Vested Benefits, plus, in the event of termination due to Disability,
to the Executive or his estate his Base Salary at the Termination Date on a
monthly basis for 12 months following the month in which Executive's employment
is terminated. In the event that Executive's employment with the Company is
terminated due to Disability, Executive's benefits under this subsection (iii)
shall be reduced by the amount of any Company sponsored (and paid for)
disability benefits paid to Executive.
(iv) Termination by Executive Other Than for Good Reason.
In the event of a Termination by Executive other than for Good Reason, the
Company shall pay Executive his Earned Salary and Vested Benefits.
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(v) Termination for Cause. In the event of a termination of
Executive's employment by the Company for Cause, the Company shall pay Executive
his Earned Salary and Vested Benefits.
(c) Timing of Payments. Earned Salary shall be paid in a single lump
sum as soon as practicable, but in no event later than the earlier of 60 days
following the end of the Employment Period or the day such Earned Salary would
have been payable under the Company's normal payroll practices. Vested Benefits
shall be payable in accordance with the terms of the plan, policy, practice,
program, contract or agreement under which such benefits have accrued except as
otherwise expressly modified by this Agreement. Fifty percent (50%) of Severance
Benefits shall be paid within 30 days after the Termination Date and the
remaining 50% of the Severance Benefits shall be paid in equal monthly
installments during the eleven month period following the payment of the first
50% of Severance Benefits.
(d) Retention of monies owed. The Company may at any time during
Executive's employment or upon its termination for any reason deduct and retain
from any monies owed by it to Executive any sum properly paid by it or any
Affiliate to, on behalf or at the request of Executive or due to it from
Executive including, but not limited to, unauthorized expenses or excess
vacation.
(e) Definitions. The following capitalized terms have the following
meanings:
"Earned Salary" means any Base Salary earned, but unpaid, for
services rendered to the Company on or prior to the date on which the Employment
Period ends.
"Normal Retirement Age" means the first day of the month
following Executive attaining age 65.
"Severance Benefit" means an amount equal to Executive's
annual Base Salary as in effect immediately prior to the Termination Date.
"Termination due to Disability" means a termination of
Executive's employment by the Company because Executive has been incapable of
substantially fulfilling the positions, duties, responsibilities and obligations
set forth in this Agreement because of physical, mental or emotional incapacity
resulting from injury, sickness or disease for a period of (i) at least six
consecutive months or (ii) more than nine months in any twelve month period. Any
question as to the existence, extent or potentiality of
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Executive's disability upon which Executive and the Company cannot agree shall
be determined by a qualified, independent physician selected by the Company and
reasonably acceptable to Executive. The determination of any such physician
shall be final and conclusive for all purposes of this Agreement. Executive or
his legal representative or any adult member of his immediate family shall have
the right to present to such physician such information and arguments as to
Executive's disability as he, she or they deem appropriate, including the
opinion of Executive's personal physician.
"Termination due to Retirement" means termination of
employment by Executive other than for Good Reason, or termination of
Executive's employment by the Company other than a Termination for Cause, on or
after Executive's Normal Retirement Age.
"Termination for Cause" means a termination of Executive's
employment by the Company due to (i) Executive's conviction of a felony or the
entering by Executive of a plea of nolo contendere with respect to a charged
felony, (ii) Executive's gross negligence, recklessness, dishonesty, fraud,
willful malfeasance or willful misconduct in the performance of the services
contemplated by this Agreement, (iii) a willful failure without reasonable
justification to comply with a reasonable written order of the Board of
Directors or the CEO; or (iv) a willful and material breach of Executive's
duties or obligations under this Agreement. Notwithstanding the foregoing, a
termination shall not be treated as a Termination for Cause unless the Company
shall have delivered a written notice to Executive stating that it intends to
terminate his employment for Cause and specifying the factual basis for such
termination, and the event or events that form the basis for the notice, if
capable of being cured, shall not have been cured within 30 days of the receipt
of such notice.
"Termination Without Cause" means any termination by the
Company of Executive's employment hereunder other than (i) a Termination due to
Disability, (ii) a Termination due to Retirement or (iii) a Termination for
Cause.
"Termination for Good Reason" means a termination of
Executive's employment by Executive within 90 days following (i) a reduction in
Executive's annual Base Salary or opportunity under the 1997 Performance
Incentive Plan below the levels contemplated by Sections 3(a) and (b), (ii) a
material reduction in Executive's positions, duties, responsibilities or
reporting lines from those described in Section 2 hereof; (iii) a material
breach of this Agreement by the Company or (iv) any termination of the
Executive's employment with RSL Com due to a "Termination Without Cause" by RSL
Com or a "Termination With Good Reason by Executive", as those terms are defined
in
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the employment agreement between the Executive and RSL Com. Notwithstanding
the foregoing, a termination shall not be treated as a Termination for Good
Reason (x) if Executive shall have consented in writing to the occurrence of the
event giving rise to the claim of Termination for Good Reason or (y) unless
Executive shall have delivered a written notice to the Company within 30 days of
his having actual knowledge of the occurrence of one of the events specified in
clause (i), (ii), (iii) or (iv) above stating that he intends to terminate his
employment for Good Reason and specifying the factual basis for such
termination, and such event, if capable of being cured, shall not have been
cured within 30 days of the receipt of such notice.
"Termination Without Good Reason" means any termination by
Executive of Executive's employment hereunder other than (i) a termination due
to Executive's death, (ii) a Termination due to Retirement, (iii) a Termination
for Good Reason, or (iv) a Termination due to Disability.
"Vested Benefits" means amounts which are vested or which
Executive is otherwise entitled to receive under the terms of or in accordance
with any plan, policy, practice or program of, or any contract or agreement
with, the Company, at or subsequent to the date of his termination without
regard to the performance by Executive of further services or the resolution of
a contingency and expenses incurred prior to termination of employment that are
reimbursable under Section 4(c).
(f) Full Discharge of Company Obligations. The amounts payable to
Executive pursuant to this Section 5 following termination of his employment
(including amounts payable with respect to Vested Benefits) shall be in full and
complete satisfaction of Executive's rights under this Agreement and any other
claims he may have in respect of his employment by the Company or any of its
subsidiaries. Such amounts shall constitute liquidated damages with respect to
any and all such rights and claims and, upon Executive's receipt of such
amounts, the Company shall be released and discharged from any and all liability
to Executive in connection with this Agreement or otherwise in connection with
Executive's employment with the Company and its subsidiaries and Affiliates,
other than Executive's rights to indemnification under Section 4(d).
6. Agreement Not to Compete With Company
(a) During the Employment Period and for a period of nine
months thereafter (the "Applicable Period"), Executive shall not directly or
indirectly own, manage, operate, finance, join, control, advise, consult, render
services to, have an interest or future interest or participate in the
ownership, management, operation,
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financing or control of, or be employed by or connected in any manner with any
Competing Business (other than as a holder of common stock of the Company, and
not in excess of 1% of the outstanding voting shares of any other publicly
traded company). "Competing Business" means the business of international long
distance communication services engaged in by the Company in any country where
the Company or an Affiliate conducts such business at any time during the Term.
Any opportunity directly or indirectly related to any business engaged in by the
Company, its subsidiaries and Affiliates of which Executive becomes aware during
the Term shall be deemed a corporate opportunity of the Company, and Executive
shall promptly make such opportunity available to the Company.
(b) If, during the period of nine months after expiration of
the Employment Period, Executive proposes to engage directly or indirectly in
what may be a Competing Business, Executive shall so notify the Company in a
writing which shall fully set forth and describe in detail the nature of the
activity which may be a competitive Business, the names of the companies or
other entities with or for whom such activity is proposed to be engaged in by
Executive or by an Affiliate of Executive (the "Section 6 Notice"). If, within
30 days after receipt by the Company of a Section 6 Notice, the Company shall
fail to notify Executive that it deems the proposed activity to be a Competitive
Business, then Executive shall be free to engage in the activities described in
the Section 6 Notice without violation of Section 6(a). If, however, the Company
notifies Executive that the proposed activities constitute a Competitive
Business, then (i) Executive shall not engage in such Competitive Business
during the nine month period following expiration of the Employment Period, and
(ii) the Company shall pay Executive, during such nine month period, in equal
monthly installments, an amount equal to his highest Base Salary; provided that
the amount payable under this Section 6(b) shall be reduced by the amount of
Severance Benefit that Executive is receiving for such period.
7. Confidential Information
(a) Without the prior written consent of the Company, Executive shall
not disclose at any time during the Employment Period or any time thereafter any
Confidential Information (as defined below) to any third person other than in
the course of fulfilling Executive's responsibilities under this Agreement
unless such Confidential Information has been previously disclosed to the public
by the Company or an Affiliate or is in the public domain (other than by reason
of Executive's breach of the provisions of this paragraph).
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(b) "Confidential Information" is any non-public information pertaining
to the Company or an Affiliate, any of their businesses or the business or
personal affairs of Lauder or his family and how any of them conducts its or his
business or affairs. "Con fidential Information" includes not only information
disclosed by the Company or an Affiliate to Executive, but non-public
information developed, created or learned by Executive during the course of or
as a result of Executive's employment with the Com pany. "Confidential
Information" specifically includes non-public information and documents
concerning the Company's and its Affiliates' methods of doing business;
research, telecommunications technology, its actual and potential clients,
transactions and suppliers (including the Company's or an Affiliate's terms,
conditions and other business arrangements with them); client or potential
client or transaction lists and billing; ad vertising, marketing and business
plans and strategies (including prospective or pending licensing applications or
investments in license holders or applicants); profit margins, goals, objectives
and projections; compilations, analyses and projections regarding the Company,
its Affiliates or any of its clients or potential clients or their businesses;
trade se crets; salary, staffing, management organization or employment
information; information relating to members of the Board of Directors and
management of the Company or an Affiliate; files, drawings or designs;
information regarding product development, marketing plans, sales plans or
manufacturing plans; operating policies or manuals, business plans, financial
records or packaging design; or any other non-public financial, commercial,
business or technical information relating to the Company, an Affiliate, Lauder
or his family or non-public information designated as confidential or
proprietary that the Company, an Affiliate or Lauder may receive belonging to
others who do business with any of them.
(c) Nothing herein shall prevent the disclosure by Executive of any
information required by an order of a court having competent jurisdiction or
under subpoena from a government agency, provided that, if Executive receives a
request for the disclosure of any Confidential Information pursuant to court
process or by a government agency, Executive shall promptly (and at the latest
within five business days but not less than three days prior to the date
Executive is required to respond to the request) notify the Company of that
request and cooperate to the maximum extent authorized by law with the Company
in protecting the Company's and it Affiliates' interest in maintaining the
confidentiality of any Confidential Information. The Company will reimburse
Executive for reasonable out-of-pocket costs or expenses incurred by Executive
in connection with his cooperation with the Company and its Affiliates
hereunder.
8. No Disparaging Comments
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Each of the parties hereto agrees not to make disparaging or derogatory comments
about the other party, members of the Board or Affiliates, except to the extent
required by law, and then only after consultation with the other party to the
maximum extent possible in order to maintain goodwill for each of the parties.
9. Return of Company Property
Promptly (and at the latest within ten business days) following Executive's
termination of services, Executive shall:
(i) return to the Company all documents, records, notebooks,
computer diskettes and tapes and anything else containing the
Company's Con fidential Information (as defined above), and
any other property or Con fidential Information of the Company
or its Affiliates, including all copies thereof in Executive's
possession, custody or control, and
(ii) delete from any computer or other electronic storage medium
owned by Executive any of the proprietary or Confidential
Information of the Company or its Affiliates.
10. No Soliciting or Hiring Company Employees
During the Employment Period and for a twelve month period thereafter, Executive
shall not directly or indirectly induce any employee of the Company or any
Affiliate, other than Executive's secretary or personal assistant, to terminate
employment with such entity. Additionally, during the Employment Period and for
a six month period thereafter, Executive shall not directly or indirectly,
either individually or as owner, agent, employee, consultant or otherwise,
employ or offer employment to any person who is or was employed by the Company
or any Affiliate as an employee; provided, however, that Executive shall not be
deemed to have breached the provisions of this sentence in the event that
Executive had no prior knowledge of such hiring (or offer of employment).
11. Continuing Obligations Following Termination
Executive agrees that his obligations and restrictions with respect to
noncompetition, confidentiality, Company property, nondisparagement and
nonsolicitation, and the Company obligations to indemnify Executive under
Section 4(d), will continue to apply following the termination of Executive's
relationship regardless of the manner in which
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his relationship with the Company is terminated, whether voluntarily, for Cause,
for Good Reason, without Cause or otherwise.
12. Arbitration of All Disputes
(a) Any dispute, controversy or claim between the Executive and the
Company or any of its officers, directors, employees or shareholders (who are
expressly made third-party beneficiaries of this agreement) arising out of,
relating to or in connection with this agreement, or the breach, termination or
validity thereof, shall be finally resolved by binding and non-appealable
arbitration, before a single arbitrator selected by the procedure set forth
below, conducted in New York, New York.
(b) Either party may commence an arbitration proceeding by giving
written notice to the other party of its desire to arbitrate.
(c) The single arbitrator (the "Arbitrator") shall be selected from
among the New York City members of the New York Regional Panel of Distinguished
Neutrals (the "Panel") of the Center for Public Resources ("CPR") by mutual
agreement of the parties, or if the parties are unable to agree, by the
following means:
(A) The Company, on one hand, and Executive
on the other hand, shall simultaneously exchange lists each
containing the names of five members of their choice of the
Panel who have indicated a willingness to serve.
(B) If a single name appears on both lists,
that individual shall be appointed.
(C) If more than one name appears on both
parties' lists, the Arbitrator shall be selected from the
common names by mutual agree ment of the parties or by the
toss of a coin.
(D) If the lists contain no names in common,
each party shall strike four names from the other party's list
and the Arbitrator shall be selected from the remaining two
names by mutual agreement of the parties or by the toss of a
coin.
(E) If the CPR ceases to have a Panel or it
is otherwise impossible to select the Arbitrator from the
Panel as contemplated by this
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Agreement, the Arbitrator shall be selected by the President
of the CPR in the manner that the President deems closest to
satisfying the purposes of this Section, or, if such person
is unable to do so, by the President of the Association of
the Bar of the City of New York.
(d) The Arbitrator, after appropriate consultation with the parties,
shall (i) deter mine, in his or her sole discretion, the rules governing the
arbitration proceeding, including whether and to what extent the parties shall
have any right to pre-hearing discovery or other forms of disclosure, the manner
of presentation of arguments and/or evidence before or at any hearing, whether
and to what extent formal rules of evidence shall govern the proceeding and the
parties' rights following the proceeding, and (ii) be governed in exercising
such discretion by the goal of reaching a fair and reasonable decision in an
expeditious and efficient manner while endeavoring to streamline the process and
avoid undue litigation costs.
(e) The Arbitrator shall assess the costs of the proceeding (including
the prevailing party's reasonable attorney's fees) on any unsuccessful party to
the extent the Arbitrator concludes that such party is unsuccessful, unless he
or she concludes that (i) matters of equity or important considerations of
fairness dictate otherwise or (ii) in the case of Executive, the Arbitrator
determined that Executive acted reasonably and in good faith in pursuing all of
the claims asserted by him in such arbitration.
(f) The Arbitrator shall be required to state his or her decision in
writing and may, but shall not be required to, elaborate on the reasons for such
decision.
(g) The arbitrator(s) shall have the authority upon application by a
party to direct specific performance, including preliminary or interim specific
performance pending the final resolution of the arbitration, of any portion of
this agreement. The parties expressly consent to the jurisdiction and power of
any federal or state court in New York to enforce the terms of such a direction
upon application by a party. If the arbitrator(s) have not yet been appointed,
the parties may obtain injunctive or other appropriate relief from a court to
enforce the terms of this agreement pending the appointment of the arbitrator(s)
who shall thereafter have full power to continue, modify or vacate the terms of
any injunctive relief ordered by the court.
(h) Notwithstanding the terms of this agreement that provide that New
York law shall govern, the arbitration and the provisions in this agreement
dealing with arbitration shall be governed exclusively by the United States
(Federal) Arbitration Act, 9 U.S.C. Sections 1-16, and judgment on or
enforcement of the award or any direction for specific
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performance rendered by the arbitrators may be entered by any court having
jurisdiction thereof or having jurisdiction over the relevant party or assets of
such party.
(i) If, notwithstanding the parties' agreement to arbitrate, any issue
is presented to a court for decision, the parties hereby waive any right to
trial by jury.
(j) The parties agree that any dispute between the parties and the
arbitration itself shall be kept confidential and that the existence of the
arbitration and any element of it (including but not limited to any pleading,
brief or other document submitted or exchanged, any testimony or other oral
submission, and any award) shall not be disclosed except to the arbitrator(s),
the CPR Institute for Dispute Resolution, the parties, their counsel and any
person necessary to the conduct of the proceeding, except as may be lawfully
required in judicial proceedings relating to the arbitration or otherwise.
13. No Punitive or Emotional Damages
The parties hereto agree that neither the Executive nor the Company will be
entitled to seek or obtain punitive, exemplary or similar damages of any kind
from the other or, in the case of Executive, from the Company's officers,
directors, employees or shareholders, or to seek or obtain damages or
compensation for emotional distress, as a result of any dispute, controversy or
claim arising out of, relating to or in connection with this Agreement, or the
performance, breach, termination or validity thereof. Nothing herein shall
preclude an award of compensatory or punitive damages against any other third
party.
14. Injunctive Relief to Avoid Irreparable Injury
(a) Executive acknowledges and agrees that the individualized services
and capabilities that he will provide to the Company under this Agreement are of
a personal, special, unique, unusual, extraordinary and intellectual character.
(b) Executive acknowledges and agrees that because the international
telecommunications industry is globally integrated and that its constituent
companies are dependent for their survival on protection of their confidential
information which is highly advanced and technical and on carefully developed
knowledge of customer systems and requirements, the restrictions in this
agreement are reasonable to protect the Company's rights under this Agreement
and to safeguard the Company's and it Affiliates' Confidential Information.
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(c) Executive acknowledges and agrees that the covenants and
obligations of Executive with respect to noncompetition, nonsolicitation,
confidentiality and Company property relate to special, unique and extraordinary
matters and that a violation of any of the terms of such covenants and
obligations will cause the Company and its Affiliates irreparable injury for
which adequate remedies are not available at law. Executive therefore agrees
that the Company shall be entitled to an order of specific performance,
injunction, restraining order or such other interim or permanent equitable
relief (without the requirement to post bond) restraining Executive from
committing any violation of the covenants and obligations contained in this
Agreement. Executive acknowledges and agrees that if any one or more of any part
of such restrictions shall be rendered or judged invalid or unenforceable, such
restriction or part shall be deemed to be severed from this Agreement and such
invalidity or unenforceability shall not in any way affect the validity of the
remaining provisions.
(d) These injunctive remedies are cumulative and are in addition to any
other rights and remedies the Company may have at law or in equity.
(e) Executive represents that his economic means and circumstances are
such that the provisions of this Agreement, including the noncompetition,
nonsolicitation, confidentiality and Company property provisions, will not
prevent him from providing for himself and his family on a basis satisfactory to
him and them.
15. Automatic Amendment by Court Order
and Interim Enforcement
(a) If the Arbitrator(s) or a court determines that, but for the
provisions of this paragraph, any part of this agreement is illegal, void as
against public policy or otherwise unenforceable, the relevant part will
automatically be amended to the extent necessary to make it sufficiently narrow
in scope, time and geographic area to be legally enforceable. All other terms
will remain in full force and effect.
(b) If the Executive raises any question as to the enforceability of
any part or terms of this agreement, including, without limitation, the
provisions relating to noncompetition, nonsolicitation, confidentiality and
Company property, the Executive specifically agrees that he will comply fully
with this Agreement unless and until the entry of an arbitral award to the
contrary.
16. Notices
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All notices and other communications required or permitted hereunder shall be
sufficiently given if (a) delivered personally, (b) sent by facsimile
transmission (with confirmation received), (c) sent by a nationally-recognized
air courier assuring overnight delivery, or (d) mailed (by registered or
certified mail, return receipt requested and postage prepaid) as follows:
if to the Executive, to the Executive at:
Nir Tarlovsky
P.O. Box 461
Sikun Banim B, Sede
Wurberg, Israel
44935
if to the Company, to the Company at
c/o RSL Communications, N. America, Inc.
Suite 4300
767 Fifth Avenue
New York, New York 10153
Fax: (212) 317-0600
Attention: Corporate Counsel
with a copy to:
Debevoise & Plimpton
875 Third Avenue
New York, New York 10022
Fax: (212) 909-6836
Attention: Louis Begley, Esq.
or to such other address as shall be furnished by notice from time to time by
one party hereto to the other party. Any such communication shall be deemed to
have been given, (i) in the case of personal delivery, on the date of delivery,
(ii) in the case of delivery by air courier, on the first business day following
the day on which such communication was posted, and (iii) in the case of
mailing, on the third business day following the day on which such notice was
posted.
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17. Sole and Entire Understanding; Amendments
The entire understanding and agreement between the Company and Executive have
been incorporated into this Agreement. There are no other agreements, promises,
representations, understandings or inducements by the Company to Executive or
Executive to the Company other than those specifically set forth in this
Agreement. This Agreement may not be altered, amended or added to except in a
single writing signed by the Company and the Executive. Coincident herewith,
Executive and RSL Com are entering into an Employment Agreement covering
Executive's services to RSL Com.
18. Waiver of Breach
A waiver or breach of any provision of this Agreement shall not constitute or
operate as a waiver of any other breach of such provision or of any other
provision, and any failure to enforce any provision hereof shall not operate as
a waiver of such provision or of any other provision.
19. Headings
The headings of sections in this Agreement are for convenience only, are not a
part of this Agreement and shall not affect the construction of the provisions
of this Agreement.
20. Arm's Length
(a) This Agreement was entered into at arm's length, without duress or
coercion, and is to be interpreted as an agreement between parties of equal
bargaining strength. Both the Company and the Executive agree that this
Agreement is clear and unambiguous as to its terms, and that no parol or other
evidence will be used or admitted to alter or explain the terms of this
Agreement, but that it will be interpreted based on the language within its four
corners in accordance with the purposes for which it is entered into.
(b) The parties hereto expressly agree that any rule or contractual
interpretation, as applied under California law or anywhere else, that would
allow parol or extrinsic evidence to attempt to show fraud in the inducement or
duress to contradict the plain, unambiguous terms of this Agreement shall not
apply to this Agreement and its performance and enforcement. This provision is a
material part of this Agreement and, should any party try to introduce evidence
contrary to this provision, any other party shall be entitle to consider it a
breach and to rescind this contract in full.
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21. Successors and Assigns
(a) This Agreement will inure to the benefit of, and will be binding
upon, the Company, its successors and assigns and upon the Executive and his
heirs, successors and assigns; provided, however, that, because this is an
Agreement for personal services, the Executive cannot assign any of his
obligations under this Agreement to anyone else.
(b) This Agreement may be executed in counterparts, in which case each
of the two counterparts will be deemed to be an original and the final
counterpart shall be deemed to have been executed in New York, New York.
22. New York Law Governs
Any questions or other matters arising under this Agreement, whether of
validity, interpretation, performance or otherwise, will therefore be governed
by and construed in accordance with the laws of the State of New York applicable
to agreements made and to be wholly performed in New York, without reference to
principles of conflicts or choice of law under which the law of any other
jurisdiction would apply.
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IN WITNESS WHEREOF, this Agreement has been executed by
Executive and then by the Company in New York, New York, on the dates shown
below, but effective as of the date and year first above written.
Date: /s/
----------------- ------------------------------------
Executive
INTERNATIONAL TELECOMMUNICATIONS
GROUP, LTD.
Date: BY: /s/
----------------- ----------------------
Title:
-------------------
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Exhibit 23.1
Independent Auditors' Consent
We consent to the use in this Post-Effective Amendment No. 1 to
Registration Statement No. 333-46125 of RSL Communications, Ltd. of our report
dated February 19, 1999 appearing in the Prospectus, which is part of such
Registration Statement.
We also consent to the reference to us under the headings "Summary of
Selected Consolidated Financial Data," "Selected Consolidated Financial Data"
and "Experts" in such Prospectus.
Deloitte & Touche LLP
New York, New York
May 4, 1999
