UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
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Commission file number 0-23139
RSL COMMUNICATIONS, LTD.
------------------------
(Exact name of the registrant as specified in its charter)
Bermuda N/A
------- ---
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) identification No.)
Clarendon House
Church Street
Hamilton HM CX Bermuda
----------------------
(Address of principal executive offices)
(441) 295-2832
--------------
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
As of August 7, 2000, the registrant had 34,230,837 of its Class A common
shares, par value $0.00457 per share, and 24,267,283 of its Class B common
shares, par value $0.00457 per share, outstanding.
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RSL COMMUNICATIONS, LTD.
Table of Contents
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 2000 (Unaudited) and December 31, 1999............... 3
Condensed Consolidated Statements of Operations for the
Three Month and Six Month Periods Ended June 30, 2000
(Unaudited) and 1999 (Unaudited).............................. 4
Condensed Consolidated Statements of Cash Flows for the Six
Month Periods Ended June 30, 2000 (Unaudited) and 1999
(Unaudited)................................................... 5
Notes to Condensed Consolidated Financial Statements............. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ..................... 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk ............................................. 25
PART II - OTHER INFORMATION
Item 2. Change in Securities and Use of Proceeds................. 27
Item 4. Submission of Matters to a Vote of Security Holders...... 27
Item 5. Other Information........................................ 28
Item 6. Exhibits and Reports on Form 8-K......................... 28
Signatures............................................................ 29
Exhibit Index......................................................... 30
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
RSL COMMUNICATIONS, LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
As of As of
June 30, December 31,
2000 1999
---- ----
(unaudited)
<S> <C> <C>
Assets
Cash and Cash Equivalents ............................ $ 129,708 $ 238,724
Accounts Receivable, Net ............................. 273,707 258,983
Marketable Securities - Available for Sale ........... 81,693 72,813
Prepaid Expenses and Other Current Assets ............ 166,712 116,929
----------- -----------
Total Current Assets ................................. 651,820 687,449
----------- -----------
Marketable Securities - Available for Sale ........... -- 11,341
Property and Equipment ............................... 647,260 610,095
Less: Accumulated Depreciation ....................... (173,752) (134,559)
----------- -----------
Property and Equipment, Net .......................... 473,508 475,536
Investment in Unconsolidated Subsidiaries ............ 3,405 16,872
Goodwill and Other Intangibles, Net .................. 701,193 606,039
Deposits and Other Assets ............................ 22,472 6,071
----------- -----------
Total Assets .................................... $ 1,852,398 $ 1,803,308
=========== ===========
Liabilities and Shareholders' Deficit
Accounts Payable and Other Liabilities ............... $ 433,616 $ 500,371
Short-term Debt ...................................... 20,830 23,348
----------- -----------
Total Current Liabilities ............................ 454,446 523,719
----------- -----------
Total Long-term Debt ................................. 1,486,224 1,273,961
Other Liabilities - Noncurrent ....................... 17,284 15,986
----------- -----------
Total Liabilities .................................... 1,957,954 1,813,666
----------- -----------
Minority Interest .................................... 69,276 73,254
----------- -----------
Shareholders' Equity ................................. 795,230 641,778
Accumulated Deficit .................................. (970,062) (725,390)
----------- -----------
Total Shareholders' Deficit .......................... (174,832) (83,612)
----------- -----------
Total Liabilities and Shareholders' Deficit ..... $ 1,852,398 $ 1,803,308
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
3
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RSL COMMUNICATIONS, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except loss per share)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues ................................................ $ 390,547 $ 367,700 $ 766,430 $ 707,981
Operating Costs and Expenses:
Cost of Services (exclusive of depreciation and
amortization shown separately below) .................. 272,850 258,487 534,216 508,878
Selling, General and Administrative Expenses ............ 138,489 113,055 258,149 210,897
Write-down for impairment of assets ..................... 48,267 -- 48,267 --
Non-cash Compensation Expense ........................... 3,071 2,926 6,126 2,926
Depreciation and Amortization ........................... 51,910 43,004 101,162 80,083
--------- --------- --------- ---------
Total Operating Costs and Expenses ...................... 514,587 417,472 947,920 802,784
--------- --------- --------- ---------
Loss From Operations .................................... (124,040) (49,772) (181,490) (94,803)
Interest Income ......................................... 4,014 5,039 8,888 11,094
Interest Expense ........................................ (40,267) (31,276) (78,825) (60,274)
Other Income (Expense)- Net ............................. (3,766) 65 (4,159) 180
Foreign Exchange Gain- Net .............................. 3,625 4,340 8,674 14,028
Minority Interest ....................................... 4,648 (609) 7,980 822
Loss in Equity Interest of
Unconsolidated Subsidiaries - Net ..................... (2,499) (152) (4,426) (376)
Income Tax Expense ...................................... (1,144) (490) (1,314) (490)
--------- --------- --------- ---------
Net Loss ................................................ $(159,429) $ (72,855) $(244,672) $(129,819)
========= ========= ========= =========
Basic and Diluted Net Loss Per Share of Common Stock .... $ (2.81) $ (1.36) $ (4.37) $ (2.44)
Weighted Average Number of Shares of Common Stock
Outstanding ........................................... 56,674 53,394 56,026 53,163
</TABLE>
See notes to condensed consolidated financial statements.
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RSL COMMUNICATIONS, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
----------------
June 30,
--------
2000 1999
---- ----
<S> <C> <C>
Net loss ........................................................ $(244,672) $(129,819)
Depreciation and amortization ................................... 101,162 80,083
Working capital change and other ................................ (79,934) (29,892)
--------- ---------
Net cash used in operations ................................ (223,444) (79,628)
--------- ---------
Acquisitions of subsidiaries .................................... (82,152) (32,837)
Purchase of property and equipment .............................. (102,409) (89,375)
Purchase of marketable securities ............................... (522) (23,399)
Other ........................................................... 323 11,355
--------- ---------
Net cash used in investing activities ...................... (184,760) (134,256)
--------- ---------
Proceeds from the issuance of Notes ............................. 197,123 169,748
Proceeds from the issuance of preferred shares .................. 115,000 --
Payment of underwriting fees and expenses and offering costs .... (10,792) (256)
Proceeds from long term debt .................................... 10,104 --
Proceeds from the issuance of short term debt ................... -- 33,335
Payment of notes payable and debt ............................... (6,270) (27,699)
Proceeds from issuance of Class A shares ........................ 398 1,475
--------- ---------
Net cash provided by financing activities ....................... 305,563 168,696
--------- ---------
Decrease in cash and cash equivalents ........................... (102,641) (45,188)
Effects of foreign currency on cash and cash equivalents ........ (6,375) (1,931)
Cash and cash equivalents at beginning of period ................ 238,724 367,823
--------- ---------
Cash and cash equivalents at end of period ...................... $ 129,708 $ 320,704
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
INFORMATION:
Cash paid for interest .......................................... $ 51,631 $ 37,523
========= =========
SUPPLEMENTAL DISCLOSURE OF NON-
CASH INVESTING AND FINANCING ACTIVITIES:
Exchange of Class A Common Stock for stock of subsidiaries ...... $ 28,712 $ 34,611
========= =========
Assets acquired under capital lease obligations ................. $ 8,394 $ 3,934
========= =========
Stock of subsidiaries issued .................................... $ 10,450 $ --
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
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RSL COMMUNICATIONS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2000
1. BASIS OF PRESENTATION
The condensed consolidated financial statements of which these notes are part
have been prepared by us and RSL Communications PLC ("RSL PLC") and RSL COM
U.S.A., Inc. ("RSL COM U.S.A"), our subsidiaries, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations; however, in the opinion of our
management, the Condensed Consolidated Financial Statements include all
adjustments, consisting only of normal recurring accruals, necessary to present
fairly the financial information for such periods. These Condensed Consolidated
Financial Statements should be read in conjunction with our Consolidated
Financial Statements and the notes thereto included in our Annual Report on Form
10-K, as amended, for the year ended December 31, 1999.
2. COMPREHENSIVE LOSS
Comprehensive loss consists of net loss and other gains and losses affecting
shareholder's equity that, under generally accepted accounting principles, are
excluded from net income. For us, such items consist of foreign currency
translation gains and losses and unrealized gains and losses on marketable
equity investments.
The components of total comprehensive loss for interim periods are presented in
the following table:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
(unaudited) (unaudited)
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Net Loss ...................................... $(159,429) $ (72,855) $(244,672) $(129,819)
Other Comprehensive Income (Loss)
Foreign currency translation adjustments .... (22,038) 5,633 (16,512) (1,619)
Unrealized gain on securities ............... 2,421 349 2,428 341
--------- --------- --------- ---------
Total Comprehensive Loss ...................... $(179,046) $ (66,873) $(258,756) $(131,097)
========= ========= ========= =========
</TABLE>
3. NET LOSS PER SHARE
Net loss per share is computed on the basis of the weighted average number of
common shares outstanding during the period. Diluted loss per share amounts are
not presented because the inclusion of these amounts would be anti-dilutive.
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4. SUMMARIZED FINANCIAL INFORMATION
Presented below are condensed consolidating financial statement data as of and
for the six months and the quarter ended June 30, 2000. The notes issued by RSL
PLC are fully and unconditionally guaranteed by us and by RSL COM U.S.A. on a
joint and several basis.
<TABLE>
<CAPTION>
For the six months ended June 30, 2000
(unaudited) RSL COM Non-Guarantor RSL
RSL Ltd. RSL PLC U.S.A. Subsidiaries Adjustments Consolidated
-------- ------- ------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues .......... -- $ 473,771 $ 177,378 $ 115,281 -- $ 766,430
Operating
Expenses .......... 11,510 578,275 195,647 164,508 (2,020) 947,920
(Loss)/Income from
Operations ........ (11,510) (104,504) (18,269) (49,227) 2,020 (181,490)
Other
Inc./(Exp.) ....... 6,004 (69,427) (4,334) 5,587 (1,012) (63,182)
Net (Loss)/Income $ (5,506) $(173,931) $ (22,603) $ (43,640) $ 1,008 $(244,672)
-----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
For the quarter ended June 30, 2000
(unaudited) RSL COM Non-Guarantor RSL
RSL Ltd. RSL PLC U.S.A. Subsidiaries Adjustments Consolidated
-------- ------- ------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues .......... -- $ 241,586 $ 88,020 $ 60,941 -- $ 390,547
Operating
Expenses .......... 8,562 318,530 96,496 92,711 (1,712) 514,587
(Loss)/Income from
Operations ........ (8,562) (76,944) (8,476) (31,770) 1,712 (124,040)
Other
Inc./(Exp.) ....... 2,672 (33,622) (3,939) 1,498 (1,998) (35,389)
Net Loss .......... $ (5,890) $(110,566) $ (12,415) $ (30,272) $ (286) $(159,429)
</TABLE>
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<TABLE>
<CAPTION>
(unaudited) RSL COM Non-Guarantor RSL
RSL Ltd. RSL PLC U.S.A. Subsidiaries Adjustments Consolidated
----------- ----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Curr. Assets $ 1,213,309 $ 400,214 $ 98,525 $ 145,930 $(1,206,158) $ 651,820
PP&E - net 3,762 324,423 90,185 55,138 -- 473,508
Goodwill
& Other
Intangibles-net 38,004 436,762 167,604 58,823 701,193
Other Assets 277,100 22,000 852 38,501 (312,576) 25,877
------------------------------------------------------------------------------------
$ 1,532,175 $ 1,183,399 $ 357,166 $ 298,392 $(1,518,734) $ 1,852,398
------------------------------------------------------------------------------------
Liabilities &
Shareholders
Equity
(Deficit)
Notes Payable, $ 0 $ 17,127 $ 3,625 $ 77 $ 0 $ 20,830
Current
Portions of
Capital Lease
Obligations
and Long Term
Debt
Current 1,092,916 (102,672) 477,959 190,725 (1,225,312) 433,616
Liabilities
Long-term 0 424,350 0 24,303 (448,653) 0
funding -
Parent
Non-current 0 1,518,717 10,667 7,829 35,571 1,572,784
Portion of
Capital Lease
Obligations,
Long-term debt
and Other
Shareholders 439,259 (674,123) (135,086) 75,458 119,660 (174,832)
Equity
(Deficit)
Total
Liabilities &
Stockholders' ------------------------------------------------------------------------------------
Equity (Deficit) $ 1,532,175 $ 1,183,399 $ 357,166 $ 298,392 $(1,518,734) $ 1,852,398
------------------------------------------------------------------------------------
</TABLE>
As of June 30, 2000
<TABLE>
<CAPTION>
(unaudited) RSL COM Non-Guarantor RSL
RSL Ltd. RSL PLC U.S.A. Subsidiaries Consolidated
-------- ------- ------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash used in
Operating Activities (15,567) (187,251) 2,582 (23,208) (223,444)
Net cash used in
Investing Activites (16,925) (100,983) (5,914) (60,938) (184,760)
Net cash provided by
Financing Activities 36,315 272,084 (2,739) (97) 305,563
</TABLE>
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5. ALLIANCE AND ACQUISITIONS
In May 2000, we formed an alliance with Seat Pagine Gialle Spa. (SEAT), a
leading publisher of telephony directories and a leading Internet business in
Italy. Upon termination of the joint venture alliance with SEAT, our subsidiary,
RSL COM Germany, will have the right, beginning in January 2001, to sell to
SEAT, and SEAT will have the right to purchase from us, all of its remaining
equity interest in Telegate Holding. The amount of consideration upon the
exercise of the option will be based on the average value of a telegate share
during a predetermined reference period. The total consideration we will receive
as a result of the transaction will be between approximately 415 million Euros
and 525 million Euros depending on the average price of a telegate share during
this reference period.
In April 2000, we acquired the remaining 67% outstanding interest in Consorcio
Europeo para las Telecomunicaciones S.A. (Cetel) not owned by us. We completed
the acquisition of the 70% interest in ALO Comunicaciones, S.A. (ALO) that was
not already owned by Cetel. The shareholders of Cetel and ALO received
approximately 7% of the total equity in our subsidiary, RSL COM Spain
(subsequently renamed Alo Comunicaciones) and cash as consideration for the
acquisitions.
In April 2000 we completed the purchase of the remaining 8.5% of RSL Com Asia
Ltd. for cash, giving us 100% interest. RSL Com Asia is the parent company for
our Australian operation, which is now known as ComVergent Telecommunications,
Limited.
In May 2000, we completed the purchase of REDNET Limited, a business to business
internet service provider in the United Kingdom. We purchased REDNET for
consideration consisting of cash and Class A common shares.
In May 2000, we completed the purchase of Voyager Internet Limited and Voyager
Networks Limited, ISPs specializing in network design and business internet
access in the United Kingdom. We purchased Voyager for consideration consisting
of cash and Class A common shares.
In June 2000, we completed the purchase of INS, Informations- und
Netzwerksysteme EDV- Beratungs- und Handelsgesellschaft m.b.H for consideration
consisting of Class A common shares. INS is an Austrian internet service
provider.
In the aggregate, we utilized cash of approximately $76.7 million, an aggregate
of 2.3 million Class A common Shares and recorded a preliminary estimate of
goodwill of $120.5 million in connection with these acquisitions.
6. SUBSEQUENT EVENTS
In July 2000, we announced that we intend to sell or close our operations in
Canada, Japan and Hong Kong. In connection with this decision, as of June 30,
2000, we recorded a one-time, non-cash asset write-down for the impairment of
assets of $48.3 million. These assets are primarily property, plant and
equipment and the amount of the impairment was based upon fair market value, as
determined by current estimates of realizable value upon sale to third parties.
This write down impacts the results of the North American and Asia/Pacific/Other
operating segments. These three operations had annual revenues of $52.3 million
in 1999 and had revenues for the six months ended June 30, 2000 of approximately
$28.0 million, with substantially all of the revenue having been generated in
Canada.
In July 2000 we signed an agreement with our Chairman and principal shareholder,
Ronald S. Lauder, for an unsecured loan facility totaling $100 million,
available until June 30, 2001. We will pay LIBOR plus 4.5% on any amounts drawn
under the facility and will issue to Mr. Lauder warrants to purchase 75,000
Class A common shares at $11.50 per share for each $5 million drawn under the
facility. The Company will only issue warrants to Mr. Lauder if loans are drawn
on the facility.
In August 2000, we announced the appointment of Paul B. Domorski as our
President and CEO, effective August 21, 2000. Mr. Domorski, formerly President
of British Telecom Syncordia Solutions, succeeds Itzhak Fisher, who will remain
as a consultant to our board of directors. Mr. Domorski's office will be located
in the
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United Kingdom. In addition, Donald R. Shassian, our Chief Operating Officer and
former Chief Financial Officer, will be leaving our company after a transition
period to pursue other opportunities.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
We are a growing facilities-based communications company that provides a broad
range of voice, data / Internet and value-added products and service solutions
primarily to small and medium-sized businesses and residential customers in
selected markets around the globe. We have built a local presence and currently
have revenue-generating operations in Australia, Austria, Belgium, Denmark,
Finland, France, Germany, Italy, Luxembourg, Mexico, the Netherlands, New
Zealand, Portugal, Spain, Sweden, Switzerland, the United Kingdom, the United
States and Venezuela. Through our subsidiary, deltathree.com, we also own and
operate a privately-managed Internet Protocol (IP) telephony network with 71
points of presence in 36 countries around the world. deltathree.com completed
its initial public offering on November 29, 1999 and as a result we currently
own approximately 68% of the equity of deltathree.com. Accordingly, we will
continue to report the financial results of deltathree.com as a part of our
consolidated results of operations. Prior to its initial public offering, we
combined results from deltathree.com's operation with our other operations. We
currently present the results of deltathree.com's operations as a separate
segment.
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Consolidated Results Of Operations For The Three Month And Six Month Periods
Ended June 30, 2000 Compared To The Three Month And Six Month Periods Ended June
30, 1999
Revenues
Revenues from our voice services are derived primarily from the number of
minutes of use (or fractions thereof) that we bill and are recorded upon
completion of telephone calls. We also derive revenues from prepaid calling
cards. Revenues from prepaid calling cards are recognized at the time of usage
or upon expiration of the card. Data service revenue is derived from both fixed
monthly charges and variable charges based on usage. We maintain local market
pricing structures for our services and generally price our services at a
discount to prices charged by the local incumbent telecommunications operators
and other 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, which we expect will be somewhat offset by increased
minute volumes and decreased operating costs per minute.
Revenues increased to $390.5 million for the three months ended June 30, 2000
compared to $367.7 million for the three months ended June 30, 1999, an increase
of 6.2%. The general strengthening of the U.S. dollar over the past year
relative to most foreign currencies in which we operate negatively impacted the
growth in revenues. Had we applied the second quarter 1999 foreign currency
exchange rates to the second quarter 2000 local currency amounts, reported
revenue would have increased by an additional $28 million. For the six months
ended June 30, 2000, revenues increased to $766.4 million, compared to $708.0
million for the six months ended June 30, 1999, an increase of 8.3%. This
increase is due primarily to the growth in customers in our European operations
partially offset by declines in certain segments of our North American
operations. Had we applied the first half 1999 foreign currency exchange rates
to the first half 2000 local currency amounts, revenue would have increased an
additional $48.6 million.
Cost of Services (exclusive of depreciation and amortization shown separately
below)
Our cost of services is primarily comprised of costs associated with gaining
local access and the transport and termination of calls over our
telecommunications network, 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. For certain key markets, we plan to make significant
investments in indefeasible rights of use, or IRUs, minimum investments units,
or MIUs and domestic circuits and, as a result, expect that an increasing amount
of out total operating costs will become fixed, as the volume of our calls
carried over our own facilities increases. As we migrate increasing amounts of
traffic from leased facilities to owned facilities, we experience improving
operating results in those operations where such traffic migration occurs. The
depreciation expense with respect to our MIUs and IRUs is not accounted for in
cost of services. We have directly linked certain of our local operators in
Europe and the United States utilizing lines leased on a fixed-cost,
point-to-point basis and utilizing MIUs and IRUs. To the extent traffic can be
transported between local operators over MIUs and IRUs, 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 MIUs or IRUs. Our cost of transport and termination will
decrease to the extent that we are able to bypass the settlement rates
associated with the transport of international traffic.
We are expanding and upgrading our Pan-European network connecting ten European
international switching centers in nine countries. We expect that the new
network will replace more expensive, short-term leases for lower capacity
circuits, will improve our least-cost routing efficiency and will handle the
growing number of minutes of traffic on our European network. It is expected
that the network will be phased-in in three regions of
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Europe, although the phase-in has been somewhat delayed from our original
expectations due to technical difficulties encountered by our vendor, and is now
expected to be implemented in the fourth quarter of 2000 and the first quarter
of 2001.
While we intend to purchase or construct additional international transmission
facilities where such facilities are available for purchase or may be
constructed and such investments are cost effective and warranted by traffic
patterns, a significant percentage of our international transmission facilities
will continue to be leased on a variable cost basis. Accordingly, variable costs
will continue to be a majority of our cost of services for the foreseeable
future.
Our cost of services is primarily affected by the volume of traffic relative to
our owned facilities and facilities leased on a point-to-point, fixed -cost
basis and capacity leased on a per minute basis with volume discounts. To the
extent that volume exceeds capacity on leased facilities that have been arranged
for in advance, we are forced to acquire capacity from alternative carriers on a
spot rate per-minute basis at a higher cost. Acquiring capacity on such an
overflow basis has a negative impact on margins, but enables us to maintain
uninterrupted service to our customers.
Cost of services increased to $272.9 million for the three months ended June 30,
2000 from $258.5 million for the three months ended June 30, 1999, an increase
of 5.6%. Cost of services for the six months ended June 30, 2000 were $534.2
million, as compared to $508.9 million for the same period last year, an
increase of 5.0%. However, as a percentage of revenues, cost of services
decreased to 69.9%, for the second quarter of 2000 compared to 70.3% for the
second quarter of 1999. For the first six months of 2000, cost of services as a
percentage of revenue decreased to 69.7%, as compared to 71.9% for the same
period last year. The decrease in cost of services as a percentage of revenues
is primarily attributable to increased higher-margin commercial accounts in
North America and Australia, partially offset by declines in Europe.
Effect of Deregulation on Cost of Services (exclusive of depreciation and
amortization)
Our cost structure varies from country to country and is significantly impacted
by the extent of regulation in place in each country. In general, our cost
structure is lower in countries that have been substantially deregulated than in
those which are only partially deregulated. In countries that are not
substantially deregulated, our access to the local network is through more
expensive means (i.e. leased lines or dial-in access). This results in higher
costs to us for carrying international traffic into or out of such a country. In
addition, local regulations in certain 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.
Further deregulation in countries in which we operate is expected to better
enable us to interconnect our switches with the local exchange network and to
purchase our own international facilities. We believe that as a result of
further deregulation, particularly in certain countries in which we operate, our
cost structure will improve. Deregulation in a particular country is also
expected to permit us to terminate international inbound traffic in such country
which we expect will result in an improved cost structure for us as a whole.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses consist primarily of costs
incurred to gain new customers, introduce new products and services, provide
ongoing customer service and continue the expansion of RSL-NET. These costs are
principally comprised of costs associated with employee compensation, occupancy,
insurance, professional fees, sales and marketing (including sales commissions)
and bad debt expenses. In
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addition, as we commence operations in different countries we incur significant
start-up costs, particularly for hiring, training and retention of personnel,
leasing of office space and advertising.
We have grown by establishing operations in countries that were 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 have involved substantial start-up costs in advance of revenue. Upon
the commencement of such operations, we generally have incurred additional fixed
costs to facilitate growth. We expect that during periods of significant
expansion, selling, general and administrative expenses will increase
materially. Accordingly, our consolidated results of operations will vary
depending on the timing and speed of our expansion strategy and, during a period
of rapid expansion, will not necessarily reflect the performance of our more
established local operators.
Selling, general and administrative expense for the three months ended June 30,
2000 increased by $25.4 million, or 22.5%, to $138.5 million from $113.1 million
for the three months ended June 30, 1999. For the six months ended June 30,
2000, selling, general and administrative expense increased to $258.1 million,
from $210.9 million for the six months ended June 30, 1999, an increase of $47.3
million or 22.4%. Selling, general and administrative expense as a percentage of
revenues increased to 35.5% in the second quarter of 2000 compared to 30.7%, in
the second quarter 1999. Selling, general and administrative expense as a
percentage of revenues increased to 33.7% for the first six months of 2000
compared to 29.8%, for the first six months of 1999. The percentage increase is
due to significant increases in costs at our non-core subsidiaries
deltathree.com, telegate AG, Australia and Canada. The increase is also
attributable to the impact of our recent acquisitions in Spain, and the expense
relating to a one-time corporate marketing campaign.
Write-Down for Impairment of Assets
On July 17, 2000, we announced our intention to sell or close our operations in
Canada, Japan and Hong Kong. In connection with this decision, as of June 30,
2000, we recorded a one-time, non-cash asset write-down for the impairment of
assets of $48.3 million. These assets are primarily property, plant and
equipment and the amount of the impairment was based upon fair market value, as
determined by current estimates of realizable value upon sale to third parties.
This write down impacts the results of the North American and Asia/Pacific/Other
operating segments. These three operations had annual revenues of $52.3 million
in 1999 and had revenues for the six months ended June 30, 2000 of approximately
$28.0 million, with substantially all of the revenue having been generated in
Canada.
Non-cash Compensation Expense
Non-cash compensation expense relates to variable stock incentive awards that
were previously granted to employees in various subsidiaries, primarily
deltathree.com. Non-cash compensation expense for the second quarter and first
six months of 2000 was $3.1 million and $6.1 million, respectively compared to
$2.9 million for the second quarter and six months ended June 30,1999.
13
<PAGE>
Special Charge
During the third quarter of 1999, we recorded a special charge of approximately
$32.1 million, primarily for consolidating locations, streamlining operations,
discontinuing certain prepaid calling card plans and exiting the telemarketing
business. The special charge was comprised of approximately $13.1 million for
terminating various operating leases, $12.4 million for the severance of 74
telemarketing employees, as well as world-wide staff reductions of 115
employees, and $6.6 million for the write down of certain telemarketing and
prepaid calling card assets of which $2.0 million was associated with the
write-off of inventory. As of June 30, 2000 the reserve balance was $8.1
million, of which $5.6 million is to terminate network and operating leases and
$2.5 million is for severance payments to be paid out during the remainder of
2000 in accordance with local legal requirements to former employees who have
already been severed.
Depreciation and Amortization Expense
Depreciation and amortization expense increased 20.7% to $51.9 million for the
three months ended June 30, 2000 from $43.0 million for the three months ended
June 30, 1999. Depreciation and amortization expense increased 26.3% to $101.2
million for the six months ended June 30, 2000 from $80.1 million for the six
months ended June 30, 1999.This increase is primarily attributable to the
increased amortization of goodwill and other intangibles recorded as a result of
our acquisitions and higher depreciation due to increased capital expenditures.
Interest Income
Interest income decreased from $5.0 million for the three months ended June 30,
1999 to $4.0 million for the three months ended June 30, 2000. Interest income
decreased from $11.1 million for the six months ended June 30, 1999 to $8.9
million for the six months ended June 30, 2000. This decline is primarily a
result of a decline in the average outstanding balance of interest-bearing
investments in the first six months of 2000 compared to the same period last
year.
Interest Expense
Interest expense increased to $40.3 million for the three months ended June 30,
2000 from $31.3 million for the three months ended June 30, 1999. For the six
months ended June 30, 2000, interest expense increased to $78.8 million, from
$60.3 million for the first six months of 1999. The increase is primarily a
result of the $175 million 9 7/8% Senior Notes issued in May 1999 and the $100
million and 100 million Euro-denominated 12 7/8% Senior Notes issued in February
2000.
Other Income (Expense) - Net
Other income (expense )- net for the three and six months ended June 30, 2000
primarily reflects the accrual of regular quarterly distributions on our $115
million 7 1/2% Series A Convertible Preferred Shares which we issued on February
22, 2000.
Foreign Exchange
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
14
<PAGE>
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 $22.0 million as a
component of equity as of June 30, 2000. Such amount is recorded upon the
translation of the foreign subsidiaries' financial statements into U.S. dollars,
and is dependent upon the various foreign exchange rates and the magnitude of
the foreign subsidiaries' financial statements.
We incur settlement costs when we exchange traffic via operating agreements with
foreign correspondents. These costs currently represent a small portion of total
costs, however, as our international operations increase, we expect that these
costs will become a more significant portion of our cost of services. Such costs
are settled by utilizing a net settlement process with our foreign
correspondents comprised of special drawing rights ("SDRs"). SDRs are the
established method of settlement among international telecommunications
carriers. The SDRs are valued based upon a basket of foreign currencies and we
believe that this mitigates, to some extent, our foreign currency exposure. We
have monitored and will continue to monitor our currency exposure.
We recorded a foreign exchange gain of $3.6 million for the three months ended
June 30, 2000 compared to $4.3 million for the three month period ended June 30,
1999. For the six months ended June 30, 2000 we recorded a foreign exchange gain
of $8.7 million compared to $14.0 million for the six month period ended June
30, 1999. The gains are primarily a result of the decline in the value of the
deutsche mark against the U.S. dollar associated with our 1998 deutsche mark
denominated Senior Discount Notes. Also contributing to the foreign exchange
gain during 2000 is the gain in U.S. dollar terms associated with the decline in
the value of the Euro associated with our Euro-denominated debt issued in
February 2000.
Loss in Equity Interest of Unconsolidated Subsidiaries - Net
We recorded a loss in equity interest of unconsolidated subsidiaries - net of
$2.5 million for the three months ended June 30, 2000 compared to a net loss of
$0.2 million for the three months ended June 30, 1999. For the six months ended
June 30, 2000 we recorded a loss in equity interest of unconsolidated
subsidiaries - net of $4.4 million, compared to a net loss of $0.4 million
recorded for the six months ended June 30, 1999. This increased loss reflects
additional allocable loss in the investments of Maxitel Servicos e Gestao de
Telecommunicacoes, S.A., a Portugese international telecommunications carrier,
and the recording of losses associated with Banda Ancha, a consortium formed in
April 2000 to develop an LMDS network in Spain.
Net Loss
The net loss increased to $159.4 million for the three months ended June 30,
2000, as compared to the net loss of $72.9 million for the three months ended
June 30, 1999. For the six months ended June 30, 2000, the net loss increased to
$244.7 million, as compared to the net loss of $129.8 million for the same
period last year. The increase is due to the factors described above, and in the
following discussion of segment results. In particular, results were negatively
impacted by our decision to sell or close our operations in Canada, Hong Kong
and Japan, which resulted in the non-cash charge of $48.3 million, discussed
above. Net loss per share was $2.81.
15
<PAGE>
Segment Information
European Operations
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
(unaudited)
(in thousands, except percentages)
<S> <C> <C> <C> <C>
Revenue ............................................. $ 226,801 $ 178,303 $ 448,878 $ 330,414
Operating costs and expenses:
Cost of services (exclusive of depreciation and
amortization shown separately below) ................ 151,001 113,611 301,005 212,937
--------- --------- --------- ---------
Gross margin ........................................ 75,800 64,692 147,873 117,477
Selling, general and administrative expenses ........ 75,365 58,396 144,631 109,415
Non-cash compensation ............................... -- -- 276 --
Depreciation and amortization ....................... 21,320 14,148 40,093 27,471
--------- --------- --------- ---------
Loss from operations ................................ $ (20,885) $ (7,852) $ (37,127) $ (19,409)
========= ========= ========= =========
Other Financial Data:
EBITDA (as defined) (1) ............................. $435 $6,296 $3,242 $8,062
Revenue as a percentage of consolidated revenue ..... 58.1% 48.5% 58.6% 46.7%
Gross margin as a percentage of revenue ............. 33.4% 36.3% 32.9% 35.6%
Selling, general and administrative expense as a
percentage of revenue ............................. 33.2% 32.8% 32.2% 33.1%
</TABLE>
----------
(1) EBITDA, as used herein, consists of loss from operations before
depreciation and amortization and also excludes non-cash compensation
expense. It 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 definition of EBITDA may be different than that used by
other companies.
We derive our European revenues primarily from the provision of international
and domestic long distance voice services, including directory information
services in Germany and the sale and resale of wireless services in certain
countries in which we operate. We have introduced several new product groups,
such as data, Internet, value-added services and web based applications and
broadened existing services such as fixed voice and wireless services.
Substantially all revenues from our European operations are derived from
commercial sales to end-users. Sales are targeted towards small to medium-sized
corporate customers, and niche consumer markets. To reduce our credit risk to
such niche consumer markets, we primarily offer prepaid products to these
targeted consumers.
Revenue from our European operations increased by 27.2% to $226.8 million for
the three months ended June 30, 2000 compared to $178.3 million for the same
period in 1999. Revenue from our European operations increased by 35.9% to
$448.9 million for the six months ended June 30, 2000 compared to $330.4
16
<PAGE>
million for the same period in 1999.The increase in our European revenues was
attributable to a substantial increase in the number of business, residential
and wireless customers. The total number of customers in Europe increased by
378,418 or 76.4% from 495,511 as of June 30, 1999 to 873,929 as of June 30,
2000. European revenues as a percentage of consolidated revenues increased from
48.5% in the second quarter of 1999 to 58.1%, in the second quarter of 2000. For
the six months ended June 30, 2000 European revenues represented 58.6% of
consolidated revenue, as compared to 46.7% during the same period last year.
This growth is consistent with our strategy of expansion in Europe as well as
the decision made in October 1999 to discontinue certain prepaid calling card
plans and exit the telemarketing business in the United States. Europe currently
represents our largest market segment.
Cost of services increased 32.9% to $151.0 million in the second quarter of 2000
from $113.6 million in the second quarter of 1999. Cost of services increased
41.4% to $301.0 million in the first six months of 2000 from $212.9 million in
the comparable period of 1999. Costs of services as a percentage of revenues in
the second quarter of 2000 was 66.6% compared to the 63.7% recorded in the
second quarter of 1999. The increase in the cost of services as a percentage of
revenue is primarily attributable to competitive pricing pressures particularly
in the United Kingdom and the absence of high margin revenues as a result of the
termination of the Debitel contract in October 1999.
Selling, general and administrative expense in the second quarter of 2000
increased to $75.4 million from $58.4 million in the second quarter of 1999. For
the first six months, selling, general and administrative costs increased to
$144.6 million, from $109.4 million for the same period last year. Selling,
general and administrative expenses as a percentage of revenue in the second
quarter of 2000 was 33.2% and for the first six months was 32.2%, as compared to
32.8% and 33.1% in the same periods last year. The increase in expenses during
the quarter relate primarily to the expansion into new markets by telegate, our
German directory services provider, as well as the impact of our recent
acquisitions of Cetel and Alo in Spain and their aggressive customer growth
strategy.
Depreciation and amortization in the second quarter of 2000 increased to $21.3
million from $14.2 million recorded in the second quarter of 1999. Depreciation
and amortization during the first six months increased to $40.0 million from the
$27.5 million recorded during the first six months of 1999. These increases were
primarily attributable to the amortization of intangible assets, principally
goodwill, recorded in connection with several acquisitions. Depreciation expense
also increased as a result of the substantial capital investment made over the
past year.
Net loss from European operations in the second quarter of 2000 increased to
$20.9 million from $7.9 million recorded in the second quarter of 1999. Year to
date net loss from European operations increased to $37.1 million, from $19.4
million for the same period last year. The decline reflects the substantially
higher revenue which was more than offset by the competitive pricing pressures,
the costs of expansion into new markets and the absence of the impact of the
Debitel contract.
17
<PAGE>
North American Operations
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
(unaudited)
(in thousands, except percentages)
<S> <C> <C> <C> <C>
Revenue ............................................. $ 102,804 $ 145,209 $ 202,271 $ 293,629
Operating costs and expenses:
Cost of services (exclusive of depreciation and
amortization shown separately below) ................ 83,845 118,019 161,129 238,190
--------- --------- --------- ---------
Gross margin ........................................ 18,959 27,190 41,142 55,439
Selling, general and administrative expenses ........ 22,522 29,834 40,957 58,743
Non-cash compensation ............................... 1,081 -- 1,373 --
Write-down for impairment of assets ................. 37,382 -- 37,382 --
Depreciation and amortization ....................... 11,536 10,325 23,358 22,592
--------- --------- --------- ---------
Loss from operations ................................ $ (53,562) $ (12,969) $ (61,928) $ (25,896)
========= ========= ========= =========
Other Financial Data:
EBITDA (as defined) (1) ............................. $(3,563) $(2,644) $185 $(3,304)
Revenue as a percentage of consolidated revenue ..... 26.3% 39.4% 26.4% 41.5%
Gross margin as a percentage of revenue ............ 18.4% 18.7% 20.3% 18.9%
Selling, general and administrative expense as
a percentage of revenue ........................... 21.9% 20.5% 20.2% 20.0%
</TABLE>
----------
(1) EBITDA, as used herein, consists of loss from operations before
depreciation and amortization. EBITDA has also been normalized to exclude
non-cash compensation expense and the write-down for impairment of assets
in Canada. 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 definition of EBITDA may be different than that used by
other companies.
Our North American revenues result primarily from the sale of long distance
voice services on a retail basis to commercial customers, on a wholesale basis
to other carriers and to a lesser extent on a bulk discount basis to
distributors of prepaid calling cards. We discontinued certain unprofitable
prepaid calling card plans and our telemarketing business beginning in September
1999. We also generate revenues from data, Internet and other value-added
services in North America. We experience significant month to month changes in
revenues generated by our carrier customers (i.e. customers who acquire our
services for the purpose of reselling such services on a wholesale basis to
other carriers or on a retail basis to end users). We believe such carrier
customers will react to temporary price fluctuations and spot market
availability that will impact our carrier revenues. Over the past two years, we
have shifted our marketing focus in the United States to focus on small and
medium-sized businesses and have restructured our pricing of wholesale services
to other carriers.
On July 17, 2000, we announced our intention to sell our Canadian operations. In
connection with this decision, we have taken a one-time, non-cash asset
write-down for the impairment of assets of $37.4 million that is reflected as a
one-time charge to second quarter 2000 earnings. These assets are primarily
property, plant and equipment and the amount of the impairment was based upon
fair market value, as determined by current estimates of realizable value upon
sale to a third party. The Canadian operations had annual revenues of $48.5
18
<PAGE>
million in 1999 and had revenues and operating losses for the six months ended
June 30, 2000 of $24.9 million and $6.3 million, respectively. Canada's
increasing EBITDA losses and operating losses primarily reflect its attempt to
expand into Canada's eastern markets.
Revenue from our North American operations decreased to $102.8 million for the
three months ended June 30, 2000 compared to $145.2 million for the same period
in 1999, a 29.2% decrease primarily as a result of our discontinuance of certain
unprofitable prepaid calling card plans and telemarketing businesses beginning
in September 1999. For the six months ended June 30, 2000 North American
revenues were $202.3 million, as compared to $293.6 million for the same period
last year. The revenue decline was also partially attributable to reduced
low-margin carrier revenues. The number of residential and business customers in
North America declined 30.0% from 177,487 as of June 30, 1999 to 124,170 as of
June 30, 2000.
North American revenues as a percentage of consolidated revenues decreased from
39.4% in the second quarter of 1999 to 26.3% in the second quarter of 2000. On a
year to date basis, North American revenues as a percentage of consolidated
revenues decreased from 41.5% last year to 26.4% in 2000. This decline is a
result of our effort to reduce our dependence on certain prepaid and
telemarketing businesses and low-margin wholesale markets, and the expansion of
our presence in Europe.
Cost of services decreased 29.0% to $83.8 million in the second quarter of 2000
from $118.0 million in the second quarter of 1999. The decrease is primarily a
result of lower revenues. Cost of services as a percentage of revenues in the
second quarter of 2000 was 81.6%, compared with the 81.3% in the second quarter
of 1999. This increase is primarily due to the expansion efforts in the eastern
portion of Canada. Excluding the Canadian operation, cost of services as a
percentage of revenue improved as a result of cost containment efforts and the
discontinuance of lower margin sales in the United States. Year to date, cost of
services as a percentage of revenues was 79.7%, as compared to 81.1% in the same
period last year. This decline is primarily due to the focus on more profitable
customer segments.
Selling, general and administrative expenses in the second quarter of 2000
decreased to $22.5 million from $29.8 million in the second quarter of 1999. On
a year to date basis, selling, general and administrative expenses decreased to
$41.0 million, from $58.7 million for the same period last year. Selling,
general and administrative expenses as a percentage of revenues, increased to
21.9% in the second quarter of 2000 as compared to 20.5% recorded in the second
quarter of 1999, due to the expansion efforts of our Canadian operations. Year
to date, selling, general and administrative expenses remained essentially
unchanged from the same period last year.
Depreciation and amortization in the second quarter and the first six months of
2000 were $11.5 million and $23.4 million, respectively. For the same periods
last year, depreciation and amortization were $10.3 million for the second
quarter and $22.6 million for the first six months. The increase is primarily
due to additional capital investment made over the last year.
Loss from operations in North America increased from $13.0 million in the second
quarter of 1999 to $52.5 million in the second quarter of 2000. For the first
six months of 2000, loss for operations in North America increased to $60.8
million, from $25.9 million last year. The increase is primarily due to the
asset impairment charge pertaining to the disposition of our Canadian
operations. Excluding the impairment charge, loss from operations for the first
six months of 2000 was $23.5 million, an improvement from the $25.9 million in
the same period last year.
19
<PAGE>
Asia/Pacific and Other Operations
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
(unaudited)
(in thousands, except percentages)
<S> <C> <C> <C> <C>
Revenue ............................................. $ 57,705 $ 43,623 $ 110,232 $ 82,931
Operating costs and expenses:
Cost of services (exclusive of depreciation
and amortization shown separately below) ............ 36,774 26,309 69,559 56,979
--------- --------- --------- ---------
Gross margin ........................................ 20,931 17,314 40,673 25,952
Selling, general and administrative expenses ........ 22,555 17,626 43,002 30,568
Non-cash compensation expense ....................... -- -- 89 --
Write-down for impairment of assets ................. 10,885 -- 10,885 --
Depreciation and amortization ....................... 5,932 6,238 12,494 8,961
--------- --------- --------- ---------
Loss from operations ................................ $ (18,441) $ (6,550) $ (25,797) $ (13,577)
========= ========= ========= =========
Other Financial Data:
EBITDA (as defined) (1) ............................. $(1,624) $(312) $(2,329) $(4,616)
Revenues as a percentage of consolidated revenue .... 14.8% 11.9% 14.4% 11.7%
Gross margin as a percentage of revenue ............. 36.3% 39.7% 36.9% 31.3%
Selling, general and administrative expense as
a percentage of revenue ......................... 39.1% 40.4% 39.0% 36.9%
</TABLE>
----------
(1) EBITDA, as used herein consists of loss from operations before
depreciation and amortization. EBITDA has also been normalized to exclude
non-cash compensation expense and the write-down for impairment of assets
in Japan and Hong Kong. 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 definition of EBITDA may be different than
that used by other companies.
Asia/Pacific and other operations are comprised primarily of domestic and
international long distance and wireless services operations in Australia. This
segment also includes relatively small operations in Venezuela, Mexico, Japan
and Hong Kong.
On July 17, 2000, we announced our intention to sell or shut down our operations
in Japan and Hong Kong. In connection with this decision, we have taken a
one-time, non-cash asset write-down for the impairment of assets of $10.9
million that is reflected as a one-time charge to second quarter 2000 earnings.
These assets are primarily property, plant and equipment and the amount of the
impairment was based upon fair market value, as determined by current estimates
of realizable value upon sale to third parties. Together, these operations had
annual revenues of $1.1 million in 1999 and had revenues for the six months
ended June 30, 2000 of $0.1 million.
On May 2, 2000 we announced the launch of an initial public offering of our
Australian subsidiary, through which we intended to divest 100% of our interest
in this operation as part of the IPO. However, due to weakness in the IPO
market, we have now engaged an investment bank to seek a private buyer for our
Australian operations.
20
<PAGE>
Revenues from our Asia/Pacific and Other operations increased 32.3% to $57.7
million for the three months ended June 30, 2000 compared to $43.6 million for
the same period in 1999. Revenues for the six months ended June 30, 2000 were
$110.2 million, compared to $82.9 million for the same period in 1999, an
increase of $27.3 million or 32.9%. The increase is primarily due to customer
growth in Australia. The number of customers in Asia/Pacific and Other
operations increased by 101,628 or 51.6% from 197,004 as of June 30, 1999 to
298,632 as of June 30, 2000.
Revenues from our Asia/Pacific and Other operations as a percentage of
consolidated revenues increased to 14.8%, in the second quarter of 2000 from
11.9% the second quarter of 1999. For the first six months, revenues from
Asia/Pacific and Other operations represented 14.4% of consolidated revenues
compared to 11.7% during the same period last year. The increase is primarily as
a result of the growth in customers in Australia over the past year.
Cost of services in the second quarter of 2000 increased to $36.8 million from
$26.3 million recorded in the second quarter of 1999. For the six months ended
June 30, 2000 cost of services increased to $69.6 million from $57.0 million
recorded in the same period last year. These higher costs are primarily a result
of the higher revenues. Cost of services as a percentage of revenues in the
second quarter increased to 63.7% from 60.3% for the same period in 1999. This
increase is a result of a year to date reclassification in the second quarter of
last year of certain customer acquisition costs from cost of services to
selling, general and administrative expenses. On a year to date basis, cost of
services as a percentage of revenues declined from 68.7% in 1999 to 63.1% this
year.
Selling, general and administrative expense in the second quarter of 2000
increased to $22.6 million as compared to $17.6 million in the second quarter of
1999. For the six month period ended June 30, 2000, selling, general and
administrative expense increased to $43.0 million compared to $30.6 million for
the same period last year. Selling, general and administrative expenses as a
percent of revenues in the second quarter 2000 declined to 39.1% from 40.4% in
the second quarter 1999. The decline is a result of a year to date
reclassification in the second quarter of last year of certain customer
acquisition costs from cost of services to selling, general and administrative
expenses. For the first six months, selling, general and administrative expense
as a percentage of revenue increased from 36.9% in 1999 to 39.0% in 2000 due to
high customer acquisition costs in Australia.
Depreciation and amortization in the second quarter of 2000 decreased slightly
to $5.9 million from $6.3 million in the second quarter last year. For the first
six months of 2000, depreciation and amortization increased from $9.0 million in
1999 to $12.5 million in 2000 due to capital expenditures primarily in
Australia.
The loss from the Asia/Pacific and Other operations for the second quarter of
2000 increased to $18.5 million from $9.3 million recorded in the second quarter
of 1999. For the first six months of 2000, operating loss from Asia/Pacific and
Other operations increased to $25.8 million, compared to $13.6 million last
year. The increased operating losses are primarily due to the start-up costs
incurred in our Latin America operations and the asset impairment of our Japan
and Hong Kong operations, substantially offset by improved results in Australia.
21
<PAGE>
deltathree.com Operations (1)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
(unaudited)
(in thousands, except percentages)
<S> <C> <C> <C> <C>
Revenue ............................................. $ 3,237 $ 565 $ 5,049 $ 1,007
Operating costs and expenses:
Cost of services (exclusive of depreciation and
amortization shown separately below) ................ 1,592 548 2,523 771
-------- -------- -------- --------
Gross margin ........................................ 1,645 17 2,526 236
Selling, general and administrative expenses ........ 9,294 4,876 16,608 5,128
Non-cash compensation ............................... 1,758 -- 4,156 --
Depreciation and amortization ....................... 1,904 4,192 3,257 4,222
-------- -------- -------- --------
Loss from operations ................................ $(11,311) $ (9,051) $(21,495) $ (9,114)
======== ======== ======== ========
Other Financial Data:
EBITDA (as defined) (2) ............................. $ (7,649) $ (4,859) $(14,082) $ (4,892)
Revenues as a percentage of consolidated revenue .... 0.8% 0.2% 0.7% 0.1%
Gross margin as a percentage of revenue ............. 50.8% 3.0% 50.0% 23.4%
Selling, general and administrative expense as a
percentage of revenue ........................... 287.1% 863.0% 328.9% 509.2%
</TABLE>
----------
(1) The amounts presented are as included in our consolidated financial
results and differ from the separately reported results of deltathree.com
because our results exclude our intercompany transactions with
deltathree.com and because prior period results have been restated by
deltathree.com for items that were not material to our results.
(2) EBITDA, as used herein, consists of loss from operations before
depreciation and amortization and also excludes non-cash compensation
expense. 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 definition of EBITDA may be different than that used by
other companies.
We acquired a 51% controlling interest in deltathree.com in 1997 and the
remaining 49% interest by April 1998. In November 1999, deltathree.com sold 6.9
million shares of common stock in its initial public offering at a price of $15
per share and received net proceeds from the offering of $96.2 million. These
proceeds will enable deltathree.com to provide its growing base of subscribers
expanded worldwide infrastructure, new distribution channels as well as fund
additional marketing, advertising, promotional, and technological initiatives.
After the initial public offering of its common stock, we continue to own
approximately 68% of the equity of deltathree.com.
Revenues from deltathree.com operations increased from $0.6 million in the
second quarter of 1999 to $3.2 million in the second quarter of 2000, and from
$1.0 million for the first six months of 1999 to $5.0 million for the same
period this year. This increase is primarily as a result of integration service
fees received from deltathree.com's online partners as well as a greater number
of PC-to-phone and phone-to-phone calls being placed by an increasing user base.
Cost of services for deltathree.com increased from $0.5 million in the second
quarter and $0.8 million for the first six months of 1999 to $1.6 million for
the second quarter and $2.5 million for the first six months of 2000 primarily
as a result of higher revenues and the increased cost of terminating traffic.
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Selling, general and administrative expenses increased from $4.9 million in the
second quarter of 1999 to $9.3 million in the second quarter of 2000 and from
$5.1 million for the first six months of 1999 to $16.6 million for the first six
months of 2000, primarily due to the expansion of marketing, advertising and
promotional activities, and additional personnel and occupancy costs as the
Company executes its aggressive growth strategy.
Liquidity and Capital Resources
We have incurred significant operating losses, net losses and negative cash flow
from operations, due in large part to the start-up and development of our
operations and the development of RSL-NET, our integrated digital
telecommunications network. We expect that our net losses and negative cash flow
will continue as we continue to implement our growth strategy. Historically, we
have funded our losses and capital expenditures through borrowings, capital
contributions, and a portion of the net proceeds of prior securities offerings.
Cash used in operating activities for the six months ended June 30, 2000 totaled
$223.6 million compared with $79.6 million for the same period in 1999
reflecting the use of cash to fund operating losses, working capital
requirements, and higher quarterly cash interest payments. Capital expenditures,
which include assets acquired under capital lease obligations, for the six
months ended June 30, 2000 were $110.8 million compared with $93.3 million for
the comparable period in 1999. These capital expenditures are principally for
switches, fiber, and related telecommunications equipment as well as the
build-out of our Pan-European network. We also began the build-out of the
wireless local loop network in Spain as a result of the award of a license to a
consortium, called Banda Ancha, in which we have a 30% economic interest. Cash
expended for acquisitions were approximately $82.2 million during the six months
ended June 30, 2000 compared with $32.8 million for the first six months of
1999. At June 30, 2000, we had $197.4 million of working capital as compared to
$163.7 million of working capital at December 31, 1999. We are reviewing our
plans for ongoing cash expenditures, including for acquisitions and capital
expenditure, and expect to significantly reduce our expenditures through the end
of 2000 from historical levels.
Our indebtedness was approximately $1.5 billion at June 30, 2000, substantially
all of which represented long-term debt. Nearly all of our indebtedness is
attributable to the debt securities issued by RSL PLC and guaranteed by us and
RSL COM U.S.A. These debt securities include various Senior Notes and Senior
Discount Notes which are due from 2006 through 2010 (the "Notes"). The Notes
were issued under indentures containing certain restrictive covenants which
impose limitations on our ability to, among other things: (i) incur additional
indebtedness, (ii) pay dividends or make certain other distributions, (iii)
issue capital stock of certain subsidiaries, (iv) guarantee debt, (v) enter into
transactions with shareholders and affiliates, (vi) create liens, (vii) enter
into sale-leaseback transactions, and (viii) sell assets.
At June 30, 2000, our subsidiary telegate had $40 million of revolving credit
facilities with various banks that accrue interest at a weighted average rate of
approximately 6.0%, all of which was available. Our equipment vendors have
provided to certain of our subsidiaries $61.5 million in vendor financing
commitments to fund the purchase of additional switching and related
telecommunications capital equipment. At June 30, 2000, all available amounts
were utilized under these facilities at a weighted average interest rate of
approximately 8%.
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In February 2000, we issued 2.3 million Series A Cumulative Convertible
Preferred Shares ("Preferred Shares") at a price of $50 per share, and received
net proceeds of approximately $111 million. The Preferred Shares are convertible
at any time by the holders into our Class A common shares at a conversion rate
of 2.2584 shares for each Preferred Share subject to adjustments under certain
circumstances. Dividends accrue at the rate of 7 1/2% per year and are payable
quarterly in either cash or Class A common shares. Beginning in February 2005,
we will have the right to redeem some or all of the Preferred Shares at a
predetermined redemption price plus accrued dividends, if any. We will be
required to redeem any Preferred Shares still outstanding on February 1, 2012 at
a redemption price of $50 per share plus accrued dividends. Holders of the
Preferred Shares are generally not entitled to any voting rights. The Preferred
Shares, which have a liquidation value of $50 per share, rank junior to all of
our existing and future debts and obligations.
Concurrent with the issuance of the Preferred Shares, RSL PLC issued $100
million and 100 million Euro-denominated Senior Notes due 2010 (the "2000
Notes"). The 2000 Notes, which are guaranteed by us and by RSL COM U.S.A., a
wholly owned subsidiary of RSL PLC, bear interest at an annual rate of 12 7/8%.
The debt isssuances generated combined proceeds to us of approximately $192.2
million. In connection with the guarantee of the 2000 Notes, RSL COM U.S.A. also
became a guarantor of RSL PLC's previously issued and outstanding Notes.
On May 4, 2000, we formed an alliance with Seat Pagine Gialle Spa. (SEAT), a
leading publisher of telephony directories and a leading Internet business in
Italy. Upon termination of the joint venture alliance with SEAT, RSL COM Germany
will have the right, beginning in January 2001, to sell to SEAT, and SEAT will
have the right to purchase from us, all of its equity interest in Telegate
Holding. The amount of consideration upon the exercise of the option will be
determined based on the average value of a telegate share during a predetermined
reference period. The total consideration we will receive as a result of the
transaction will be between approximately 415 million Euros and 525 million
Euros depending on the average price of a telegate share during this reference
period.
On July 20, 2000 we signed an agreement with our Chairman and principal
shareholder, Ronald S. Lauder, for an unsecured loan facility totaling $100
million, available until June 30, 2001. We will pay LIBOR plus 4.5% on any
amounts drawn under the facility and will issue to Mr. Lauder warrants to
purchase 75,000 Class A common shares at $11.50 per share for each $5 million
drawn under the facility. The Company will only issue warrants to Mr. Lauder if
loans are drawn on the facility.
The limitation under our most restrictive covenants will likely prohibit us from
incurring any significant amount of additional indebtedness to fund net losses
unless we complete an equity offering or generate significant positive cash flow
from operations. We believe that the remaining net proceeds from the issuance of
the 2000 Notes and the Preferred Shares, together with availability under our
revolving credit facilities, short-term lines of credit and overdraft facilities
from local banks, and other cash resources, will be sufficient to fund our
capital expenditures and operations into 2001. We are also in the process of
selling certain of our non-core assets, including our operations in Canada,
Australia and Japan. We believe that any proceeds received from these potential
sales, in addition to proceeds received from the monetization of Telegate
Holding will be sufficient to fund our capital expenditures and operations into
2002. However, we may be required to raise additional capital regardless of
market conditions, if our plans or assumptions change or prove to be inaccurate,
we identify additional required or desirable infrastructure investments or
acquisitions, if we experience unanticipated costs or competitive pressures or
if the net proceeds from the issuance of our debt and equity securities,
together with other sources of liquidity otherwise prove to be insufficient.
Regardless, we plan to raise additional capital when and if market conditions
permit, to ensure that adequate funding is available for capital expenditures
and operations for the year 2001 and beyond.
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In order to reduce interest costs and improve our balance sheet, we may also
refinance or retire long-term debt on an opportunistic basis, including through
open market repurchases. Any repurchase will depend on market conditions and
other considerations, such as our cash requirements and the availability of
replacement debt or equity financing on acceptable terms.
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 specially designed as a hedge. SFAS
No.133 is effective for fiscal years beginning after June 15, 2000. Management
is 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.
Seasonality
Our European operations experience seasonality during January, August, October
and December, and, to a lesser extent, March, as 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.
Item 3. 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 $22 million as a component of equity
as of June 30, 2000. Such amount is recorded upon the translation of the foreign
subsidiaries' financial statements into U.S. dollars, and is dependent upon the
various foreign exchange rates and the magnitude of the foreign subsidiaries'
financial statements. For the three month period ended June 30, 2000, we had
recorded a foreign currency gain of approximately $3.6 million, primarily as a
result of the decrease in the Deutsche mark against the U.S. dollar in
connection with the DM296 million 10% Senior Discount Notes issued during 1998
and the decrease in the Euro against the U.S. dollar in connection with the 100
million Euro 12 7/8% Senior Notes issued in February 2000.
We incur settlement costs when we exchange traffic via 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. Such costs are settled by utilizing a net settlement process with our
foreign correspondents comprised of special drawing rights ("SDRs"). SDRs are
the established method of settlement among international telecommunications
carriers. The SDRs are valued based upon a basket of foreign currencies and we
believe that this mitigates, to some extent, our foreign currency exposure. We
have monitored and will continue to
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monitor our foreign currency exposure, and, if necessary, may enter into forward
contracts and/or similar instruments to mitigate the potential impacts of such
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 has secured on our current debt. We do not
currently anticipate entering into interest rate swaps and/or similar
instruments.
The carrying value of our cash and cash equivalents, accounts receivable,
accounts payable, marketable securities - available for sale, accrued expenses
and notes payable is a reasonable approximation of their fair value. On June 30,
2000, the fair value of our long-term debt (excluding capital lease obligations)
was estimated to be $888.5 million based on the overall weighted average rate of
our long-term debt of 10.7% and an overall weighted average maturity of 8.2
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 107 basis points in
interest rates (ten percent of our overall weighted average borrowing rate).
Such an increase in interest rates would result in approximately a $74.0 million
decrease in fair value of our long-term debt.
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PART II
OTHER INFORMATION
Item 2. Change in Securities and Use of Proceeds
In May 2000, we issued to Michael Revell and Robert Willans 275,722
and 264,910 Class A common shares, respectively, in connection with our
acquisition of REDNET Limited, a company controlled by Messrs. Revell and
Willans. The issuance of such Class A common shares was exempt from
registration under the Securities Act pursuant to Section 4(2) thereof.
In May 2000, we issued (i) 6,224 Class A common shares to each of
Jonathan Shaw, Christopher Windley and Nigel Williams and (ii) 531,651
Class A common shares to each of Walbrook Trustees (IOM) Limited re: Shaw
Settlement, Walbrook Trustees (IOM) Limited re: Windley Settlement and
Walbrook Trustees (IOM) Limited re: Williams Settlement, in connection
with our acquisition of Voyager Network Limited and Voyager Internet
Limited, companies controlled by such persons and entities. The issuance
of such Class A common shares was exempt from registration under the
Securities Act pursuant to Section 4(2) thereof.
In June 2000, we issued to Johannes Mistelbauer and Mesonic Holding
GmbH 61,707 and 58,129 Class A common shares, respectively, in connection
with our acquisition of INS Informations- und Netzwerksysteme EDV-
Beratungs- und Handelsgesellschaft m.b.H., a company controlled by Mr.
Mistelbauer and Mesonic. The issuance of such Class A common shares was
exempt from registration under the Securities Act pursuant to Section 4(2)
thereof.
Item 4. Submission of Matters to a Vote of Security Holders
On June 23, 2000, we held our annual general meeting of our
shareholders. At the meeting, there were present in person or by proxy a
total of 22,348,632 Class A common shares out of a total 31,438,603 shares
of such stock issued and outstanding and entitled to vote at the meeting,
and a total of 24,267,283 Class B common shares out of a total of
24,267,283 issued and outstanding and entitled to vote at the meeting (or,
in the aggregate 265,021,462 votes out of a total of 274,111,433 potential
votes).
The shareholders voted in favor of the election of the following
eight directors to serve on our Board of Directors until the next annual
general meeting of shareholders: Ronald S. Lauder, Itzhak Fisher, Jacob Z.
Schuster, Gustavo A. Cisneros, Fred H. Langhammer, Leonard A. Lauder,
Eugene A. Sekulow and Nicolas G. Trollope. Each of the nominees for
director received 264,935,876 votes in favor of his election, 85,586 votes
against his election and 0 abstention votes.
In addition, the shareholders voted in favor of (i) a proposal to
adopt our employee stock purchase plan as follows: 249,826,436 votes for,
3,633,036 votes against and 38,837 abstention votes, and (ii) the
appointment of Deloitte & Touche LLP as our auditors and the delegation to
our audit committee the authority to fix the auditor's fee for the current
fiscal year as follows: 264,951,940 votes for, 50,083 votes against and
19,439 abstention votes.
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Item 5. Other Information
Forward-Looking Statements
Certain matters discussed in this Report under the heading
"Management's Discussion and Analysis of Financial Condition and Results
of Operation - Liquidity and Capital Resources" contain certain
forward-looking statements which involve risks and uncertainties and
depend upon certain assumptions, some of which may be beyond our control,
including, but not limited to changing market conditions, competitive
matters (such as the size and financial resources of competitors, pricing
pressures, etc.), regulatory environment (such as timing and extent of
deregulation of telecommunications market), the integration of
acquisitions and new operations, substantial capital requirements, the
availability of transmission facilities, reliance on sophisticated
information systems, devaluation and currency risks, general economic
conditions in the markets in which we operate, as well as other risks
referenced from time to time in our filings with the Securities and
Exchange Commission and, accordingly, there can be no assurance with
regard to such statements.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
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 to date (incorporated by
reference to Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999).
3.4 Certificate of Designation relating to 7 1/2% Series A Convertible
Preferred Shares (incorporated by reference to the Registrant's
Registration Statement on Form S-3 (Registration No. 333-35864)).
4.1 Form of Class A Common Share (incorporated by reference to Registrant's
Registration Statement on Form S-1 (Registration No. 333-34281)).
27.1 Financial Data Schedule (filed herewith).
(b) Reports on Form 8-K.
We filed a Form 8-K with the SEC dated May 2, 2000, reporting that we had
issued press releases regarding (i) the launch of an initial public
offering of our Australian subsidiary, (ii) an alliance with SEAT which
provides us with the opportunity to sell our Telegate investment and (iii)
our first quarter financial results. The press releases were filed as
exhibits to the Form 8-K.
We filed a Form 8-K with the SEC dated May 24, 2000, reporting that we had
issued a press release reporting the delay of the initial public offering
of our Australian subsidiary. The press release was filed as an exhibit to
the Form 8-K.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on
its behalf by the undersigned thereunto duly authorized.
RSL COMMUNICATIONS, LTD.
Date: August 14, 2000 By /s/ Joel S. Beckoff
------------------------------------
Name: Joel S. Beckoff
Title: Vice President - Controller
and Chief Accounting Officer
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Exhibit Index
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 to date (incorporated by
reference to Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999).
3.4 Certificate of Designation relating to 71/2% Series A Convertible
Preferred Shares (incorporated by reference to the Registrant's
Registration Statement on Form S-3 (Registration No. 333-35864)).
4.1 Form of Class A Common Share (incorporated by reference to Registrant's
Registration Statement on Form S-1 (Registration No. 333-34281)).
27.1 Financial Data Schedule (filed herewith).
30
