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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
|X| Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1999
|_| Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period
from ____________________ to ___________________
Commission file number 0-23139
RSL COMMUNICATIONS, LTD.
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(Exact name of Registrant as specified in its charter)
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Bermuda 4813 N/A
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<S> <C> <C>
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification Number)
Incorporation or Organization) Classification Code Number)
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Clarendon House
Church Street
Hamilton HM CX Bermuda
(441) 295-2832
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(Address and telephone number of
registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Class A Common Shares, par value $.00457 per share
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(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
As of March 23, 2000, 31,387,850 Class A Common Shares of the registrant
were outstanding and 24,267,283 Class B Common Shares of the registrant were
outstanding and the aggregate market value of the voting stock (computed based
on the average of the last bid and asked price on such date) held by
non-affiliates was approximately $655.9 million.
DOCUMENTS INCORPORATED BY REFERENCE
Location in Form 10-K in Which
Document Document is Incorporated
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Registrant's 2000 Proxy Statement PART III
to be filed with the Commission
no later than April 30, 2000
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Table of Contents
PART I
Item 1. BUSINESS
Item 2. PROPERTIES
Item 3. LEGAL PROCEEDINGS
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Item 6. SELECTED FINANCIAL DATA
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Item 11. EXECUTIVE COMPENSATION
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
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PART I
ITEM 1. BUSINESS
Company Overview
We are a rapidly growing facilities-based communications company that
provides a broad range of voice, data/Internet and value-added product 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
in each of the 22 countries in which we currently operate, establishing strong
local management, a direct sales force and other marketing and distribution
channels that have enabled us to rapidly grow our customer base to over
1,000,000 customers as of December 31, 1999. We are continuing to build our
broadband global network (RSL-NET) designed to provide high quality voice, data
and Internet services while reducing our operating costs. As of December 31,
1999, our network included over 108,000 fiber-kilometers of terrestrial and
under-sea fiber optic cable that we own or lease on a long-term basis, and 51
national and international switches. We expect to have approximately 180,000
fiber-kilometers in operation by year-end 2000, based on existing commitments
and transactions under negotiation. Through our subsidiary, deltathree.com, we
also own and operate a privately-managed Internet Protocol (IP) telephony
network with 46 points of presence in 29 countries around the world.
We currently have operations in:
o Australia o France o Mexico o Switzerland
o Austria o Germany o The Netherlands o U.K.
o Belgium o Hong Kong o New Zealand o U.S.
o Canada o Italy o Portugal o Venezuela
o Denmark o Japan o Spain
o Finland o Luxembourg o Sweden
Over our network, we currently offer, or are in the process of launching,
in selected markets a variety of voice, data/Internet and value-added services,
including:
Voice Data/Internet Value-added
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o international long distance o Internet services o conference calling
o national long distance o voice-over Internet o unified messaging
o wireless Protocol o voice-mail
o private line o Integrated Services o video conferencing
o pre-paid/post-paid calling Digital Network
card (ISDN)
o toll-free dialing o Digital Subscriber
Line (DSL)
o X.25 (Packet Data) Services
o frame-relay
o Asynchronous Transfer Mode (ATM)
o remote access data services
According to International Telecommunication Union (ITU), the market for
international long distance switched telecommunications as a whole generated an
estimated $56 billion in revenue and 90 billion minutes in 1998. According to
International Data Corporation, due to the rapid growth of the Internet and the
growing importance of electronic communications and
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commerce, the market for data products and services around the world generated
approximately $6.3 billion in revenue in 1998, and is projected to grow at an
annual rate of 27.3% over the next five years. We plan to capitalize on this
growth in our target markets.
We were originally formed to capitalize on the growth, deregulation and
profitability of the international long distance telecommunications market. We
established an early presence by entering selected markets around the world
ahead of full deregulation and aggressively acquiring licenses, interconnection
agreements, retaining key management and know-how of acquired businesses and
infrastructure in each of those markets. We have since expanded our offerings to
include wireless services in selected countries and a broad array of data
communications products and services.
Our Global Operations
We conduct operations in four principal regions: Europe, North America,
Asia/Pacific Rim and Latin America. To date, we have derived revenues primarily
from our European and North American operations. We have implemented a different
strategy for each region, driven in part by the pace of local deregulation.
Since inception we have experienced strong year-over-year growth in revenues,
customers and minutes of use in each of these regions. We believe that our
decentralized structure has better enabled us to apply the appropriate
management focus, marketing strategies and financial resources necessary to
develop our business in each of our targeted markets.
Europe. We are licensed operators in 14 major European countries and have
interconnected our network in each of these countries (other than Luxembourg)
directly with the local exchange carriers. In many of these countries, we were
one of the first competitive operators to receive a license following local
market deregulation. We believe this has provided us with a competitive
advantage over other new entrants in these markets.
North America. We began operating in the U.S. in 1995 and have recently
expanded our network to cover various regions of Canada and Mexico, the two
largest country destinations for U.S. originated traffic. We believe our
experience in providing sophisticated data products in the U.S. will facilitate
our introduction of these products in our other markets.
Asia/Pacific Rim. Our local operations in the Asia/Pacific Rim region are
primarily in Australia, the most deregulated market in such region. We also have
start-up operations in Japan and Hong Kong.
Latin America. We have established a local presence in Mexico, Venezuela
and Brazil in anticipation of deregulation in these markets. In Mexico, together
with our joint venture partner, we own switches and fiber cable covering 14
cities.
In addition, through our subsidiary deltathree.com, we are a global
provider of IP telephony services, which includes the transmission of IP-based
voice and data traffic for other carriers and the provision of enhanced
Web-based communications services to individuals and businesses.
Industry Overview
Growing demand for international long distance services
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According to industry sources, international long distance switched
telecommunications traffic worldwide increased from 28 billion minutes in 1989
to 90 billion minutes in 1998 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, including increased capacity
and improved quality
o expansion of telecommunicatons infrastructure
o globalization of the world's economies
o free trade
o increased use and reliance on the Internet and
e-commerce
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 voice-based
services offered. These services include global voicemail, faxmail, 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.
Growing demand for data communications services
Data communications is the fastest growing segment of the
telecommunications industry. Businesses and consumers are increasing rapidly
their use of data-intensive applications such as intranets, extranets, virtual
private networks, telecommuting, remote office applications, Internet access, IP
telephony, unified messaging and e-mail. The emergence and wide acceptance of
the Internet has fundamentally changed how millions of people worldwide share
information, communicate and conduct business. International Data Corporation
estimates that the number of Internet users in the United States will increase
from approximately 63 million in 1998 to approximately 177 million by the end of
2003. The number of worldwide Internet users reached nearly 140 million in 1998
and is growing rapidly. The growth in Internet usage is driving an increase in
demand for data communication services. Forrester Research projects that the
total market for data networking services and Internet access will grow from
$6.2 billion in 1997 to approximately $49.7 billion by 2002. While the growth of
the Internet is being driven by a number of factors, the ease of use, speed and
reliability of the Internet along with the improvements in network security,
infrastructure and bandwidth are at the forefront.
We believe that a significant portion of the growth in data communications
will be generated by small and medium-sized businesses. We believe that data
communications, including an increased use of the Internet, allow these
businesses to compete more effectively by streamlining communications among
employees, customers and suppliers. In addition, we believe that people using
computers from their homes to connect to corporate networks for business or to
the Internet for personal purposes will add significant demand for data
applications.
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Our Strategy
To capitalize on the strong growth in demand for communications services
and the opportunity arising from global telecom deregulation, we are pursuing
the following strategies:
Focus on delivering innovative, competitively priced, integrated communications
solutions
We currently provide our customers in selected markets with a broad array
of voice, data and Internet communications services. The provision of
traditional long distance and international voice service allows us to
capitalize on the strong growth in global cross-border communications traffic by
businesses and individuals. Through the addition of data, Internet and
value-added services to our traditional voice-oriented product offerings in our
markets, we believe we will be better positioned to capture the bulk of the
communications expenditures of our customer base. We also plan to introduce
direct connect and local access in selected country operations. We believe that
our experience in providing sophisticated data products in the U.S. will
facilitate our introduction of these products into our other markets. To
expedite this process, we are considering various strategies, including
acquisitions and entering into arrangements with existing DSL providers. We
believe that our advanced current and planned product and service offerings
(such as frame-relay, ATM, DSL, Internet access and Web hosting) will capture
the high growth and margin expansion opportunities created by the increasing
demand for broadband data communication services.
Continue to build our global voice and data network
We currently operate a network of 51 national and international switching
facilities which we interconnect using a combination of owned and leased
terrestrial and submarine broadband, fiber optic lines. Our network includes an
aggregate of 108,000 fiber-kilometers. We expect to have approximately 180,000
fiber-kilometers in operation by year-end 2000, based on existing commitments
and transactions currently under negotiation. In each of the local markets in
which we operate, we connect to local and municipal networks using local leased
capacity or interconnect agreements. As our on-net switched traffic continues to
grow, we are rapidly replacing short-term leased transport facilities with
RSL-owned fiber optic lines in and between the markets in which we operate. Due
to the current abundance of available fiber in the U.S. and Europe, we believe
that we have an opportunity to invest in building our network while incurring
declining incremental costs. In particular, we are in the process of expanding
our European international fiber infrastructure and have contracted for
broadband fiber capacity that interconnects many of our major markets in Europe,
which we expect will be operational by year-end 2000 or early 2001.
Develop strong sales and marketing channels targeted at small and medium-sized
businesses and high volume residential customers
We focus on offering our products and services to small and medium-sized
businesses that we believe have traditionally been underserved by major
telecommunications carriers and incumbent telecommunications operators. To best
target, sell and service this customer base, we have built a decentralized
direct sales force who focus on offering our customers complete voice and data
communications solutions. We provide our services to other segments of our
customer base, such as residential, wireless and other business customers
through a variety of cost-effective marketing and sales channels, such as
independent agents, distributors, resellers and telemarketing organizations. We
will continue to invest in building our direct and indirect marketing and sales
channels to increase our market share, sales per customer and gross margins. We
believe that the combination of these sales channels provides us with the most
cost-effective means of rapidly growing our business across its different
segments.
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Deliver superior customer service
We strive to provide personalized customer service and believe that the
quality of our customer service is one of our competitive advantages. Our
business customers are covered actively by account and service representatives
who seek to identify, prevent and solve problems. We currently have customer
support centers in each country in which we operate. These centers provide order
and installation management, as well as a helpdesk for service or billing issue
resolution. We also outsource some of our after-hours support services. Major
accounts have dedicated contact numbers and representatives who actively monitor
the customer's service and provide feedback on performance. After-hours support
is usually handled by the local 24 hour engineering support facilities. We also
provide a trouble reporting center for our residential customers. To further
enhance our customer service and support, we have information and billing
systems in place in the different regions we serve.
Pursue strategic acquisitions and alliances
Through a combination of acquisitions, joint ventures and strategic
investments we have augmented our organic growth and expanded our product and
customer reach. We will continue to make acquisitions and investments to broaden
our product and service offering in certain markets (e.g., data networking
companies, Internet service providers, DSL and application service providers),
strengthen our management team, acquire additional customers, expand our direct
and indirect sales channels and expand our network.
Expand Internet-based telephony and other Internet-related services
Through our subsidiary, deltathree.com, we have built and are operating
currently a leading privately-managed voice-over IP global network with 45
points of presence in 29 countries around the globe. Through deltathree.com,
customers can place long distance calls over our IP network using standard
telephones, at reduced rates. deltathree.com also offers Web-based and other
enhanced communications services to individuals and businesses. deltathree.com
also serves as a carrier's carrier for us and for other communications carriers,
significantly reducing transport costs through the use of Internet-based
telephony. We believe that our experience in selling, provisioning and servicing
the advanced IP-based communications services that deltathree.com offers,
provides us with a competitive advantage over other carriers that are just
beginning to realize the benefits of this technology.
Network
Introduction
In most of the countries in which we operate, we have assembled a network
of switches and fiber infrastructure (whether leased or owned). All of these
networks are interconnected through under-sea cables or terrestrial lines that
we own or lease, to form the advanced global broadband network we call RSL-NET.
We utilize RSL-NET to carry traffic within and between countries in which
we operate, thereby providing us with control over end-to-end quality and cost.
Most of the traffic carried over RSL-NET is retail traffic from one country to
another. We use least cost routing (LCR) techniques at each gateway switch to
select best quality/least cost routes either via RSL-NET or via other operators
to destinations worldwide. RSL-NET is currently comprised of a mixture of
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capacity on owned facilities, IRU's and short-term leases. We use voice
compression equipment on some high cost links to reduce transport costs to a
minimum, as has been the practice in the industry generally. We are reducing
compression on RSL- NET as we add more cost effective, high capacity links.
Network Strategy Evolution
RSL-NET is evolving from a mostly leased network designed primarily for
voice services towards a multi-service, owned network with scalable capacity and
the capability to support most broadband services. RSL-NET will be supported
from our existing 24 hour a day management centers in London and Pittsburgh.
These centers currently support, respectively, the European operations and the
U.S., Mexico, and the international frame-relay network. There is a separate
management center in Sydney that supports our Australian operations.
With the significant increase in new available fiber-optic cable capacity
(both submarine and terrestrial), the cost of owned facilities has been reduced
dramatically over recent months. In the current market the cost to us to
purchase broadband capacity is sometimes lower than the cost of short-term
leased network facilities based on our present day traffic projections.
Accordingly, we are transforming RSL-NET into a principally
owned-facilities network, with significantly greater bandwidth (capacity) than
is currently in place. We believe this new broadband network will allow us to
dispense with compression equipment, improve signal quality, eliminate
associated capital spending, reduce cash operating costs and provide a platform
to support frame-relay, ATM, other data and IP transport services. We are in the
process of installing and upgrading this broadband network and we expect to
continue to do so through early 2001.
In nearly all of the countries in which we operate, interconnection through
the incumbent local carrier has been mandated by local regulation, allowing call
origination and termination via the incumbent local carrier's network at
cost-based rates. These rates, however, are usually distance-dependent and in
most of our major markets, we are constructing a national network to minimize
interconnection charges.
Owned Facilities
Our owned facilities include switches and interests in international fiber
optic cable systems. Our 23 international gateway switches are located in:
Europe: o Amsterdam o London (2)
o Brussels o Madrid
o Copenhagen o Milan
o Frankfurt o Paris
o Hamburg o Stockholm
o Helsinki o Vienna
o Lisbon o Zurich
North America: o Dallas o Montreal
o Los Angeles (2) o New York
Asia/Pacific: o Sydney o Tokyo
Latin America: o Nuevo Laredo
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In addition, we operate 28 national switches throughout our operations. Our
existing international gateway switches conform to international signaling and
transmission standards and allow us to interconnect our network, where practical
and permitted, to existing government-owned and government-controlled monopolies
and carrier networks around the world while maintaining quality and dependable
services.
We also own or lease capacity on various digital fiber optic cable systems,
including submarine systems that connect North America, South America, Europe,
Asia and Australia. Additionally, we currently own or lease capacity on
international routes connecting the U.S., Canada and Mexico and routes
connecting many European countries. In Europe, we have agreed to acquire
substantial fiber optic capacity that will interconnect 10 cities in nine major
Western European countries. We expect this capacity to be installed during 2000
and early 2001. We have national fiber optic networks in Canada, Mexico, the
United States, France and Germany, and a fiber ring around Helsinki, Finland. We
are in the process of putting in place national fiber optic networks in the U.K.
and Spain. Together with our joint venture partner in Mexico, we 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. 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 of revenue through
return traffic or other settlement arrangements with the government-owned
monopoly or other carriers in that country.
Our U.S. operations currently hold 22 operating agreements, one of which
allows us to transport traffic into three countries. These agreements provide
potential direct access to 21 countries, although we are not currently
transporting or terminating traffic pursuant to the majority of these
agreements. 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.
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 under-sea fiber optic cables
are not available or cost effective. Leased satellite facilities are also used
for redundancy when digital under-sea cable service is temporarily interrupted.
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deltathree.com IP Network
deltathree.com, our subsidiary, is a global provider of Internet Protocol
(IP) telephony services, which include the transmission of voice and data
traffic for communications carriers and the provision of enhanced Web-based and
other communications services to individuals and businesses. IP telephony is the
real time transmission of voice communications in the form of digitized
"packets" of information over the public Internet or a private network, similar
to the way in which e-mail and other data is transmitted. deltathree.com has
built a privately managed, global network using IP technology, and has primarily
been using this network to transmit traffic for communications carriers,
including for us. This service is referred to as carrier transmission services.
In order to provide high-quality, low-cost service, deltathree.com operates
a privately managed, IP telephony network. By managing its network,
deltathree.com has the ability to regulate traffic volumes for the
communications traffic it carries and directly control the quality of its
services from its originating POP to the termination point. In addition,
deltathree.com's network allows it to avoid the significant transmission delays
associated with the highly congested Internet, which may impede delivery of
high-quality, reliable services to users. deltathree.com's network consists of:
o 46 POPs in 29 countries;
o gateways, gatekeepers and routers at each POP;
o hubs in New York, Los Angeles, London, Frankfurt
and Hong Kong;
o dedicated leased bandwidth;
o interconnections with RSL-NET;
o peering arrangements with Internet backbone
providers, enabling transmission efficiency; and
o a technologically-advanced network operations
center.
Products and Services
We offer a variety of voice, data/Internet and value-added product and
service solutions to our customers. We will provide the services described below
to the extent permitted by local regulations in each of our markets. We believe
that our centralized Global Product and Services group will enable us to more
effectively manage the roll out of many of our new data-centric services that we
plan to offer:
Voice
International and National Long Distance. We provide both international and
national long distance services to most of our customers and terminate
international long distance calls throughout the world. 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, the District of Columbia, Puerto Rico, the U.S. Virgin
Islands, the Territory of Guam and the Commonwealth of the Northern Mariana
Islands, and can terminate calls throughout the U.S. In Spain, a consortium
headed by our Spanish subsidiary was recently awarded one of the three national
Wireless Local Loop (LMDS) operating licenses in the 3.5 GHz bandwidth. This
license will enable us to provide voice, data and video services through radio
transmission and allow customers to make local and long distance calls while
providing them a permanent, high speed connection to the Internet for a flat
rate.
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Wireless Services. We provide wireless services to corporate, business and
residential subscribers in Canada, the U.K., Germany, Finland and Australia.
Through our agreements with wireless 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.
Private Line Service. We 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.
Pre-Paid/Post-Paid Calling Cards. Our calling cards are either prepaid or
post-paid cards (for which calls are billed in arrears). Our post-paid calling
cards provide international calling from 65 countries, with termination
virtually anywhere around the world. Prepaid calling cards provide international
outbound and national calling, and differ from other calling cards in marketing
focus and 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.
Toll-free Dialing. We currently offer national toll-free dialing in
Australia, Austria, Canada, Finland, France, Germany, Mexico, Spain, Sweden,
Switzerland, the UK and the U.S. We anticipate offering national toll-free
services in most of our markets in 2000. International toll-free services are
currently available in Canada, and we plan to launch such services in our other
markets in 2000.
Data/Internet Services
Internet Services. We currently offer customers in the U.S., Australia,
Austria, Canada, Finland, Switzerland and the United Kingdom, broadband Internet
access on a wholesale and/or end-user basis, e-mail, domain name registration,
Web hosting, design and application services, and VPN (virtual private network).
We plan to roll out these services to our business customers throughout Europe
and Australia in 2000. In Spain, a consortium headed by our Spanish subsidiary
was recently awarded one of the three national Wireless Local Loop (LMDS)
operating licenses in the 3.5 GHz bandwidth. This license will enable us to
provide voice, data and video services through radio transmission and allow
customers to make local and long distance calls while providing them a
permanent, high speed connection to the Internet for a flat rate.
Voice-over Internet Protocol. Many of our existing operations offer
customers voice over IP services through deltathree.com. The service enables a
customer to transmit a phone call over a data network using Internet protocol at
reduced rates as compared to traditional voice calls.
Integrated Services Digital Network (ISDN). We currently offer ISDN in
Australia, Austria, Canada, Denmark, Finland, Germany, Sweden, UK and in the
U.S. ISDN allows the transmission of multiple voice channels and high speed data
services over twisted copper wire infrastructure. We intend to extend this
service to most of our other markets in 2000, thereby reducing access costs to
long-haul ATM, frame-relay and IP services.
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Digital Subscriber Line (DSL). A number of our customers in Finland are
currently connected to RSL-NET via DSL links. Trials are also under way in the
U.K. and the U.S. DSL provides high speed broadband local connection over
existing copper loops, thereby reducing access costs to long-haul ATM,
frame-relay and IP services. We intend to roll out this service as rapidly as
possible in our other markets, subject to local network operators being required
to offer us unbundled local loop access.
X.25 (Packet Data) Services. We currently offer X.25 services in the U.S.,
Canada, and Australia. Typical users are medium-sized companies that desire
interconnection of their legacy networks using this older data standard. Most
current applications would use frame relay services. X.25 services are a
standard part of the data services being rolled out to the UK, Germany, Sweden,
Finland, and Mexico in early 2000.
Frame-relay. We currently offer frame-relay services in the U.S., Canada,
and Australia. Typical users are small and medium-sized businesses that desire
interconnection between their LANs (Local Area Networks) in different countries.
Frame-relay provides a more reliable, manageable and cost-effective link than
standard private dedicated circuits for multi-site applications. Frame-relay
services are a standard part of the data services being rolled out to the UK,
Germany, Sweden, Finland, and Mexico in early 2000. We plan to launch full-range
data services in other markets in 2000.
Asynchronous Transfer Mode (ATM). We currently offer ATM services in the
U.S., Canada and Australia. Typical users are larger corporations that desire
high-speed links between major sites for data and voice services. ATM services
are a standard part of the data services being launched in the UK, Germany,
Sweden, Finland, and Mexico in 2000. We intend to launch full-range data
services in our other markets.
Remote Access Data Services. As an adjunct to directly-connected data
services such as ATM and frame-relay, we offer secure global dial-up access to a
customer's data VPN (virtual private network). Access is via either "800"
numbers in each country, or via firewall-protected Internet access. Typical
users are companies with agents or remote representative offices, needing
cost-effective access to corporate data networks resources and applications.
Remote access data services are made available wherever full-range data services
are offered.
Value-Added Services
Conference Calling. We are currently developing services to allow voice and
data conference calling. We intend to offer these services initially in the
U.S., Canada and selected European countries, in 2000.
Unified Messaging. The current unified messaging product developed by
deltathree.com is available to our customers in most locations in which we have
operations. Users access all their fax, e-mail and voice messages via the
Internet, or retrieve voice or (computer-spoken) e-mail messages via a voice
call. The product is currently being enhanced to increase the range of messaging
media which can be integrated via one "D3Box".
Voice-mail. We are introducing a network service that allows a user to
receive and access voice messages locally or remotely over their regular
telephone line when unable to answer calls. We intend to offer this service in
some of our markets in 2000.
Video conferencing. We are currently introducing services to allow end
users in multiple
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locations to participate in a conference remotely by linking sites together with
video equipment. Users at each site can view those at other sites and can work
with them on shared documents. We intend to offer video conference calling in
some of our markets in 2000.
Customers
Business Customers. We focus on offering our products and services
primarily to small and medium-sized businesses with significant international
telephone usage, generally in excess of $500 per month in international phone
calls. Approximately one-third of our revenues are generated from services we
provide to businesses, most of them small or medium-sized. We also service a
number of large corporations in the U.S. and target them on those routes where
our cost structure allows us to compete effectively. 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. We expect to deliver
communications service solutions to a more diverse customer base in some of our
markets.
Residential Customers. In certain markets, we focus on acquiring
residential customers that we believe are likely to generate high volumes of
international calls. We intend to capitalize on global immigration patterns by
targeting communities with large immigrant populations, primarily for our
prepaid calling cards. 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 Telco, we cross-sell
fixed-wire and other traditional long distance services to our wireless
subscriber base and wireless services to our non-wireless customers.
Carriers. We offer international termination and transit traffic services
to other carriers, including resellers, on a wholesale basis, as a "carriers'
carrier." Although from time to time we may experience some carrier customer
turnover, our revenues from carrier customers as a group are relatively stable.
Having a broad and 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.
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
o telemarketing organizations
o the Internet
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We believe that our network of direct sales professionals and selling agents
provides us with a strong competitive advantage in our market. We continually
seek innovative ways to expand the scope of our marketing channels and to
enhance our ability to identify and retain 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 and Information Systems
For financial and operational reporting, we have recently implemented a
global financial and operational reporting system to facilitate the collection
and analysis of critical information. This system, which utilizes the Cartesis
Carat software and runs on a SQL server, has been installed at each of our
reporting locations and electronically submits information to our corporate
office in New York. We believe the implementation of this system will provide us
with a more efficient means of collecting and consolidating our global financial
and operational data. The information is consolidated in New York and can then
be disseminated to all of our locations for use in internal benchmarking.
In Europe, the U.S. and Australia we have systems in place for billing,
customer care, network tracking and monitoring functions. These systems allow
us, among other things, to bill on a single statement all services provided to a
customer, monitor and efficiently utilize our network assets and detect and
reduce fraud. We expect these systems to accommodate the new services we plan to
introduce in 2000.
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 financial and legal support
o the formation of joint ventures and strategic alliances
o the identification, evaluation, negotiation and oversight
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. Most of
these acquisitions will be identified, evaluated, negotiated and completed at
the headquarters level, generally working together with local 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 legal and 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
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flows between the local operators for the transmission of traffic between them,
as well as the allocation of working capital.
Global Network Services. We centrally 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.
Global Product Development and Sourcing. We have recently created a Global
Products and Services group that is responsible for identifying, modifying,
prioritizing and launching new communications products across all of our markets
worldwide. The group aggregates the product information and experience from
relevant markets and uses a "best practices" approach to effectively roll out
these products in other markets. We believe that by centralizing our global
product operations we will be better able to manage the rollout of many of the
new data-centric and Internet services we plan to offer in various markets.
Competition
We compete with a variety of other telecommunications providers in each of
our markets, including:
o government-owned and government-controlled telephone monopolies
in each of the countries in which we operate (e.g. France
Telecom and Deutsche Telekom), established competitors such as
Cable & Wireless PLC and alliances such as Concert, 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 a variety of international long distance carriers and resellers,
including AT&T, MCI-Worldcom and Sprint in North America; Colt
Telecommunications, Global Crossing, GTS, ICG, Qwest, and Viatel
in Europe; Telstra and Cable & Wireless Optics in Australia; and
Teleglobe in Canada; and
o emerging data and voice communications competitors, including
Facilicom in Finland, Omnicom in France, Infostrada in Italy,
Jazztel in Spain, and AT&T Canada, Sprint Canada and Telus in
Canada, and others.
Regulatory Environment
Europe
Most EU member states were required by a series of directives to fully
liberalize their telecoms regime by January 1, 1998. A small number of member
states were granted an extension to this deadline. An EU directive is addressed
to the member states and requires each member state to introduce appropriate
national measures to implement the directive within a specified timeframe. As at
November 1999, all EU member states had introduced measures of one form or
another to implement the key liberalization and harmonization directives but
there remains considerable variation in the regime from country to country as
described below. The whole EU
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telecommunications regulatory package is currently under review by the EU
Commission.
The cornerstones of the EU telecoms regulatory package are the so-called
"Licensing Directive" and the "Interconnection Directive". The Licensing
Directive is designed to ensure harmonization of licensing procedures across the
EU and to prevent member states from discriminating between licensees, imposing
arbitrary restrictions of the number of licenses or charging excessive fees. The
Interconnection Directive establishes a framework for interconnection between
all operators providing public networks or services. Operators with significant
market power in the national market for interconnection (i.e., those with a 25%
market share of certain specified market) are required to meet all reasonable
requests for access to their networks and must offer cost-oriented tariffs
normally based on long run incremental costs or "LRIC". All other public network
operators are required to negotiate interconnection. As of January 1, 2000,
member states are, in addition, required to implement measures allowing
end-users to pre-select carriers for certain types of calls.
In respect of licensing regimes, the EU Commission's review of the
regulatory package, published in November 1999 indicates that wide differences
exist between member states in licensing procedures, periods of validity, fees,
and classification of operators. The Licensing Directive encourages member
states to use general authorizations wherever possible and limits the
circumstances in which member states may issue individual licenses. However, the
directive allows member states to issue individual licenses for voice telephony
and most member states have exercised this option with the result that
individual licenses have become the rule rather than the exception. The
directive also gives member states wide discretion as to the range of conditions
that may be attached to authorization with the result again that there are wide
variations from country to country in the conditions that apply to licenses.
In respect of interconnection, there have been problems in a number of
member states in getting the incumbent local carrier to establish effective cost
accounting systems. As a result there is a considerable variation in
interconnection tariffs around the EU. The EU Commission reports that there
appear to be major weaknesses in the regulation of this issue by some national
regulatory authorities. Other common problems include difficulties in
establishing comprehensive reference interconnection offers, requirements to
establish a minimum number of interconnection points, insistence by the
incumbent that it does not have the capacity to meet demand, and delays in
establishing interconnection.
To address these problems the Commission has made the following proposals
(among others):
o National regulators would be required to use general
authorizations to authorize all communications networks and
services; specific authorization would only be permitted for the
purpose of allocating scarce resources such as radio spectrum
and numbers.
o The range of possible license conditions would be restricted and
categories of authorization would be agreed at the EU level.
o EU guidelines would be drawn up to promote best practice and
transparency in fees for authorizations.
o Increased use of non-binding recommendations to improve
harmonization.
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o The interconnection regime would remain broadly the same as far
as call termination is concerned. However, national regulatory
authorities would be given responsibility to deal with specific
access issues according to a set of conditions and criteria laid
down in EU legislation. The concept of access to networks would
be developed so that access to certain network elements or
infrastructures might be mandated, for example, by granting new
entrants access to incumbents' local loops, or to mobile network
infrastructures, or by granting Internet service providers
access to cable TV networks. The proposal is that dominant
operators would be required to offer access; operators with
significant market power would be required to negotiate.
o Oblige mobile operators with significant marker power to offer
indirect access to other networks and service providers (but not
carrier pre-selection).
Consultation on these proposals closed on February 15, 2000. However, the
outcome of the consultation has not yet been published, so there is no certainty
that any or all of the proposals will be adopted in the form proposed or at all.
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.
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.
Although we believe the possibility to be remote, any such 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.
Among domestic carriers, incumbent local exchange carriers are currently
classified as dominant carriers with respect to the local exchange services they
provide. No domestic interstate, interexchange carriers are classified as
dominant. Among the domestic carriers that the FCC regulates as non-dominant are
AT&T and regional Bell operating company affiliates unaffiliated with foreign
carriers having the ability to discriminate against rivals through the control
of bottleneck services or facilities in a foreign destination market.
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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. The FCC has recently granted the application of Bell Atlantic to provide
long distance services in the State of New York.
The 1996 Telecommunications Act also imposes on incumbent local exchange
carriers the duties (among others), (a) to offer for resale at wholesale,
non-discriminatory rates any telecommunications service that the carrier
provides at retail to subscribers who are not telecommunications carriers and
(b) to provide, to any requesting telecommunications carrier for the provision
of a telecommunications service, nondiscriminatory access to network elements on
an unbundled basis at any technically feasible point on rates, terms and
conditions that are just, reasonable and nondiscriminatory. The FCC has recently
affirmed that xDSL-based advanced services are telephone exchange or exchange
access services, and that the unbundling and resale provisions of the 1996
Telecommunications Act apply to incumbent local exchange carriers offering such
services. The FCC has also amended its rules to require incumbent local exchange
carriers to provide unbundled access to the high frequency portion of the local
loop to permit competitive local exchange carriers to provide xDSL-based
services by sharing lines with the incumbent local exchange carrier's voiceband
services.
We have the authority to provide domestic, interstate telecommunications
services. We have also been granted authority by the FCC to provide switched and
private line international telecommunications services, as a facilities-based
carrier and as a reseller, between the United States and all countries except
Cuba. This authority permits us to conduct our present business, although we may
need additional authority in the future. Additionally, the FCC presently does
not allow carriers to provide switched basic services via facilities-based or
resold private lines, or to provide U.S. inbound or outbound switched basic
service via their authorized private lines, unless the FCC has first determined
that the foreign country affords competitive 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 Germany o Luxembourg o Spain
o Austria o Hong Kong o The Netherlands o Sweden
o Belgium o Iceland o Netherlands Antilles o Switzerland
o Canada o Ireland o New Zealand o U.K.
o Denmark o Israel o Norway
o Finland o Italy o Portugal
o France o Japan o Singapore
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. We have numerous agreements with foreign carriers providing for
the handling of switched calls.
Until recently, the U.S. was one of only 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
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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 recent years, the FCC has attempted to promote competition, and reduce
rates, for international services through a number of regulatory initiatives. 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.
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 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.
The FCC has also recently eliminated the international settlements policy
and contract filing requirements for arrangements with foreign carriers that
lack market power and for arrangements with all carriers on routes where
carriers are able to terminate at least 50% U.S. billed calls at rates that are
at least 25% lower than the relevant settlement rate benchmark. The FCC has
stated that the countries that currently meet this standard are Canada, Denmark,
France, Germany, Hong Kong, Ireland, Italy, The Netherlands, Norway, Sweden and
the United Kingdom. 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
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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.
Our intrastate long distance telecommunications operations and 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, the District of Columbia, Puerto Rico, the
U.S. Virgin Islands, the Territory of Guam and the Commonwealth of the Northern
Mariana Islands. We are also certified or otherwise authorized to resell local
exchange service in 30 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.
Canada
Canada has opened much of its market to competition including local
service, domestic and international long distance. Although there remain
Canadian ownership restrictions on facilities-based carriers serving the local
service and domestic long distance market, resale is unrestricted and
international long distance services are not restricted to the same extent as
facilities-based carriers.
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:
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
year 2000 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
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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 occurring throughout several 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.
Since July 1997, the Australian telecommunications market has been opened
to further significant competition overseen by the regulator, which has
instigated a number of initiatives designed to further competition. These
include:
o access to Telstra's copper access network (local loop);
o fixed-wire to mobile call pre-selection and override code
access; and
o number portability.
Participants in the deregulated Australian telecommunications market are:
o carriers (who own and operate the transmission infrastructure).
As of July 1999, there were 31 carriers of fixed wire and mobile
telecommunication services in Australia, the main ones being
Telstra, C&W Optus, Vodafone and AAPT. Under deregulation,
carriers are no longer protected against competition from other
infrastructure owners such as broadcasters, transport utilities
and electricity companies.
o service providers (who generally buy wholesale transmission
capacity or services from carriers and on-sell services to end
customers using their own and the carriers' infrastructure).
There are generally three groups of service providers:
o Agent service providers perform certain agency roles such as
customer acquisition and management on behalf of carriers or
service providers from whom they are paid a fee.
o Switchless services providers aggregate customer traffic and
receive volume discounts on the wholesale telecommunications
services purchased from carriers for resale.
o Switched carriage service providers own and operate telephone
exchanges, intelligent switches and support infrastructure while
leasing transmission capacity from carriers.
Both switched and switchless service providers maintain direct customer
relationships and typically operate their own billing and customer support
services.
Our Australian operation is a switched carrier service provider in its
fixed wire and data communications businesses, as it owns and operates its own
switch exchanges and can provide value added services. We lease transmission
capacity from carriers and makes use of its low cost access to our global
network. In mobile services, our Australian operation is a switchless service
provider and purchases wholesale mobile telephony service from C&W Optus and
Vodafone.
Deregulation commenced in Australia in 1997. The regulator is the
Australian Consumer
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and Competition Commission (ACCC) which has responsibility under the Trade
Practices Act 1974 for:
o non-discriminatory access regulation, including arbitrating
access disputes between industry participants;
o the competition policy framework, including aspects of number
portability; and
o monitoring and prevention of anti-competitive conduct.
The Trade Practices Act adopts a dual approach to the regulation of the
telecommunications industry. In addition to the general competition law
provisions of the Trade Practices Act, the telecommunications specific
provisions include a declared services regime that guarantees access to certain
essential network services. The ACCC regulates competition through
anti-competition notices that carry significant penalties for breaches of the
competition rules.
The ACCC may declare a carriage service if the ACCC considers declaration
of the service would promote the long-term interests of end-users. This may
occur where, in the absence of an access regime, the owners of network elements
may be in a position to inhibit or distort competition in markets which require
the use of their "bottleneck" services. "Bottleneck" services are those which
are either uneconomic to duplicate or are required for any-to-any connectivity.
All carriage service providers are reliant on access to other carriage service
providers' networks to terminate calls. Telstra's network is particularly
important because over 95% of all wireline customers are connected to this
network.
If a service is declared, a carrier or carriage service provider supplying
that service (access provider) must comply with certain standard access
obligations. If access providers and access seekers cannot reach commercial
agreements on the supply of Declared Services, the ACCC has power to arbitrate.
Internet Telephony
The use of the Internet and private IP networks to provide telephone
service is a recent market development. While we believe that U.S. law currently
permits the provision of voice communications services over the Internet and
private IP networks, some countries have laws or regulations that may prohibit
voice communications over the Internet.
We believe that, under United States law, based on specific regulatory
classifications and recent regulatory decisions, the IP communications services
that deltathree.com provides constitute information services (as opposed to
regulated telecommunications services). As such, deltathree.com's services are
not currently regulated by the FCC or any state agencies charged with regulating
telecommunications carriers. Nevertheless, aspects of deltathree.com's
operations may be subject to state or federal regulation, including regulation
governing universal service funding, disclosure of confidential communications,
copyright and excise tax. Several efforts have been made in the United States to
enact federal legislation that would either regulate or exempt from regulation
communications services provided over the Internet. Increased regulation of the
Internet may slow its growth, particularly if other countries also impose
regulations. Such regulation may negatively impact the cost of doing business
over the Internet and materially adversely affect deltathree.com's business,
operating results, financial condition and future prospects.
In addition, the FCC is currently considering whether to impose surcharges
or other common carrier regulations upon some providers of Internet and IP
telephony, primarily those
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which provide Internet and IP telephony services to end users located within the
United States. In a 1998 Report to Congress, the FCC indicated that certain
forms of phone-to-phone Internet Telephony may bear the characteristics of
telecommunications, as opposed to information, services, thereby subjecting them
to regulation as common carrier offerings. More recently, in September 1999, the
FCC released a notice of inquiry seeking information on the extent to which
phone-to-phone IP telephony services might impact the accessibility of
telecommunications services to people with disabilities, including opportunities
for achieving greater accessibility for IP telephony and the extent to which IP
telephony is now, or soon will be, an effective substitute for conventional
circuit-switched telephony. There are also petitions pending before the FCC and
various state regulatory commissions seeking a declaratory ruling that providers
of IP telephony are not enhanced service providers, and should be treated as
common carriers. Congressional dissatisfaction with the FCC's conclusions could
result in requirements that the FCC impose greater or lesser regulation, which
in turn could materially adversely affect deltathree.com's business, financial
condition, operating results and future prospects.
If the FCC were to determine that certain services offered by
deltathree.com are subject to FCC regulations as telecommunications services,
the FCC may require providers of Internet and IP telephony services to be
subject to traditional common carrier regulation, make universal service
contributions, and/or pay access charges. It is also possible that the FCC may
adopt a regulatory framework other than traditional common carrier regulation
which would apply to Internet and IP telephony providers. Any such
determinations could materially adversely affect deltathree.com's business,
financial condition, operating results and future prospects to the extent that
they negatively affect its cost of doing business or otherwise slow the growth
of its business.
State regulatory authorities may also retain jurisdiction to regulate the
provision of intrastate Internet and IP telephony services. Several state
regulatory authorities have initiated proceedings to examine the regulation of
such services. Others could initiate proceedings to do so. If such regulations
are adopted, they could materially adversely affect deltathree.com's business,
financial condition or otherwise slow the growth of its business.
The regulatory treatment of Internet and IP telephony outside of the United
States varies widely from country to country. A number of countries that
currently prohibit competition in the provision of voice telephony may also
prohibit Internet and IP telephony. Other countries permit but regulate Internet
and IP telephony. Some countries will evaluate proposed Internet and IP
telephony service on a case-by-case basis and determine whether it should be
regulated as a voice service or as another telecommunications service. Finally,
in many countries, Internet and IP telephony have not yet been addressed by
legislation or regulatory action. Increased regulation of the Internet and/or
Internet and IP telephony providers or the prohibition of Internet and IP
telephony in one or more countries, or more aggressive enforcement of existing
regulations in such countries, could materially adversely affect
deltathree.com's business, financial condition, operating results and future
prospects.
Employees
As of December 31, 1999, we employed approximately 2,800 people, including
officers, administrative and salaried selling personnel. We believe we have good
relationships with our employees.
ITEM 2. PROPERTIES
Our principal office is located at Clarendon House, Church Street,
Hamilton, Bermuda.
24
<PAGE>
We maintain executive offices at 810 Seventh Avenue, New York, New York.
The 15,500 square foot lease extends until February 28, 2010 and provides for
annual lease payments of $759,500.
During 1999, we maintained executive offices at 767 Fifth Avenue, New York,
New York, under a lease which provided for annual lease payments of $591,000.
The lease was terminated in March 2000.
Through our direct and indirect subsidiaries, we also lease additional
office space for our operations.
ITEM 3. LEGAL PROCEEDINGS
On October 8, 1999, Aerotel, Ltd. and Aerotel U.S.A. commenced a suit
against us, deltathree.com and one of our U.S. subsidiaries in the United States
District Court for the Southern District of New York. Aerotel alleges that we
are infringing on a patent issued to Aerotel in November 1987 by making, using,
selling and offering for sale prepaid telephone card products in the United
States. Aerotel seeks an injunction to stop us from using technology covered by
this patent, monetary damages in an unspecified amount and reimbursement of
attorneys' fees. We have answered the complaint and the parties are currently
engaged in pre-trial discovery. As we continue to evaluate these claims, we
believe that we have meritorious defenses to the claims and intend to defend the
lawsuit vigorously. However, the outcome of the litigation is inherently
unpredictable and an unfavorable result may have a material adverse effect on
us. Regardless of the ultimate outcome, the litigation could result in
substantial expenses to us and significant diversion of efforts by our
managerial and other personnel.
We are, from time to time, a party to litigation that arises in the normal
course of our business operations. Except as previously described, we are not
presently a party to any litigation that we believe could reasonably be expected
to have a material adverse effect on our business or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market for our common shares
Our Class A common shares, par value $.00457 per share are traded on The
Nasdaq Stock Market National Market. The quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commissions, and may not necessarily
reflect actual transactions. On March 23, 2000, the last reported price for the
Class A common shares was $23.563 per share. There is no public market for our
Class B common shares, par value $.00457 per share (which we refer to
25
<PAGE>
together with the Class A common shares as our common shares). There were
approximately 160 holders of record for the Class A common shares as of March
23, 2000, including nominees for an unknown number of beneficial holders, and 11
holders of record of the Class B common shares.
The following table sets forth the range of high and low sale prices for
the Class A common shares for our fiscal years ended December 31, 1998 and 1999.
Price
---------------
Period High Low
------ ---- ---
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.............................. $38.75 $18.69
Third Quarter............................... $23.38 $12.13
Fourth Quarter.............................. $28.13 $15.69
Dividend Policy
We have never paid dividends on any class of common shares and do not
anticipate paying any dividends on our Class A common shares or cash dividends
on any other class of shares in the foreseeable future. Some of our credit
facilities and the documents governing senior notes issued by our subsidiary,
RSL Communications PLC, contain restrictions on our ability and the ability of
our subsidiaries to declare and pay cash dividends. 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.
The payment of dividends in cash or shares on either our Series A preferred
shares or Class A common shares is also generally limited under applicable
Bermuda law to the amount of our "surplus." This means the excess of the fair
market value of our total assets over the sum of our total liabilities and our
paid-in share capital. However, even when this limitation applies, we are
permitted to issue additional Series A preferred shares out of the share premium
account attributable to our Series A preferred shares. We have irrevocably
committed to convert these shares, effective immediately following their
issuance, into the number of Class A common shares that would be deliverable to
holders on the dividend payment date in order to satisfy the dividend
requirement of our Series A preferred shares. In no event will holders receive
additional Series A preferred shares in lieu of any dividend payment. We
currently expect that for the foreseeable future all dividends on our Series A
preferred shares will be paid by delivery of Class A common shares.
26
<PAGE>
Bermuda Taxation
At the date hereof, there is no Bermuda income, corporation or profits tax,
withholding tax, capital gains tax, capital transfer tax, estate duty or
inheritance tax payable by 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 1966 that, in the event there is
enacted in Bermuda any legislation imposing tax computed on profits or income or
computed on any capital assets, gain or appreciation or any tax in the nature of
estate duty or inheritance tax, such tax shall not be applicable to us or to our
operations, or to our shares or other obligations until March 28, 2016 except
insofar as such tax applies to persons ordinarily resident in Bermuda and
holding such shares or other 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 its authorized share capital and the premium on its issued shares at
a rate not exceeding $27,825 per annum.
Recent sales of unregistered securities
In May 1999, we, through RSL Communications PLC, issued $175 million
aggregate principal amount at maturity of 9 7/8% Senior Notes due 2009, or 9
7/8% Notes, unconditionally guaranteed by us pursuant to an indenture governing
the 9 7/8% Notes. The placement agent for the offering of the 9 7/8% Notes was
Goldman, Sachs & Co. The aggregate commissions were approximately $1.1 million.
The 9 7/8% 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 August 1999, we issued to Arnold Goodstein 23,969 Class A common shares
in exchange for shares of RSL COM PrimeCall, Inc. owned by Mr. Goodstein. The
issuance of such Class A common shares was exempt from registration under the
Securities Act pursuant to Section 4(2) thereof.
In September 1999, we issued to Matthias Wolfensberger 20,736 Class A
common shares in exchange for shares of RSL COM Schweiz AG owned by Mr.
Wolfensberger. The issuance of such Class A common shares was exempt from
registration under the Securities Act pursuant to Section 4(2) thereof.
In November 1999, we issued to Dov Bar-Gera 179,032 Class A common shares
in exchange for shares of RSL COM Austria AG owned by Mr. Bar-Gera. The issuance
of such Class A common shares was exempt from registration under the Securities
Act pursuant to Section 4(2) thereof.
ITEM 6. SELECTED FINANCIAL DATA
The following tables present selected consolidated financial data derived from
our consolidated financial statements and related notes. The selected
consolidated statements of operations data presented below with respect to the
years ended December 31, 1999, 1998 and 1997 and the balance sheet data as of
December 31, 1999 and 1998 have been derived from the Consolidated Financial
Statements audited by Deloitte & Touche LLP, appearing elsewhere in this Annual
Report on Form 10-K. The selected consolidated statement of operations data for
the year ended December 31, 1996
27
<PAGE>
and 1995 and balance sheet data as of December 31, 1997, 1996 and 1995 are
derived from audited financial statements not included in this document.
You should read this in conjunction with the Consolidated Financial Statements
and notes thereto and the section entitled "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
Annual Report on Form 10-K.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1995(1) 1996 1997 1998(9) 1999
------- ----- ---- ------- ----
<S> <C> <C> <C> <C> <C>
($ and shares in thousands, except loss per share)
Consolidated Statement of
Operations:
Revenues............................ $ 18,617 $113,257 $ 300,796 $ 885,938 $ 1,469,849
Operating costs and expenses:
Costs of services (exclusive of
depreciation and amortization
shown separately below)....... (17,510) (98,461) (265,321) (702,602) (1,034,334)
Selling, general and administrative
expense....................... (9,639) (38,893) (94,712) (238,141) (447,883)
Non-cash compensation expense.... -- -- -- -- (23,562)
Special charge (2)............... -- -- -- -- (30,143)
Depreciation and amortization.... (849) (6,655) (21,819) (75,445) (177,865)
------- -------- --------- --------- ----------
Total operating costs and expenses.. (27,998) (144,009) (381,852) (1,016,188) (1,713,787)
------- -------- --------- --------- ----------
Loss from operations................ (9,381) (30,752) (81,056) (130,250) (243,938)
Interest income..................... 173 3,976 13,826 16,104 20,593
Interest expense.................... (194) (11,359) (39,373) (75,431) (133,244)
Other income--net................... -- 470 6,595(3) 739 764
Foreign exchange transaction (loss)
gain............................. -- -- -- (11,055) 17,022
Minority Interest................... -- (180) 210 6,079 (11,365)
Loss in equity interest of
unconsolidated subsidiaries...... -- -- -- (3,276) (4,718)
Income taxes........................ -- (395) (401) (1,334) (3,341)
------- -------- --------- --------- ----------
Loss before extraordinary item...... (9,402) (38,240) (100,199) (198,424) (358,227)
Extraordinary item (4).............. -- -- -- (20,800) --
------- -------- --------- --------- ----------
Net loss............................ $ (9,402) $(38,240) $(100,199) $ (219,224) $ (358,227)
======= ======== ========= ========= ==========
Loss per common share before
extraordinary item (5)........... $ (1.67) $ (5.13) $ (5.27) $ (4.52) $ (6.63)
Extraordinary item per common share
(4)(5)........................... $ -- $ -- $ -- $ (0.47) $ --
Net loss per common share (5)....... $ (1.67) $ (5.13) $ (5.27) $ (4.99) $ (6.63)
Weighted average number of common
shares outstanding (5)........... 5,641 7,448 19,008 43,913 54,022
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1995 (1) 1996 1997 1998 (9) 1999
-------- ------ ---- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Other Financial Data:
EBITDA (as defined) (6)............. $ (8,532) $(24,097) $ (59,237) $ (54,805) $ (10,411)
Capital expenditures (7)............ 6,074 23,880 49,417 247,665 256,000
Cash (used in) provided by operating
activities....................... 3,554 (10,475) (91,812) (82,752) (158,885)
Cash used in investing activities... (16,537) (225,000) (18,821) (509,438) (226,502)
Cash provided by financing activities 18,143 335,031 152,035 815,476 263,602
<CAPTION>
As of December 31,
-------------------------------------------------------
1995 1996 1997 1998 (9) 1999
---- ------ ---- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents........... $ 5,163 $104,068 $ 144,894 $ 367,823 $238,724
Securities available for sale....... -- 67,828 13,858 111,548 84,154
Restricted marketable securities (8) -- 104,370 68,836 20,159 --
Total assets........................ 53,072 427,969 605,664 1,714,593 1,803,308
Short-term debt, current portion of
long-term debt, and current portion
of capital lease obligations (10) 5,506 6,974 8,033 36,130 23,348
Long-term debt and capital lease
obligations (10)................. 6,648 314,425 316,608 1,089,375 1,273,961
Shareholders' equity (deficit)...... 5,705 20,843 126,699 133,484 (83,612)
</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) In the third quarter of 1999, we recorded a special charge of $32.1 million
for consolidating locations, streamlining operations and exiting certain
product lines and distribution channels, including telemarketing and
certain prepaid calling card plans. The charge is composed of approximately
$13.1 million for terminating various operating leases, $12.4 million for
the severance of 189 employees and $6.6 million for the cost of exiting
certain product lines and other items, of which $2.0 million was associated
with the write-off of inventory which was recorded as part of cost of
services.
(3) Other income-net includes the reversal of certain 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.
(4) 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.
(5) 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 a 2.19-for-one stock split in 1997.
Shares issuable pursuant to (a) outstanding stock options, (b) unexercised
warrants, (c) warrants 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 certain events, to
exchange their shares in the respective subsidiaries for, in certain
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 exercisable currently 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 calculation as
their effect is anti-dilutive.
(6) EBITDA, as used herein, consists of loss from operations before
depreciation and amortization and also excludes a special charge and
non-cash compensation recorded in 1999. Specifically, EBITDA excludes a
$2.0 million charge for inventory write-off recorded in cost of services
and a special charge of $30.1 million to reorganize and streamline
operations and $23.6 million of non-cash compensation expense primarily
attributable to deltathree.com. In addition, if the EBITDA loss of
deltathree.com were also excluded from our results, we would have reported
positive EBITDA for 1999 of $1.8 million. 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.
(7) Capital expenditures include assets acquired through capital lease
financing and other debt.
(8) Restricted marketable securities held to maturity consist of U.S.
government securities which were pledged for a three year period to secure
the payment of interest on the principal amount of the notes we issued in
1996.
(9) During 1998, we acquired various companies. See footnote 2 to our
consolidated financial statements for information regarding these
acquisitions.
(10) As of December 31,1999, we had approximately $38 million of available
(undrawn) borrowing capacity under our current bank and vendor facilities.
The availability of these amounts is dependent upon our compliance with
various financial ratios at the time of borrowing.
29
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements, including the notes thereto, appearing
elsewhere in this Annual Report on Form 10-K. The following contains statements
which constitute forward-looking statements regarding our intent, belief or
current expectations or those of our officers with respect to, among other
things, our financing plans, trends affecting our financial condition or results
of operations, the impact of competition, the start-up of certain operations and
acquisition opportunities. Our actual future results could differ materially
from those discussed herein. Prospective investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from
those in the forward-looking statements as a result of various factors.
Information contained in this Annual Report on Form 10-K, including, without
limitation, information contained in this section of the Annual Report on Form
10-K under the heading "Risk Factors" and information under "Business,"
identifies important factors that could cause such differences.
Overview
We are a rapidly growing facilities-based communications company that provides a
broad range of voice, data/Internet and value-added product 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
in each of the 22 countries in which we currently operate, establishing strong
local management, a direct sales force and other marketing and distribution
channels that have enabled us to rapidly grow our customer base to over
1,000,000 customers as of December 31, 1999. We are continuing to build our
broadband global network (RSL-NET) designed to provide high quality voice, data
and Internet services while reducing our operating costs. As of December 31,
1999, our network included over 108,000 fiber-kilometers of terrestrial and
under-sea fiber optic cable that we own or lease on a long-term basis, and 51
national and international switches. We expect to have approximately 180,000
fiber-kilometers by year-end 2000 based on existing commitments and transactions
currently under negotiation. Through our subsidiary, deltathree.com, we also own
and operate a privately-managed Internet Protocol (IP) telephony network with 46
points of presence in 29 countries around the world.
We currently have operations in:
o Australia o France o Mexico o Sweden
o Austria o Germany o The Netherlands o Switzerland
o Belgium o Hong Kong o New Zealand o U.K.
o Canada o Italy o Portugal o U.S.
o Denmark o Japan o Spain o Venezuela
o Finland o Luxembourg
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 part of our consolidated results of operations. Prior to its initial public
offering, we combined results from deltathree.com's operations with our other
operations. We currently present the results of deltathree.com's operations as a
separate segment.
Revenues
Revenues 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 the 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 offset by increased minute volumes and decreased operating costs per
minute.
30
<PAGE>
European Operations
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(in thousands, except percentages)
<S> <C> <C> <C> <C> <C>
Revenues ............................. $ 156 $ 27,414 $ 73,653 $ 306,289 $ 736,274
Cost of services (exclusive of
depreciation and amortization
shown separately below) ........... (143) (21,569) (59,516) (232,977) (469,501)
--------- --------- --------- --------- ---------
Gross margin ......................... 13 5,845 14,137 73,312 266,773
--------- --------- --------- --------- ---------
Selling, general and administrative
expenses .......................... (539) (17,377) (43,004) (103,874) (243,953)
Non-cash compensation expense ........ -- -- -- -- (2,799)
Special charge ....................... -- -- -- -- (12,613)
Depreciation and amortization ........ (12) (1,906) (7,038) (25,829) (68,281)
--------- --------- --------- --------- ---------
Loss from operations ................. $ (538) $ (13,438) $ (35,905) $ (56,391) $ (60,873)
========= ========= ========= ========= =========
Other Financial Data
EBITDA (as defined)(1) ............... $ (526) $ (11,532) $ (28,867) $ (30,562) $ 24,081
Revenues as a percentage of
consolidated revenues ............. 0.8% 24.2% 24.5% 34.6% 50.1%
Gross margin as a percentage of
revenues .......................... 8.3% 21.3% 19.2% 23.9% 36.2%
Selling, general and administrative
expense as a percentage of revenues 345.5% 63.4% 58.4% 33.9% 33.1%
</TABLE>
- ----------
(1) EBITDA, as used herein, consists of loss from operations before
depreciation and amortization and also excludes a special charge recorded
in 1999 for consolidating locations, streamlining operations and exiting
certain product lines and distribution channels, including telemarketing
and certain prepaid calling plans. 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 began substantial European operations in three countries in the second
quarter of 1996 and have since established operations in 11 additional European
countries.
We derive revenues from international and domestic long distance voice and data
services, and reselling wireless services in selected 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 certain consumer market
segments. 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.
31
<PAGE>
North American Operations
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(in thousands, except percentages)
<S> <C> <C> <C> <C> <C>
Revenues .......................... $ 18,461 $ 85,843 $ 194,129 $ 448,232 $ 546,615
Cost of services (exclusive of
depreciation and
amortization shown
separately below) .............. (17,367) (76,892) (176,482) (365,506) (439,456)
--------- --------- --------- --------- ---------
Gross margin ...................... 1,094 8,951 17,647 82,726 107,159
--------- --------- --------- --------- ---------
Selling, general and
administrative expenses ........ (7,444) (17,606) (37,136) (81,385) (106,949)
Non-cash compensation expense ..... -- -- -- -- (441)
Special charge .................... -- -- -- -- (16,038)
Depreciation and amortization ..... (619) (3,047) (5,465) (16,087) (42,951)
--------- --------- --------- --------- ---------
Loss from operations .............. $ (6,969) $ (11,702) $ (24,954) $ (14,746) $ (59,220)
========= ========= ========= ========= =========
Other Financial Data
EBITDA (as defined) (1) ........... $ (6,350) $ (8,655) $ (19,489) $ 1,341 $ 772
Revenues as a percentage of
consolidated revenues .......... 99.2% 75.8% 64.5% 50.6% 37.2%
Gross margin as a percentage of
revenues ....................... 5.9% 10.4% 9.1% 18.5% 19.6%
Selling, general and
administrative expense as a
percentage of revenues ......... 40.3% 20.5% 19.1% 18.2% 19.6%
</TABLE>
- ----------
(1) EBITDA, as used herein, consists of loss from operations before
depreciation and amortization and also excludes a special charge recorded
in 1999 for consolidating locations, streamlining operations and exiting
certain product lines and distribution channels, including telemarketing
and certain prepaid calling plans. 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 are derived from operations in the U.S. and Canada.
These revenues result primarily from the sale of long distance voice services
(1) on a retail basis to end-users, (2) on a bulk discount basis to distributors
of prepaid calling cards, and (3) on a wholesale basis to other carriers. We
also sell data and internet services on a retail basis to end users. 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. During 1999, we shifted our marketing focus
in the U.S. to small and medium-sized businesses and have restructured our
pricing of wholesale services to other carriers.
Asia/Pacific and Other Operations
<TABLE>
<CAPTION>
Inception--
April 1997
Through Year Ended Year Ended
December 31, December 31, December 31,
1997 1998 1999
---- ---- ----
(in thousands, except percentages)
<S> <C> <C> <C>
Revenues ........................................... $ 32,625 $ 129,675 $ 183,338
Cost of services (exclusive of depreciation and
amortization shown separately below) ............ (29,025) (103,358) (123,053)
--------- --------- ---------
Gross margin ....................................... 3,600 26,317 60,285
--------- --------- ---------
Selling, general and administrative expenses ....... (6,191) (33,140) (68,593)
Non-cash compensation expense ...................... -- -- (311)
Special charge ..................................... -- -- (1,492)
Depreciation and amortization ...................... (839) (7,340) (26,331)
--------- --------- ---------
Loss from operations ............................... $ (3,430) $ (14,163) $ (36,442)
========= ========= =========
Other Financial Data
EBITDA (as defined) (1) ............................ $ (2,591) $ (6,823) $ (8,174)
Revenues as a percentage of consolidated
revenues ........................................ 10.9% 14.6% 12.5%
Gross margin as a percentage of revenues ........... 11.0% 20.3% 32.9%
Selling, general and administrative expense as a
percentage of revenues .......................... 19.0% 25.6% 37.4%
</TABLE>
- ----------
(1) EBITDA, as used herein, consists of loss from operations before
depreciation and amortization and also excludes a special charge recorded
in 1999 for consolidating locations, streamlining operations and exiting
certain product lines and distribution channels, including telemarketing
and certain prepaid calling plans. 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.
32
<PAGE>
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. In Australia we provide domestic and international long
distance, mobile and prepaid calling card services. We initiated operations in
Japan in July 1998 and in Hong Kong in January 1999.
Also included in Asia/Pacific and other operations are our operations in Latin
America. We commenced Latin American revenue producing operations in Venezuela
and Mexico in the third quarter of 1997 and in the first quarter of 1999,
respectively. In 1999, we entered into a joint venture to market voice-over
Internet services in Brazil. The financial results of our operations in Latin
America have been immaterial to date.
deltathree.com Operations (1)
<TABLE>
<CAPTION>
Acquisition--
July 1997
through Year Ended Year Ended
December 31, December 31, December 31,
1997 1998 1999
------------ ------------ ------------
(in thousands, except percentages)
<S> <C> <C> <C>
Revenues ........................................... $ 389 $ 1,742 $ 3,622
Cost of services (exclusive of depreciation and
amortization shown separately below) ...... (299) (761) (2,324)
-------- -------- --------
Gross margin ....................................... 90 981 1,298
-------- -------- --------
Selling, general and administrative expenses ....... (1,071) (4,725) (13,536)
Non cash compensation expense ...................... -- -- (19,859)
Depreciation and amortization ...................... (185) (2,671) (6,237)
-------- -------- --------
Loss from operations ............................... $ (1,166) $ (6,415) $(38,334)
======== ======== ========
Other Financial Data
EBITDA (as defined) (2) ............................ $ (981) $ (3,744) $(12,238)
Revenues as a percentage of consolidated
revenues .................................. 0.1% 0.2% 0.2%
Gross margin as a percentage of revenues ........... 23.1% 56.3% 35.8%
Selling, general and administrative expense as a
percentage of revenues .................... 275.3% 271.2% 373.7%
</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.
(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.
33
<PAGE>
We acquired a 51% controlling interest in deltathree.com in 1997 and the
remaining 49% interest by April 1998. In November 1999, deltathree.com
successfully 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 and technological initiatives.
After the initial public offering of its common stock, we continue to own
approximately 68% of the equity of deltathree.com.
Cost of Services (exclusive of depreciation and amortization)
Our cost of services is primarily 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 are 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 investment units, or MIUs, and domestic circuits and, as a
result, expect that an increasing amount of our 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. In addition, we
intend to lower our variable cost of termination as a percentage of revenues by
carrying traffic pursuant to more of our existing operating agreements and by
negotiating additional operating agreements on strategic routes. 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 two local operators
over MIUs or 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.
While we intend to purchase or construct 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.
Effect of Deregulation on European 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 partially deregulated. In countries that are
not substantially deregulated, our access to the local exchange network is
through more expensive means (i.e., leased lines or dial-in access). This
results in higher costs to us for carrying international traffic originating
within one country and terminating in another country. 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. 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.
34
<PAGE>
Selling, General and Administrative Expenses
Our selling, general and administrative expenses consist primarily of costs
incurred to gain new customers, introduce of 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 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 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 have involved substantial start-up costs in advance of revenues. 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.
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 5- to 20-year period.
Component Cost and Purchase Price Allocation
We have recorded goodwill in connection with our European and 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 allocation for
these acquisitions is set forth below.
Europe. As of December 31, 1999, we had recorded an aggregate of approximately
$230.6 million of goodwill in connection with our European acquisitions. Our
component cost and purchase price allocation for our European acquisitions for
each of 1995, 1996, 1997, 1998 and 1999 are as set forth below.
Component Cost and
Purchase Price Allocation
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
($ in millions)
<S> <C> <C> <C> <C> <C>
Assets Acquired:
Cash ........................................... $ -- $ 2.3 $ 1.4 $ -- $ 3.5
Accounts receivable ............................ 0.2 0.7 2.3 28.7 2.5
Telecommunications equipment ................... -- 2.3 0.8 8.2 1.9
Deposits and others ............................ -- 0.1 0.8 13.1 2.8
Intangible assets-goodwill ..................... 0.9 24.2 31.4 131.3 42.8
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 12.5
Lease commitments .............................. -- 2.4 -- -- --
Equity:
Increase to shareholders' equity ............... -- -- 3.4 -- 10.6
---- ----- --- ------ -----
Total Cash Invested ............................... $0.9 $21.9 $28.0 $134.1 $30.4
Total Net Liabilities Assumed ..................... -- 2.3 -- 12.4 0.2
Total Stock Issued ................................ -- -- 3.4 -- 10.6
---- ----- --- ------ -----
Total Purchase Price............................... $0.9 $24.2 $31.4 $146.5 $41.2
==== ===== ===== ====== =====
</TABLE>
35
<PAGE>
North America. As of December 31, 1999, we had recorded approximately
$295.6 million of goodwill in connection with our North American acquisitions.
Our component cost and purchase price allocation for our North American
acquisitions for each of 1995, 1996, 1997, 1998 and 1999 are as set forth below:
Component Cost and
Purchase Price Allocation
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
($ in millions)
<S> <C> <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 1.2
Deposits and others ............................... 1.9 -- 0.5 5.5 4.7
Intangible assets--goodwill ....................... 29.3 27.6 80.3 147.6 10.8
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 2.9
----- ----- ----- ------ -----
Total Cash Invested .................................. $14.4 $19.5 $42.0 $133.9 $13.8
Total Net Liabilities
Assumed .............................................. 14.9 8.1 0.8 26.4 --
Total Stock
Issued ............................................... -- -- 38.2 9.5 2.9
----- ----- ----- ------ -----
Total Purchase Price ................................. $29.3 $27.6 $81.0 $169.8 $16.7
===== ===== ===== ====== =====
</TABLE>
Years Ended December 31, 1999 and 1998
Revenues. Revenues increased to $1,469.8 million for the year ended December 31,
1999 compared to $885.9 million for the year ended December 31, 1998, an
increase of $583.9 million or 65.9%.
This increase is due primarily to an increase in our European revenues from
$306.3 million in 1998 to $736.3 million in 1999 an increase of $430.0 million
or 140.3%. This increase was primarily from acquisitions, principally the
Motorola Tel.co wireless reseller business in the United Kingdom and Germany in
August 1998 and Telegate, the German directory information provider which we
began to consolidate in December 1998. We also experienced positive sequential
growth, excluding the impact of acquisitions, in each quarter during 1999.
Contributing to the growth in European revenues was the growth in the customer
base, which increased from 439 thousand customers at the end of 1998 to over 700
thousand at the end of 1999. European revenues as a percentage of consolidated
revenues increased from 34.6% in 1998 to 50.1% in 1999 primarily as a result of
these acquisitions and growth. This growth is consistent with our strategy of
expansion in Europe to position ourselves for profitability as anticipated
deregulation will make it possible for us to compete more effectively with the
incumbent local service providers.
36
<PAGE>
Revenues from our North American operations increased from $448.2 million in
1998 to $546.6 million in 1999, an increase of $98.4 million or 22.0%. This
increase was primarily from acquisitions, principally the Westinghouse
Communications business in the United States and the Westel Telecommunications
business in Canada, both of which occurred in July of 1998. Partially offsetting
the growth from these acquisitions was the efforts made during 1999 to focus the
United States' operations on end user customers rather than low margin wholesale
and prepaid calling card customers. Also contributing to the slower revenue
growth was the decision made in October 1999 to discontinue certain prepaid
calling card plans and exit the telemarketing business, which also provide low
margin. As a result of these actions, the number of customers in our North
American operations declined from 206,000 at December 31, 1998 to 136,000 at
December 31,1999 and North American revenues as a percentage of consolidated
revenues decreased from 50.6% to 37.2%.
Revenues from our Asia, Pacific and other operations, which are comprised
primarily of our operations in Australia, increased from $129.7 million in 1998
to $183.3 million in 1999, an increase of $53.6 million or 41.3%. This increase
was primarily due to the growth in mobile service customers as a result of the
acquisition of First Direct Communications Pty. Ltd. and Link Telecommunications
Pty. Ltd., two mobile telecommunications resellers in Australia in March 1998.
Also contributing to the revenue growth was the increase in commercial and
residential customers. Total customers in the region, which includes relatively
minor operations in Japan, Hong Kong as well as Mexico and Venezuela increased
from 164,000 at December 31,1998 to 226,000 at December 31,1999. Asia, Pacific
and other operations as a percentage of consolidated revenues declined from
14.6% at December 31,1998 to 12.5% at December 1999. This decline is consistent
with our focus of aggressive growth in Europe.
The remaining revenue is attributable to deltathree.com, our internet telephony
subsidiary, which is in a start up mode. For the year ended December 31, 1999
deltathree.com reported third party revenues of $3.6 million compared with $1.7
million in 1998.
Cost of Services (exclusive of depreciation and amortization shown separately
below). Cost of services increased to $1,034.3 million for the year ended
December 31, 1999 from $702.6 million for the year ended December 31, 1998, an
increase of 47.2%. This increase is primarily due to a significant increase in
traffic and, to a certain extent, increased rates paid to our carrier vendors.
As a percentage of revenues, cost of services decreased to 70.4% of revenues,
for the year ended December 31, 1999 as compared to 79.3%, for the year ended
December 31, 1998. During 1999, we recorded a special charge of which $2
million, representing the write-off primarily of certain prepaid card inventory,
was recorded in cost of services. Cost of services, as a percentage of revenues
decreased in all of our geographic regions. In our European operations, costs of
services as a percentage of revenues decreased from 76.1% in 1998 to 63.8% in
1999. This decrease is primarily attributable to the increased utilization of
our facilities, increases in higher-volume commercial accounts and an increase
in higher margin wireless subscribers. In our North American operations, costs
of services as a percentage of revenues decreased from 81.5% in 1998 to 80.4% in
1999. This decrease is primarily attributable to the change during the year in
the mix of revenues as we reduced our emphasis on high cost, low profit margin
wholesale sales to other telecommunication carriers and expanded our sales to
lower cost, high profit margin end user commercial and residential customers.
Also contributing to the improved costs is the decision made in the third
quarter to exit the high cost, low profit margin telemarketing business and
certain prepaid calling card plans. In our Asia Pacific and other operations,
costs of services as a percentage of revenues decreased from 79.7% in 1998 to
67.1% in 1999. This decrease is primarily due to the reduction in start up costs
and growth in the cellular business in our Australia operations.
Selling, General and Administrative Expenses. Selling, general and
administrative expense for the year ended December 31, 1999 increased by $209.8
million, or 88.1%, to $447.9 million from $238.1 million for the year ended
December 31, 1998. This increase is primarily attributable to start-up costs in,
and expansion of, our European operations, customer acquisition costs, and the
hiring of additional sales and customer service personnel particularly in
Europe.
Selling, general and administrative expense as a percentage of revenues
increased to 30.5%, for the year ended December 31, 1999 as compared to 26.9%,
for the year ended December 31, 1998. In our European operations, selling,
general and administrative expense as a percentage of revenues
37
<PAGE>
decreased from 33.9% to 33.1% in 1999 due to cost efficiencies achieved at our
larger operations in Germany and the United Kingdom. This favorability was
partially offset by the inclusion of the results of Telegate AG, a directory
information provider in Germany, which we began consolidating at the end of
1998. As a directory information provider, Telegate's cost structure is quite
different from our other operations since its costs are predominantly
labor-related with proportionately lower network costs. In our North American
operations, selling, general and administrative expense as a percentage of
revenues increased from 18.2% in 1998 to 19.6% in 1999. This increase was due to
increased marketing and advertising costs incurred in connection with our
efforts to expand our presence in the commercial and residential markets. In our
Asia, Pacific and other operations, selling, general and administrative expense
as a percentage of revenues increased from 25.6% in 1998 to 37.4% in 1999 due to
increases in marketing, advertising and customer retention costs in Australia as
well as start up costs in Japan, Hong Kong, Mexico and Venezuela. Selling
general and administrative expense at deltathree.com increased from $4.7 million
in 1998 to $13.5 million in 1999. This increase is due to additional marketing,
advertising and start-up costs as the Company expands its customer base and
product offerings.
Non-cash Compensation Expense. Non-cash compensation expense relates to variable
stock incentive awards that were previously granted to employees in several of
our subsidiaries, primarily deltathree.com. Non-cash compensation expense in
1999 was $23.6 million. This is mainly the result of deltathree.com's initial
public offering, which took place in the fourth quarter of 1999. Non-cash
compensation expense will continue to be recorded in future periods as awards
are vested primarily at deltathree.com.
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 is 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. These expenses appear in the
accompanying year ended December 31, 1999 income statement as $30.1 million in
the special charge line item and $2.0 million in the cost of services line item.
During the fourth quarter of 1999 we incurred $3.0 million for terminating
leases, $5.8 million for the severance of 76 telemarketing employees and 104
other staff employees and $6.6 million for asset write downs including
inventory. As of December 31, 1999 the reserve balance was $16.7 million, of
which $10.1 million is for terminating leases and $6.6 million is for severance
payments to be paid out primarily to former employees who have already been
severed, during the first three quarters of 2000 in accordance with local
country requirements.
Depreciation and Amortization Expense. Depreciation and amortization expense
increased 136% to $177.9 million for the year ended December 31, 1999 from $75.4
million for the year ended December 31, 1998. This increase is primarily
attributable to the full year impact of the amortization of goodwill and other
intangibles recorded in connection with several large acquisitions made in the
second half of 1998 and higher depreciation due to continued significant capital
expenditures. Depreciation expense is expected to continue to increase in the
future as we continue to expand and enhance our network.
Interest Income. Interest income increased to $20.6 million for the year ended
December 31, 1999 from $16.1 million for the year ended December 31, 1998. The
increase is primarily as a result of interest earned on the net proceeds from
the notes issued in prior years as well as the notes issued in 1999.
Interest Expense. Interest expense increased to $133.2 million for the year
ended December 31, 1999 from $75.4 million for the year ended December 31, 1998.
The increase is primarily as a result of increased debt relating to the notes
issued during 1998 and 1999.
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
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.
38
<PAGE>
We recorded a foreign currency translation adjustment of $7.6 million as a
component of equity as of December 31, 1999. 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. Such rights are the
established method of settlement among international telecommunications carriers
and are valued based upon a basket of foreign currencies. We believe that this
mitigates, to some extent, our foreign currency exposure. We have monitored and
will continue to monitor our currency exposure.
Foreign exchange transaction gain (loss)--net, was a net gain of $17.0 million,
for the year ended December 31, 1999, as compared to a net loss of $11.1
million, for the year ended December 31, 1998. The gains through 1999 compared
to the loss in 1998 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 in 1999 as opposed to the increase in the
Deutsche mark against the U.S. dollar in 1998.
Loss in Equity Interest of Unconsolidated Subsidiaries--Net. We recorded a loss
in equity interest of unconsolidated subsidiaries--net of $4.7 million for the
year ended December 31, 1999, to reflect our pro-rata share of the operating
loss in the investments of Maxitel Servicos e Gestao de Telecommunicacoes, S.A.,
a Portuguese international telecommunications carrier, MK Telecom Network Inc.,
a Canadian microwave telecommunications facilities company and Cetel, a Spanish
international telecommunications carrier.
Net Loss. The net loss increased to $358.2 million for the year ended December
31, 1999, as compared to the net loss of $219.2 million for the year ended
December 31, 1998 due to the factors described above. Also impacting the
comparisons of the net loss between periods is an extraordinary item of $20.8
million recorded in the year ended December 31, 1998, representing the premium
paid to retire approximately $127.5 million of the original $300.0 million of
our 1996 Notes.
Years Ended December 31, 1998 and 1997
Revenues. Revenues increased to $885.9 million in 1998 compared to $300.8
million in 1997, an increase of 195%. This increase is due primarily to an
increase in (1) North American revenues to $448.2 million in 1998 from $194.1
million in 1997 and (2) European revenues, which increased to $306.3 million in
1998 from $73.7 million in 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 Telco
acquisition, which contributed $153.7 million to 1998 European revenues, and (3)
an increase in the European customer base. Revenues from Asia/Pacific and other
operations increased to $129.7 million for 1998, compared with $32.6 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 52.0% 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
39
<PAGE>
in part 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.
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-up
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 expense increased as a result of
the Motorola Telco acquisition and the significant increase in employees in many
of our European 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.
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. 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 or 1999.
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 communications
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 year ended December 31, 1999 totaled
$152.9 million compared with $82.8 million for the year ended December 31,1998
reflecting the use of cash to fund operating losses and working capital
requirements. Capital expenditures, which include assets acquired under capital
lease obligations, for 1999 were $256.0 million compared with $247.7 million for
the comparable period in 1998. These capital expenditures are principally for
switches, fiber, and related telecommunications equipment. We intend to continue
to expand and develop our infrastructure, in part by replacing leased
transmission facilities with owned transmission lines, purchasing IRU' s and
interests in inter-city fiber routes in certain key markets and installing
additional national and international telephone gateway switches. We expect that
we will invest in the aggregate
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approximately $260 million in 2000, including $10 million expected to be
invested at deltathree.com, to expand and enhance our existing
telecommunications network.
In March, 2000 a consortium led by our subsidiary RSL COM Spain was awarded a
license to operate a wireless local loop network. The consortium, of which RSL
COM Spain owns a 30% equity interest, will provide voice, data and video
services through radio transmission, will enable users to make local and long
distance calls and provide a permanent, high speed connection to the Internet
for a flat rate. The network is expected to be operational before the end of
2000 in 30 cities. In connection with the build out of this network, we expect
our share of the capital expenditures for 2000 to be in the range of $10 million
to $25 million, incremental to our $260 million capital program.
Cash expended for acquisitions of subsidiaries were $66.4 million for 1999
primarily reflecting payments for properties acquired at the end of 1998 as well
as the acquisition of Advanced Communications and an equity interest in Cetel
compared with $287.0 million for 1998. At December 31, 1999, we had $163.7
million of working capital as compared to $255.2 million of working capital at
December 31, 1998.
Our indebtedness, excluding capital lease obligations, was approximately $1.2
billion at December 31, 1999, 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 by RSL COM U.S.A.
Through RSL PLC we have various senior notes and senior discount notes that are
due from 2006 through 2009, totaling $1.19 billion, net, as of December 31,
1999. The notes were issued under indentures containing certain restrictive
covenants which impose limitations on our ability to, among other things, incur
additional indebtedness, pay dividends or make certain other distributions,
issue capital stock of certain subsidiaries, guarantee debt, enter into
transactions with shareholders and affiliates, create liens, enter into
sale-leaseback transactions and sell assets.
Pursuant to a consent solicitation, we obtained the consent of holders of our
outstanding debt and amended our indentures governing our debt in September
1999. These amendments were to permit the issuance and sale of capital stock of
deltathree.com and our Australian subsidiary in public or private transactions
without restricting the use of proceeds solely to investments in
telecommunications assets. In connection with the consent solicitation, total
fees were approximately $6.8 million. We recorded these fees as a reduction in
paid in capital received by deltathree.com in connection with its initial public
offering. We intend to continue to pursue an initial public offering of our
Australian subsidiary and, if successful, proceeds received by us would be
reinvested in our business.
Through LDM Systems, Inc., one of our subsidiaries, we have a $10.0 million
revolving credit facility, all of which was available at December 31, 1999. This
facility accrues interest at a rate of prime plus 2.5% per annum.
Through Telegate Holding, another subsidiary, we have a $26 million revolving
credit facility, all of which was available as of December 31, 1999.
Through RSL COM Canada, we have a $6.9 million revolving credit facility of
which $5.3 million was used for the lease of telecommunications equipment. The
lease terms provide for monthly payments through February 2006 at an interest
rate of 8.7% per annum.
One of our primary equipment vendors has provided some of our subsidiaries
approximately $85 million in vendor financing to fund the purchase of additional
switching and related telecommunications capital equipment. At December 31,
1999, all available amounts were utilized under this facility. Borrowings from
this equipment vendor accrue interest at a rate of LIBOR plus 3.50% to 5.25% or
STIBOR plus 3.50% depending on the equipment purchased and whether the loan is
guaranteed by the Swedish Export Credits Guarantee Board. We repaid
approximately $30 million of the outstanding balance by the end of the first
quarter of 2000.
In February, 2000 we issued 2.3 million Series A Convertible Preferred Shares
(Series A Preferred Shares) at a price of $50 and received net proceeds of
$111.0 million. Concurrent with the issuance, RSL PLC issued $100 million and
100 million Euro-denominated senior notes due 2010. The debt issuances generated
combined proceeds to us of approximately $192.2 million.
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Limitations 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 currently believe that the combined net proceeds from the
Series A preferred shares, the concurrent debt offering and the remaining net
proceeds from previous sales of shares and notes, and available borrowings under
our revolving credit facilities, short-term lines of credit and overdraft
facilities from local banks, will be sufficient to fund our capital expenditures
and operations into the fourth quarter of 2001. However, we may be required to
raise additional capital regardless of market conditions, if our plans or
assumptions change or prove to be inaccurate, if 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
Series A preferred shares and additional debt, together with other sources of
liquidity, otherwise prove to be insufficient. We may, in any event, seek to
raise additional capital through public or private debt or equity financings, if
such financings become available on acceptable terms.
We determine our needs for cash exclusive of the needs of deltathree.com, which
expects to seek additional financing in the public or private markets. We do not
currently expect to provide any additional financing for deltathree.com.
However, if deltathree.com is unable to obtain the financing that it needs from
other sources, we may be requested by it to provide such financing. In the event
we provide deltathree.com such financing, our requirements for additional cash
would increase beyond the amounts we currently project.
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 of our principal European
customers are closed for some or all of this time.
RISK FACTORS
Forward-looking statements and associated risks.
This annual report contains forward-looking statements, including
statements regarding our expected financial position, business and financing
plans. These forward-looking statements reflect our views with respect to future
events and financial performance. The words, "believe," "expect," "plans" and
"anticipate" and similar expressions identify forward-looking statements.
Although we believe that the expectations reflected in such forward-looking
statements are reasonable, we can give no assurance that such expectations will
prove to have been correct. Important factors that could cause actual results to
differ materially from such expectations (which we refer to as "Cautionary
Statements") include, but are not limited to those matters addressed under this
section ("Risk Factors"). All subsequent written and oral forward-looking
statements attributable to us, our subsidiaries or persons acting on our behalf
are expressly qualified in their entirety by the Cautionary Statements. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of their dates. We undertake no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
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We have a short operating history and limited operating experience. This may
negatively affect future operations.
We started operating our business in 1995. Some of our operations were
acquired from others. However, most of our operations were started subsequent to
1995. Therefore, our operations have limited operating histories and we have
limited experience in conducting those operations.
We entered newly opening markets as a key part of our business strategy. This
has special risks.
One key aspect of our business strategy has been to acquire or start
businesses in markets where there is 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 our lack of experience in a developing market;
o absence of recognition by consumers;
o reluctance of consumers to use an untested service provider;
o lack of consumer education about our products and services;
o resistance by consumers, regulators and existing competitors;
o need to commit to arrangements regarding transmission of phone
calls prior to knowing the level of customer usage; and
o legislative delays in adopting laws and regulations that are
necessary for us to promote our business and compete effectively
with incumbent carriers.
Additionally, we have discounted and may need to continue 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.
We expand our business by acquiring or starting new operations. We may
experience significant costs, delays and operational problems integrating these
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 facilities
o information systems
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o sales and marketing
o customer service
o billing
o finance and accounting
o quality control
o management
o personnel
o regulatory compliance
Some or all of the operational hardware and software systems used in
businesses we acquire may be incompatible with our existing systems. Acquired
businesses also may offer products and services that we have no previous or
limited experience in providing, such as, in the case of the 1998 Motorola Telco
acquisition, the wireless resale business. 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. We have experienced high levels
of customer attrition and turnover in certain acquired businesses in the United
States, Australia, France and Germany. In connection with the Motorola Telco
acquisition, we experienced higher levels of customer attrition than previously
experienced by our European operations.
Moreover, we may, as a result of legal restrictions or other reasons,
be limited to acquiring only a minority interest in a strategic target, in which
case we will lack control over the target company's operations and strategies.
Lack of control may interfere with our growth and the integration of our
operations.
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
o install hardware and software
In addition, since we already operate businesses in many countries and
we may 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 monitor operations and control costs
o maintain effective quality controls
o create or integrate an effective management team and operations
infrastructure
o obtain satisfactory and cost-effective lease rights from, and
interconnection agreements with, competitors that own transmission
lines
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Our rapid growth puts strains on our resources, including our ability
to:
o finance operating losses and capital expenditures;
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.
Moreover, acquisitions and establishing new operations entail
considerable expense in advance of anticipated revenues and may cause
substantial fluctuations in our operating results.
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 in our current markets may result in continued losses.
We have generated net losses of $725.4 million from our inception
through December 31, 1999. We have also incurred losses from operations since
inception. We must continue to expand our operations and meet increasing demands
for service, quality, availability of value-added services and competitive
pricing in order to to establish and maintain a competitive position in our
markets. We expect to incur significant net losses 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 the interest expense on our outstanding
indebtedness. Significant net losses and negative cash flow from operations may
continue beyond 2001.
In particular, we expect deltathree.com to have increasing losses as it
rapidly expands its operations. Following its initial public offering completed
in November 1999, deltathree.com expects to finance its own operations
independently. Accordingly, we believe our financial results should be analyzed
separately from deltathree.com. However, so long as deltathree.com results
continue to be included in our consolidated results, their losses will adversely
affect those results.
We have limited experience in providing data and Internet services which may
affect future operations.
We have limited experience in providing data and Internet services. Our
ability to succeed in the data and Internet business will depend upon, among
other things, our ability to integrate new equipment and software into our
network, hire and train qualified personnel, enhance our billing, back-office
and information systems to accommodate data and Internet transmission services,
and obtain customer acceptance of our service offerings. If we are not
successful in providing data and Internet services, there may be a material
adverse effect on our business, financial condition, results of operations and
our ability to service our outstanding indebtedness. The data and Internet
businesses are also extremely competitive and prices have declined substantially
in recent years and are expected to continue to decline. In providing these
services, we will be dependent upon vendors for assistance in the planning and
deployment of our data and Internet product and service offerings, and ongoing
training and support. Our vendors may not have adequate experience in providing
equipment and configuring data networks in our various markets. We may also
experience technical difficulties in integrating our equipment and handling
differing data transmission protocols in our various markets.
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We will need to raise substantial additional capital to fund our growth strategy
and continuing losses and to repay or refinance our outstanding debt securities.
We cannot be sure that we will be able to raise additional capital when needed
or on acceptable terms.
We made capital expenditures of approximately $247.7 million in 1998
and $256.0 million in 1999. In 2000, we intend to make capital expenditures in
similar amounts to those in 1998 and 1999. Our working capital deficit has been
consistently increasing. We currently believe the combined net proceeds of the
preferred shares offering and the concurrent debt offering, available cash,
including the remaining net proceeds from our previous sales of shares and
notes, and available borrowings under our credit facilities will be adequate to
meet our future liquidity needs into the fourth quarter of 2001. We calculate
our cash needs separately from those of deltathree.com, which completed an
initial public offering in November 1999 and expects to finance its own
operations independently from us. We may be required to seek additional capital
regardless of market conditions if:
o our plans or assumptions change or prove to be inaccurate,
including assumptions about our competitors;
o we identify additional required or desirable infrastructure
investments or acquisitions;
o we experience unanticipated costs or competitive pressures;
o the remaining net proceeds from the sale of our securities and
other sources of available liquidity otherwise prove to be
insufficient; or
o deltathree.com is unable independently to raise additional capital
sufficient to finance its business.
We may also be required to raise capital to pay interest or principal
on, or to refinance, our outstanding indebtedness, as it matures. We may, in any
event, seek to raise additional capital promptly following this offering through
public or private debt or equity financings, if such financings become available
on acceptable terms. We cannot be sure that we will be able to raise additional
capital if and when required. Among other things, the limitations contained in
our outstanding indebtedness likely will prevent us from incurring any
significant amounts of additional indebtedness, should additional capital be
required, without the completion of a significant equity offering or the
generation of significant positive cash flow at such time. If we fail to obtain
additional capital on acceptable terms, we may be required to reduce our capital
and operating expenditures, which would likely negatively impact our business,
results of operations and financial condition and our ability to pay interest on
or repay our existing obligations.
Our substantial indebtedness could adversely affect our financial condition and
prevent us from satisfying our obligations.
At December 31, 1999, we had total consolidated indebtedness of
approximately $1.2 billion and shareholders' deficit of approximately $83.6
million. Subject to our compliance with the limitations contained in our
outstanding indebtedness, we may incur substantial amounts of additional
indebtedness.
For the years ended December 31, 1995, 1996, 1997, 1998 and 1999, our
earnings were insufficient to cover our fixed charges. The deficiency was
approximately $9.4 million for the year ended December 31, 1995, $37.7 million
for the year ended December 31, 1996, $100.0 million for the year ended December
31, 1997, $199.9 million for the year ended December 31, 1998 and $338.8 million
for year ended December 31, 1999.
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If our operations do not generate enough revenues or we cannot obtain
sufficient funds at acceptable rates to make our debt payments when they are due
or we fail to comply with the material terms of the legal documents governing
our indebtedness, the value of our securities could be adversely affected.
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 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;
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 borrow
additional money or incur additional debt.
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
most 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
o make some types of investments
As described above, these restrictions could inhibit us from raising
additional capital to fund our operations and planned expansions, which could
adversely affect our ability to generate cash to service our outstanding
indebtedness.
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
the combined net proceeds of our recent preferred shares offering and debt
offering, available cash, including the remaining net proceeds from our previous
sales of shares and notes, and available borrowings under our credit facilities
will be adequate to meet our future liquidity needs into the fourth quarter of
2001.
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We cannot be sure that currently anticipated operating improvements
will be realized on schedule or that available cash and borrowings will be
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 at or
before the time 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.
We determine our needs for cash exclusive of the needs of
deltathree.com, which expects to seek additional financing in the public or
private markets. We do not currently expect to provide any additional financing
for deltathree.com. However, if deltathree.com is unable to obtain the financing
that it needs from other sources, we may be requested by it to provide such
financing. If we provide deltathree.com such financing, our requirements for
additional cash would increase beyond the amounts we currently project.
Our ability to pay our obligations, and the ability of our subsidiary, RSL PLC,
to pay its obligations, depends upon our ability to receive cash from our
subsidiaries.
Most of our outstanding indebtedness has been issued by our wholly
owned subsidiary, RSL PLC. We are, and RSL PLC is, a holding company and, in
each case, the only material assets consist of shares of subsidiaries and
fluctuating cash balances. We and RSL PLC have contributed or loaned to our
subsidiaries a substantial majority of the net proceeds from our prior sales of
equity and debt and we intend to contribute or loan to our subsidiaries a
substantial majority of the net proceeds from our recent sale of preferred
shares and notes. In each case, our ability to pay our obligations depends upon
our ability to receive cash from our subsidiaries. However, these subsidiaries
may face difficulties distributing cash to us because:
o they are separate and distinct legal entities and may have no
obligation to make funds available to 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 made to them by us 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 is liquidated or reorganized, there may not be
sufficient assets for us to recover our investment in that subsidiary. Any right
we or RSL PLC have to receive assets from a subsidiary upon its liquidation or
reorganization is secondary to the claims of the subsidiary's creditors, unless
we are, or RSL PLC is, independently recognized as a creditor. Even if we are,
or RSL PLC is, recognized as a creditor, our claims 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
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o technological improvements
o expansion of telecommunications infrastructure
o the globalization of the world's economies
o free trade
We may be unable to compete effectively or adjust our contemplated plan of
development to meet these changing market conditions.
Much of our planned growth is predicated upon the deregulation of
telecommunications markets. Such deregulation may not occur when or as
anticipated, if at all, and we may not be able to grow in the manner or at the
rates currently contemplated.
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 and Internet
Protocol, or IP, 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 to 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.
Worldwide deregulation is increasing competition in our industry. If we are
unable to compete effectively, our operations will be negatively impacted.
Some of the markets we compete in have only recently deregulated or are
in the process of deregulating communications 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 communications 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 compete with a variety of other communications providers in each of
our markets, including:
o government-owned and government-controlled telephone monopolies
(e.g., France Telecom and Deutsche Telekom), established
competitors such as Cable & Wireless PLC and global alliances, such
as Concert, AT&T's alliance with British Telecom, that offer
international and national long distance services, local service in
conjunction with long distance services, data and Internet products
and services and packages of value-added services;
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o a variety of international long distance carriers and resellers
including AT&T, MCI Worldcom and Sprint in North America; Colt
Telecommunications, Global Crossing, GTS, ICG, Qwest and Viatel in
Europe; Telstra and Cable & Wireless Optus in Australia and
Teleglobe in Canada; and
o emerging data and voice communications competitors, including
Facilicom in Finland, Omnicom in France, Infostrada in Italy,
Jazztel in Spain and AT&T Canada, Sprint Canada and Telus in
Canada and others.
Many of the incumbent telecommunications operators and established
competitors have significantly greater financial, management and operational
resources than us and more operational history and experience. In addition,
incumbent telecommunications operators 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 would be adversely affected to the extent that the incumbent
telecommunications operators 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 long distance 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, currently 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.,
Canada and Germany.
We attempt to discount our services from the prices charged by the
incumbent telecommunications operators 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., Canada and Germany,
severe price competition has occurred and, as deregulation progresses in other
markets we may encounter severe price competition in those markets.
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.
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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 has implemented 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 and formerly 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 have implemented 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,
deltathree.com, may be subject to and affected by regulations introduced by the
authorities in each country where deltathree.com operates. Based on specific
regulatory classifications and recent regulatory decisions, deltathree.com
believes it qualifies for certain exemptions from telecommunications and common
carrier regulation in many of its markets. However, the growth of Internet
telephony has led to close examination of its regulatory treatment in many
jurisdictions, making the legal status of deltathree.com's services uncertain
and subject to change as a result of future regulatory action, judicial
decisions or legislation in any of the jurisdictions in which deltathree.com
operates. Established regulated telecommunications carriers have sought and may
continue to seek regulatory actions to restrict the ability of companies such as
deltathree.com to provide services or to increase the cost of providing such
services. In addition, deltathree.com's services may be subject to regulation if
regulators distinguish phone-to-phone telephony service using Internet
technologies over privately-managed networks such as deltathree.com's services
from integrated PC-to-PC and PC-originated voice services over the Internet.
Some regulators may decide to treat the former as regulated common carrier
services and the latter as unregulated enhanced or information services.
Application of new regulatory restrictions or requirements to deltathree.com
could increase its costs of doing business and prevent it from delivering
services
51
<PAGE>
by its current arrangements. Further, regulations and laws which affect the
growth of the Internet could hinder deltathree.com's ability to provide its
services over the Internet.
If we are unable to predict traffic volumes accurately, we may be forced to pay
additional monies.
At least some portion of all telephone calls made by our customers is
transported through transmission facilities that we lease from our competitors.
To date, we have generally leased 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 is the case in the U.S., lease rates have declined and short-term
leases have been advantageous. When capacity is constrained, the decline in
lease rates slows or halts. 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 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. A failure to accurately project needs for leased capacity in
the future may have a negative effect on our business and our ability to satisfy
our fixed obligations.
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, the
incumbent telecommunications operators may not be required by law to allow us to
lease necessary transmission lines or, if they are required by law to lease
transmission lines to us, we may encounter delays in commencing operations and
negotiating leases and interconnection agreements (as has been the case in
certain countries). 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.
52
<PAGE>
We are also vulnerable to service interruptions and poor transmission
quality from leased lines.
If our relationships with one or more of our carrier vendors were to
deteriorate, we could suffer a negative effect on our business, financial
condition and results of operations.
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 monitor the network
o transport phone calls on the best route in terms of pricing and
call quality
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
o to upgrade systems as necessary.
The Year 2000 problem places our technology systems at risk.
Although we have not experienced any material system disruptions
resulting from the transition to the year 2000, the possiblity remains that
system failures by third parties could affect us, particularly with respect to
billing for periods that ended shortly before or after January 1, 2000. In
addition, we continue to test and assess our systems and monitor those of our
vendors and customers. We expect any problems of this nature will make
themselves known to us during the first quarter of 2000.
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.
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Our controlling shareholder has the ability to fundamentally control our
business.
Ronald S. Lauder, chairman of our board of directors, controls a
majority of the voting power of our common shares. 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 a significant majority of the
voting power of our common shares.
The concentration of ownership may have the effect of delaying,
deferring or preventing a change of control of our company, a transaction which
might otherwise be beneficial to shareholders. In addition, our memorandum of
association and bye-laws contain provisions that could delay, defer or prevent a
change in control without the approval of the incumbent board of directors.
These provisions could impede the ability of the shareholders to replace
management even if factors warrant such a change.
If we or any of our foreign subsidiaries were deemed to be a foreign personal
holding company or passive foreign investment company, our U.S. stockholders
could be adversely affected.
We will seek to manage our affairs and the affairs of our subsidiaries
so that neither we nor any of our foreign corporate subsidiaries would be
classified as a passive foreign investment company, referred to as a PFIC or,
once we are or such a subsidiary is profitable, as a foreign personal holding
company, referred to as an FPHC, under the U.S. Internal Revenue Code of 1986,
to the extent such management of affairs is consistent with our other business
goals. If we or any such subsidiary were an FPHC, the undistributed foreign
personal holding company income (generally, the taxable income, with certain
adjustments), if any, of us or of such subsidiary would be included in the
income of our U.S. shareholders as a dividend on a pro rata basis. If we were a
PFIC, then each U.S. holder of our preferred or common shares would, upon
certain distributions by us, or upon disposition of those shares at a gain, be
liable to pay tax at the then prevailing rates on ordinary income plus an
interest charge, generally as if the distribution or gain had been recognized
ratably over the U.S. holder's holding period (for PFIC purposes) for the
shares. If a "qualified electing fund" election were made by a U.S. holder of
our shares, the rule described in the preceding sentence would not apply, but
instead a pro rata share of our ordinary earnings and net capital gain (and
those of any of our foreign corporate subsidiaries that were PFIC's) would be
required to be included in such U.S. holder's income each year. Also, a U.S.
holder of our common shares (or preferred shares, if regularly traded) may be
able to make a mark-to-market election whereby annual increases and decreases in
share value are included as ordinary income or deducted from ordinary income by
marking-to-market the value of the shares at the close of each year. While we
intend to manage our affairs and the affairs of our corporate subsidiaries so as
to avoid PFIC status or, once profitable, FPHC status, to the extent such
management of our affairs is consistent with our other business goals, there can
be no assurance that we will be successful in this endeavor.
You 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.
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<PAGE>
Effects of our incorporation under Bermuda corporate law.
Bermuda law differs in certain respects from laws generally applicable
to United States corporations and shareholders. These differences include less
restrictive limitations on transactions entered into by us in which any of our
directors have an interest and greater restrictions on the rights of our
shareholders to dissent from and obtain remedies in connection with mergers,
takeovers and other combination transactions and to pursue legal challenges to
corporate actions.
ITEM 7A. 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 $7.6 million as a component of equity
as of December 31, 1999. 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. For the year ended December 31, 1999, we
recorded a foreign currency transaction gain of approximately $17.0 million,
primarily as a result of the decrease 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, accrued expenses and notes
payable is a reasonable approximation of their fair value.
At December 31, 1999, the fair value of our long-term debt was estimated to be
$1,099 million based on the overall weighted average rate of our long-term debt
of 10.43% and an overall weighted average maturity of 8.4 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 10% of the market interest rate as of
December 31, 1999. This type of an increase in interest rates would result in
approximately a $72.8 million decrease in fair value of our long-term debt.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See page F-1 for a listing of the consolidated financial statements submitted as
part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated herein by reference to the
section entitled "Election of Directors" in our 2000 Proxy Statement to be filed
with the SEC no later than April 30, 2000.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference to the
sections entitled "Executive Compensation," "Compensation Committee Report on
Executive Compensation" and "Performance Graph" in our 2000 Proxy Statement to
be filed with the SEC no later than April 30, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference to the
section entitled "Security Ownership of Certain Beneficial Owners and
Management" in our 2000 Proxy Statement to be filed with the SEC no later than
April 30, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference to the
section entitled "Certain Relationships and Related Transactions" in our 2000
Proxy Statement to be filed with the SEC no later than April 30, 2000.
56
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A)(1)
THE FOLLOWING FINANCIAL STATEMENTS OF THE COMPANY ARE INCLUDED IN PART II, ITEM
8 OF THIS REPORT:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1998 and December 31, 1999
Consolidated Statements of Operations and Comprehensive Loss for the
Years Ended December 31, 1997, December 31, 1998 and December 31, 1999
Consolidated Statements of Shareholders' Equity (Deficit) for the Years Ended
December 31, 1997, December 31, 1998 and December 31, 1999
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997,
December 31, 1998 and December 31, 1999
Notes to Consolidated Financial Statements
(A)(2) SEE (D) BELOW FOR A LISTING OF FINANCIAL STATEMENT SCHEDULES
INCLUDED AS A PART OF THIS REPORT.
(A)(3) SEE (C) BELOW FOR A LISTING OF THE EXHIBITS INCLUDED AS PART OF
THIS REPORT.
(B) CURRENT REPORTS ON FORM 8-K:
We filed a Form 8-K with the SEC dated October 29, 1999, reporting that
we had filed a press release regarding our third quarter financial
results. The press release was filed as an exhibit to the Form 8-K.
(C) THE FOLLOWING EXHIBITS ARE INCLUDED IN THIS REPORT:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
*3.1 Certificate of Incorporation of RSL Communications, Ltd.,
issued by the Bermuda Registrar of Companies on March 14, 1996.
*3.2 Memorandum of Association of RSL Communications, Ltd., filed with the Bermuda Registrar
of Companies on March 14, 1996.
#3.3 Bye-Laws of RSL Communications, Ltd., as amended.
**4.1 Form of Class A Common Share Certificate.
*10.1 Indenture, dated October 3, 1996, by and among RSL Communications PLC, RSL
Communications, Ltd. and the Chase Manhattan Bank, as Trustee containing, as exhibits,
specimens of 12 1/4 % Senior Notes due 2006.
*10.2 Note Deposit Agreement, dated October 3, 1996, by and among RSL Communications PLC, RSL
Communications, Ltd. and the Chase Manhattan Bank, as Book Entry Depositary.
*10.3 Collateral Pledge and Security Agreement, dated October 3, 1996, by and among RSL
Communications PLC and Trustee.
++++10.4 Note Deposit Agreement, dated as of February 27, 1998, among RSL Communications PLC, RSL
Communications, Ltd. and The Chase Manhattan Bank as Book-Entry Depositary.
++++10.5 Note Deposit Agreement, dated as of February 27, 1998, among RSL Communications PLC, RSL
Communications, Ltd. and The Chase Manhattan Bank as Book-Entry Depositary.
++++10.6 Indenture, dated as of February 27, 1998, by RSL Communications PLC and RSL Communications,
Ltd. to the Chase Manhattan Bank as Trustee.
</TABLE>
57
<PAGE>
<TABLE>
<S> <C>
++++10.7 Indenture, dated as of February 27, 1998, by RSL Communications PLC and RSL Communications,
Ltd. to the Chase Manhattan Bank as Trustee.
++++10.8 Note Deposit Agreement, dated as of March 16, 1998, by and between RSL Communications PLC
and The Chase Manhattan Bank as Book-Entry Depositary.
++++10.9 Indenture, dated as of March 16, 1998, by RSL Communications PLC and RSL Communications, Ltd.
to The Chase Manhattan Bank as Trustee.
*10.10 Warrant Agreement, dated October 3, 1996, between RSL Communications, Ltd., as Issuer,
and The Chase Manhattan Bank, as warrant agent.
*10.11 Warrant Registration Rights Agreement, dated October 3, 1996, between RSL Communications,
Ltd., as Issuer, and The Chase Manhattan Bank, as warrant agent.
*10.12 Subordinated Promissory Note dated September 10, 1996, from RSL Communications, Ltd. to Ronald
S. Lauder.
*10.13 Warrant for 210,000 shares of Class B Common Stock of RSL Communications, Ltd. issued to Ronald
S. Lauder on September 10, 1996.
*10.14 RSL Communications, Ltd.'s 1995 Amended and Restated Stock Option Plan.
*10.15 Memorandum of Agreement, dated July 30, 1996, between International Telecommunications
Corporation and Codetel.
*10.16 General Purchase Agreement , dated September 14, 1995, between Ericsson Inc. and International
Telecommunications Corporation.
*10.17 Lease Agreement between AB LM Ericsson Finans and International Telecommunications Corporation.
*10.18 Lease Agreement, dated April 10, 1996, between RSL COM Europe Ltd. and AB LM Ericsson Finans.
*10.19 Lease Agreement, dated December 30, 1996, between RSL COM Europe Ltd. and AB LM Ericsson Finans.
*10.20 Asset Purchase Agreement, dated as of May 8, 1996 by and between RSL COM France S.A. and Sprint
Telecommunications France Inc.
*10.21 Asset Purchase Agreement, dated as of May 8, 1996, by and among Siena
Vermogensverwaltungs-GmbH, Sprint Telecommunications Services GmbH, and Sprint Fon Inc.
*10.22 Asset Purchase Agreement, August 12, 1996, by and between RSL COM UK Limited and Incom (UK) Ltd.
*10.23 Stock Purchase Agreement, dated July 3, 1996, between RSL Communications Limited, Charles
Piluso and International Telecommunication Group, Ltd.
*10.24 Stock Purchase Agreement, dated September 9, 1996, between RSL Communications PLC,
Richard Rebetti, Jr, and International Telecommunications Group, Ltd.
*10.25 Agreement and Plan of Reorganization, dated September 9, 1996, among RSL Communications PLC,
RSL Communications, Ltd. and Charles Piluso.
*10.26 Tax Agreement, dated September 9, 1996, between RSL Communications PLC, RSL Communications,
Ltd. and Charles Piluso.
*10.27 Stock Purchase Agreement, dated September 22, 1995, by and between RSL Communications, Inc. and
Charles Piluso.
*10.28 Stock Purchase Agreement, dated September 22, 1995, by and between Richard Rebetti and
RSL Communications, Inc.
*10.29 Amendment to the Stock Purchase Agreement, dated September 22, 1995, between and among
International Telecommunications Group, Ltd., International Telecommunications Corporation and
RSL Communications, Inc.
*10.30 Stock Purchase Agreement, dated March 10, 1995, between RSL Communications, Inc., International
Telecommunications Group, Ltd. and International Telecommunications Corporation.
*10.31 Indemnity Agreement, dated March 10, 1995, between and among International
Telecommunications Group, Ltd., International Telecommunications Corporations and RSL
Communications, Inc.
*10.32 Sublease, dated July 18, 1996, between RSL Communications, Ltd., and RSL Management Corporation.
*10.33 Lease, dated as of January 15, 1997, between Longstreet Associates L.P. and RSL COM U.S.A., Inc.
</TABLE>
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<TABLE>
<S> <C>
*10.34 Amendment of Lease, dated as of December 6, 1995, between Hudson Telegraph Associates and
International Telecommunications Corporation.
**10.35 Shareholders Agreement of RSL Communications, Latin America, Ltd., dated August 4, 1997,
between and among RSL Communications, Latin America, Ltd., RSL Communications, Ltd. and Coral
Gates Investments Ltd.
+10.36 RSL Communications, Ltd. 1997 Performance Incentive Plan.
++10.37 RSL Communications, Ltd. 1997 Stock Incentive Plan, as amended.
**10.38 Lease Agreement, dated June 19, 1997 for property at 430 Park Avenue, New York, New York.
**10.39 Stock Purchase Agreement of Delta Three, Inc.
**10.40 Employment Agreement, dated September 2, 1997, between Itzhak Fisher and RSL Communications,
Ltd.
**10.41 Employment Agreement, dated September 2, 1997, between Itzhak Fisher and International
Telecommunications Group, Ltd.
+10.42 RSL Communications, Ltd. 1997 Directors' Compensation Plan.
**10.43 Registration Rights Agreement, dated September 2, 1997, among RSL Communications, Ltd., Ronald
S. Lauder, Itzhak Fisher and Coral Gate Investments Ltd.
**10.44 International Telecommunication Services Agreement, dated July 1, 1995,between International
Telecommunications Corporation and TELECOM Denmark.
**10.45 International Telecommunications Operating Agreement, dated July 15, 1995 between Telenor
Carrier Services A.S. and International Telecommunications Corporation.
**10.46 International Telecommunication Services Agreement, dated May 10, 1994, Between Mercury
Communications Limited and International Telecommunications Corporation.
**10.47 Agreement Concerning Voice Distribution of International Telophony Traffic, undated,
Between Unicource Carrier Services AG and International telecommunications Corporation.
**10.48 International Telecommunications Services Agreement, dated May 31, 1994, between Compania
Dominicana De Telefonos, C. Por A. and International Telecommunications Corporation.
**10.49 Second Supplementary Agreement to the UK-Netherlands 14 Cable System Construction &
Maintenance Agreement, effective February 18, 1997 among the parties on the Annex
thereto.
**10.50 Fourth Supplementary Agreement to the ODIN Construction and Maintenance Agreement, dated
October 24, 1996, among the parties on the Annex thereto.
**10.51 Second Supplementary Agreement to Antillas I Construction & Maintenance Agreement, dated
February 13, 1997, among the parties on the Annex thereto.
**10.52 Canus I Cable System Indefeasible Right of Use Agreement and Communications, Inc. and
International Telecommunications Corporation.
**10.53 Cantat - 3 Cable System Indefeasible Right of Use Agreement and Financing Agreement, dated
March 12, 1996, between Teleglobe Cantat - 3 Inc. and International Telecommunications
Corporation.
**10.54 PTAT - 1 Submarine System Indefeasible Right of Use Agreement, dated May 12, 1994, between
PrivateTransatlantic Telecommunications System, Inc. and International Telecommunications
Corporation.
**10.55 Third Supplementary Agreement to the TAT - 12/TAT - 13 Cable Network Construction and
Maintenance Agreement, dated October 17,1995, among the parties on the Annex thereto.
*10.56 Placement Agreement, dated as of September 30, 1996, by and among RSL Communications PLC, RSL
Communications, Ltd. and Morgan Stanley & Co. Incorporated, Bear Stearns Co. Inc. and Dillon
Read & Co. Inc..
+++10.57 Asset Purchase Agreement, dated as of April 23, 1998 by and between CBS Corporation and
RSL COM U.S.A., Inc.
*****10.58 Restated Umbrella Agreement, dated as of June 26, 1998, among Motorola Limited, SA
Motorola NV, Motorola Electronic GmbH, Motorola SA and RSL Communications, Ltd.
***10.59 Share Subscription, Share Option and Shareholders Agreement, dated June 10, 1998, among RSL COM
Europe Ltd., RSL Communications, Ltd. and Metro Holding AG.
***10.60 Marketing and Distribution Services Agreement, dated as of June 10, 1998, between RSL Com
Europe Ltd. and Metro Holding AG.
***10.61 Exchange Agreement, dated July 22, 1998, among Ligapart AG,
Metro Holding AG and RSL Communications, Ltd.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
***10.62 Amended and Restated Share Subscription, Share Option and Shareholders Agreement, dated July
22, 1998, among RSL COM Europe Ltd., RSL Communications, Ltd. and Metro Holding AG.
***10.63 Share Purchase Agreement, dated June 24, 1998, between
British Columbia Railway Company and RSL Com Holdings
Canada, Inc.
****10.64 Note Deposit Agreement, dated November 9, 1998, among RSL Communications PLC, RSL
Communications, Ltd. and The Chase Manhattan Bank as Book-Entry Depositary.
****10.65 Indenture, dated November 9, 1998, by RSL Communications PLC and RSL Communications, Ltd. to
The Chase Manhattan Bank as Trustee.
******10.66 Note Deposit Agreement, dated December 8, 1998, among RSL
Communications PLC, RSL Communications , Ltd., and The
Chase Manhattan Bank as Book-Entry Depository.
******10.67 Indenture, dated December 8, 1998, by RSL Communications PLC and RSL Communications, Ltd. to
The Chase Manhattan Bank as Trustee.
#10.68 Employment Agreement Between RSL Communications, Ltd. and David Hardwick.
******10.69 Employment Agreement Between RSL Communications, Ltd. and Donald Shassian.
#10.70 Employment Agreement Between RSL COM U.S.A., Inc., and Michael Marino.
@10.71 Registration Rights Agreement dated September 1, 1999, between RSL Communications, Ltd.
and deltathree.com, Inc.
@10.72 Amended and Restated Services Agreement by and between RSL Communications, Ltd. and
deltathree.com, Inc., dated September 3, 1999.
@10.73 Credit Facility dated September 1, 1999, between RSL Communications, Ltd. and deltathree.com,
Inc.
@10.74 Management Agreement dated as of November 1, 1999 between deltathree.com, Inc. and RSL
Communications, Ltd.
@10.75 Amendment to Services Agreement by and between RSL Communications, Ltd. and deltathree.com,
Inc., dated November 1, 1999
@10.76 Co-Branding and Services Agreement effective as of October 1, 1999, between RSL COM
PrimeCall, Inc. and deltathree.com, Inc.
@10.77 Intercompany Compliance Agreement dated as of November 1, 1999, between RSL
Communications, Ltd., RSL Communications PLC and deltathree.com, Inc
@10.78 Form of Proposed Release and Indemnification Agreement between RSL Communications, Ltd. and
deltathree.com, Inc.
@@10.79 First Supplemental Indenture, dated as of September 28, 1999, by RSL Communications PLC and
RSL Communications, Ltd. to The Chase Manhattan Bank, as Trustee, regarding 9 7/8% Senior
Notes due 2009
@@10.80 First Supplemental Indenture, dated as of September 24, 1999, by RSL Communications PLC
and RSL Communications, Ltd. to The Chase Manhattan Bank, as Trustee regarding 10 1/2%
Senior Notes due 2008
@@10.81 First Supplemental Indenture, dated as of September 24, 1999, by RSL Communications PLC
and RSL Communications, Ltd. to The Chase Manhattan Bank, as Trustee, regarding 9 1/8%
Senior Notes due 2008
@@10.82 First Supplemental Indenture, dated as of September 28, 1999, by RSL Communications PLC
and RSL Communications, Ltd. to The Chase Manhattan Bank, as Trustee, regarding 12 1/4%
Senior Notes due 2006
@@10.83 First Supplemental Indenture, dated as of September 28, 1999, by RSL Communications PLC and RSL
Communications, Ltd. to The Chase Manhattan Bank, as Trustee, regarding 12% Senior Notes due
2008
@@10.84 First Supplemental Indenture, dated as of September 28, 1999, by RSL Communications PLC and RSL
Communications, Ltd. to The Chase Manhattan Bank, as Trustee, regarding 10 1/8% Senior Discount
Notes due 2008
@@10.85 First Supplemental Indenture, dated as of September 28, 1999, by RSL Communications PLC and RSL
Communications, Ltd. to The Chase Manhattan Bank, as Trustee, regarding 10% Senior Discount
Notes due 2008
#21.1 Subsidiaries of the Registrant.
#27.1 Financial Data Schedule.
</TABLE>
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* Incorporated by reference to Registrant's Registration Statement on
Form S-4 (Registration No.333-25749).
** Incorporated by reference to Registrant's Registration Statement on
Form S-1 (Registration No.333-34281).
*** Incorporated by reference to Registrant's Registration Statement on
Form S-1 (Registration No. 333-62325)
**** Incorporated by reference to Registrant's Registration Statement on
Form S-1 (Registration No. 333-62325).
***** Incorporated by reference to the Registrant's report on Form 8-K dated
August 14, 1998.
****** Incorporated by reference to Registrant's Registration Statement on
Form S-4 (Registration No. 333-70023).
+ Incorporated by reference to Registrant's Registration Statement on
Form S-8 (Registration No. 333-40085).
++ Incorporated by reference to Registrant's Definitive Proxy Statement
filed with the Commission on April 30, 1999.
+++ Incorporated by reference to Registrant's Report on Form 8-K/A dated
August 12, 1998.
++++ Incorporated by reference to Registrant's Registration Statement on
Form S-1 (Registration No. 333-46125).
@ Incorporated by reference to deltathree.com, Inc.'s Registration
Statement on Form S-1 (Registration No. 333-86503)
# Filed herewith.
@@ Incorporated by reference to Registrant's Registration Statement on
Form S-4 (Registration No. 333-90039).
(d) Schedule I--Condensed Financial Information of RSL Communications PLC
(included at page S-1).
Schedule II--Schedule of Valuation Allowances of RSL Communications, Ltd.
(included at page S-4).
61
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
RSL COMMUNICATIONS, LTD.
Independent Auditors' Report............................................................................ F-2
Consolidated Balance Sheets as of December 31, 1998 and December 31, 1999............................... F-3
Consolidated Statements of Operations and Comprehensive Loss for the Years Ended
December 31, 1997, December 31, 1998 and December 31, 1999............................................ F-4
Consolidated Statements of Shareholders' Equity (Deficit) for the Years Ended December 31, 1997,
December 31, 1998 and December 31, 1999............................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997,
December 31, 1998 and December 31, 1999............................................................... 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, 1999 and 1998, and the related consolidated
statements of operations and comprehensive loss, shareholders' equity (deficit)
and cash flows for each of the three years in the period ended December 31,
1999. Our audits also included the consolidated financial statement schedules
listed in the index as item 14(d) in part IV. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
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, 1999 and 1998 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999 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 whole, present fairly, in all material respects,
the information set forth therein.
DELOITTE & TOUCHE LLP
New York, New York
March 2, 2000
F-2
<PAGE>
RSL COMMUNICATIONS, LTD.
CONSOLIDATED BALANCE SHEETS
($ in thousands, except for share data)
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents .......................................... $ 367,823 $ 238,724
Accounts receivable--net ........................................... 181,845 258,983
Marketable securities--available for sale .......................... 98,637 72,813
Prepaid expenses and other current assets .......................... 77,772 116,929
----------- -----------
Total current assets .................................................. 726,077 687,449
----------- -----------
Restricted marketable securities--held to maturity .................... 20,159 --
----------- -----------
Marketable securities--available for sale ............................. 12,911 11,341
----------- -----------
Property and Equipment:
Telecommunications equipment ....................................... 300,647 488,383
Furniture, fixtures and information systems ........................ 68,861 121,712
----------- -----------
369,508 610,095
Less accumulated depreciation ...................................... (45,785) (134,559)
----------- -----------
Property and equipment--net ........................................ 323,723 475,536
----------- -----------
Investment in unconsolidated subsidiaries ............................. 8,446 16,872
----------- -----------
Goodwill and other intangible assets--net of accumulated
amortization ........................................................ 589,517 606,039
----------- -----------
Deposits and other assets ............................................. 33,760 6,071
----------- -----------
Total assets .......................................................... $ 1,714,593 $ 1,803,308
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable ................................................... $ 170,135 $ 186,354
Accrued expenses ................................................... 191,234 262,880
Notes payable ...................................................... 11,537 1,190
Deferred revenue ................................................... 23,647 19,412
Capital lease obligations--current portion ......................... 24,593 22,158
Other liabilities .................................................. 49,781 31,725
----------- -----------
Total current liabilities ............................................. 470,927 523,719
----------- -----------
Other liabilities--noncurrent ......................................... 9,239 15,986
----------- -----------
Long-term debt--less current portion .................................. 12,643 4,386
----------- -----------
Senior notes--net ..................................................... 998,868 1,186,904
----------- -----------
Capital lease obligations--less current portion ....................... 77,864 82,671
----------- -----------
Total liabilities ..................................................... 1,569,541 1,813,666
----------- -----------
Minority interest ..................................................... 11,568 73,254
----------- -----------
Commitments and contingencies Shareholders' Equity (Deficit):
Common Stock, Class A--par value $0.00457; 26,529,479 and 31,017,249
issued and outstanding at December 31, 1998 and 1999,
respectively .......................................................... 121 141
Common Stock, Class B--par value $0.00457; 26,245,315 and 24,267,283
issued and outstanding at December 31, 1998 and 1999,
respectively .......................................................... 120 111
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 ................. 4,597 3,993
Additional paid-in capital ......................................... 501,239 645,336
Deferred compensation .............................................. -- (8,348)
Accumulated deficit ................................................ (367,163) (725,390)
Accumulated other comprehensive (loss) gain ........................ (5,430) 545
----------- -----------
Total shareholders' equity (deficit) .................................. 133,484 (83,612)
----------- -----------
Total Liabilities and Shareholders' Equity (Deficit) .................. $ 1,714,593 $ 1,803,308
=========== ===========
</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,
1997 1998 1999
------------- ------------- ---------------
<S> <C> <C> <C>
Revenues ............................................. $ 300,796 $ 885,938 $ 1,469,849
----------- ----------- -----------
Operating costs and expenses:
Cost of services (exclusive of depreciation and
amortization shown separately below) ............. 265,321 702,602 1,034,334
Selling, general and administrative expenses ...... 94,712 238,141 447,883
Non-cash compensation expense ..................... -- -- 23,562
Special charge .................................... -- -- 30,143
Depreciation and amortization ..................... 21,819 75,445 177,865
----------- ----------- -----------
381,852 1,016,188 1,713,787
----------- ----------- -----------
Loss from operations ................................. (81,056) (130,250) (243,938)
Interest income ...................................... 13,826 16,104 20,593
Interest expense ..................................... (39,373) (75,431) (133,244)
Other income--net .................................... 6,595 739 764
Foreign exchange transaction gain (loss) ............. -- (11,055) 17,022
Minority interest .................................... 210 6,079 (11,365)
Loss in equity interest of unconsolidated
subsidiaries ........................................ -- (3,276) (4,718)
Income taxes ......................................... (401) (1,334) (3,341)
----------- ----------- -----------
Loss before extraordinary item ....................... (100,199) (198,424) (358,227)
Extraordinary item ................................... -- (20,800) --
----------- ----------- -----------
Net loss ............................................. (100,199) (219,224) (358,227)
Other Comprehensive Income gain (Loss):
Foreign exchange translation adjustment ........... (4,666) 897 7,583
Unrealized loss on securities ........................ -- (1,039) (1,608)
----------- ----------- -----------
Comprehensive loss ................................... $ (104,865) $ (219,366) $ (352,252)
=========== =========== ===========
Loss per share of common stock before extraordinary
item .............................................. $ (5.27) $ (4.52) $ (6.63)
Extraordinary item per share of common stock ......... $ -- $ (0.47) $ --
Net loss per share of common stock ................... $ (5.27) $ (4.99) $ (6.63)
Weighted average number of shares of common stock
outstanding ....................................... 19,008 43,913 54,022
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
RSL COMMUNICATIONS, LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY/(DEFICIT)
($ and shares in thousands)
<TABLE>
<CAPTION>
Class A Class B Preferred Common Stock
Common Stock Common Stock Stock Warrants
------------------ -------------------- ------------------ -------------------
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE
December 31, 1996 ......... -- $ -- 10,529 $ 48 9,244 $ 93 1,652 $5,544
Initial Public Offering of
Class A Common Stock ...... 8,280 38 -- -- -- -- -- --
Issuance of Class A
Common Stock for
acquisition of certain
minority interests,
warrants and options
exercised ................. 2,593 11 -- -- -- -- (39) (133)
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 ..................... -- -- -- -- -- -- -- --
------ ----- ------ ----- ------ ----- ----- ------
BALANCE
December 31, 1997 ......... 10,873 49 30,761 141 -- -- 1,613 5,411
Secondary offering of
Class A Common Stock ...... 7,544 34 -- -- -- -- -- --
Issuance of Class A
Common Stock for
acquisition of certain
minority interests,
distribution rights,
warrants and options
exercised ................. 3,596 17 -- -- -- -- (243) (814)
Conversion of Class B
Common Stock in
exchange for Class A
Common Stock .............. 4,516 21 (21) -- -- -- -- --
Change in minority interest
from step acquisition ..... -- -- -- -- -- -- -- --
Foreign Currency
Translation
Adjustment ................ -- -- -- -- -- -- -- --
Unrealized loss on
securities ................ -- -- -- -- -- -- -- --
Net loss ..................... -- -- -- -- -- -- -- --
------ ----- ------ ----- ------ ----- ----- ------
BALANCE
December 31, 1998 ......... 26,529 121 26,245 120 -- -- 1,370 4,597
Issuance of Common Stock
by subsidiaries ........... -- -- -- -- -- -- -- --
Issuance of Class A Common
Stock for acquisition of
certain minority interests,
warrants and options
exercised ................. 2,510 11 -- -- -- -- (180) (604)
Conversion of Class B
Common Stock in
exchange for Class A
Common Stock .............. 1,978 9 (1,978) (9) -- -- -- --
Deferred Compensation
Expense ................... -- -- -- -- -- -- -- --
Amortization of Deferred
Compensation Expense ...... -- -- -- -- -- -- -- --
Costs incurred to obtain
noteholders' consent for
security offerings ........ -- -- -- -- -- -- -- --
Foreign Currency
Translation
Adjustment ................ -- -- -- -- -- -- -- --
Unrealized loss on
securities ................ -- -- -- -- -- -- -- --
Net loss ..................... -- -- -- -- -- -- -- --
------ ----- ------ ----- ------ ----- ----- ------
BALANCE
December 31, 1999 ......... 31,017 $141 24,267 $111 -- $ -- 1,190 $3,993
------ ----- ------ ----- ------ ----- ----- ------
------ ----- ------ ----- ------ ----- ----- ------
<CAPTION>
Accumulated
Additional Deferred Other
Paid-in Compensation Accumulated Comprehensive
Capital Expense Deficit Loss Total
---------- ------------ ----------- ------------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE
December 31, 1996 ......... $ 63,520 $ -- $ (47,740) $ (622) $ 20,843
Initial Public Offering of
Class A Common Stock ...... 167,504 -- -- -- 167,542
Issuance of Class A
Common Stock for
acquisition of certain
minority interests,
warrants and options
exercised ................. 41,757 -- -- -- 41,635
Conversion of Preferred
Stock in exchange for
Class B Common Stock ...... -- -- -- -- --
Foreign Currency
Translation Adjustment .... -- -- -- (4,666)
Amortization of deferred
financing costs ........... 1,544 -- -- -- 1,544
Net loss ..................... -- (100,199) --
-------- --------- --------- --------- ---------
BALANCE
December 31, 1997 ......... 274,325 -- (147,939) (5,288) 126,699
Secondary offering of
Class A Common Stock ...... 169,955 -- -- -- 169,989
Issuance of Class A
Common Stock for
acquisition of certain
minority interests,
distribution rights,
warrants and options
exercised ................. 57,063 -- -- -- 56,266
Conversion of Class B
Common Stock in
exchange for Class A
Common Stock .............. -- -- -- -- --
Change in minority interest
from step acquisition ..... (104) -- -- -- (104)
Foreign Currency
Translation
Adjustment ................ -- -- -- 897 897
Unrealized loss on
securities ................ -- -- -- (1,039) (1,039)
Net loss ..................... -- -- (219,224) --
-------- --------- --------- --------- ---------
BALANCE
December 31, 1998 ......... 501,239 -- (367,163) (5,430) 133,484
Issuance of Common Stock
by subsidiaries ........... 89,097 -- -- -- 89,097
Issuance of Class A Common
Stock for acquisition of
certain minority interests,
warrants and options
exercised ................. 36,116 -- -- -- 35,523
Conversion of Class B
Common Stock in
exchange for Class A
Common Stock .............. -- -- -- -- --
Deferred Compensation
Expense ................... 25,694 (25,694) -- -- --
Amortization of Deferred
Compensation Expense ...... -- 17,346 -- -- 17,346
Costs incurred to obtain
noteholders' consent for
security offerings ........ (6,810) -- -- -- (6,810)
Foreign Currency
Translation
Adjustment ................ -- -- -- 7,583 7,583
Unrealized loss on
securities ................ -- -- -- (1,608)
Net loss ..................... -- -- -- (358,227)
-------- --------- --------- --------- ---------
BALANCE
December 31, 1999 ......... $645,336 $ (8,348) $(725,390) $ 545 $ (83,612)
======== ========= ========= ========= =========
</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,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows used in operating activities:
Net loss ................................................................. $(100,199) $(219,224) $(358,227)
Adjustments to reconcile net loss to net cash used in operating
activities, net of effects of purchase of subsidiaries:
Depreciation and amortization ....................................... 21,819 75,445 177,865
Accretion of interest expense on senior discount notes .............. -- 25,706 34,482
Non-cash compensation ............................................... -- -- 23,562
Provision for losses on accounts receivable ......................... 10,908 9,043 18,021
Foreign currency transaction (gain) loss ............................ -- 6,441 (17,288)
Equity loss on investment in unconsolidated subsidiaries ............ -- 3,276 4,718
Extraordinary loss .................................................. -- 20,800 --
Accretion of interest income on restricted marketable securities .... (5,504) (2,727) (973)
Loss (gain) on sales of assets ...................................... -- 367 (537)
Reversal of accrued liabilities ..................................... (7,000) -- --
Changes in assets and liabilities:
Increase in accounts receivable--net ................................ (45,069) (49,321) (103,213)
Decrease (increase) in deposits and other assets .................... (2,929) (48,869) 5,565
(Increase in) prepaid expenses and other current assets ............. (13,196) (65,842) (43,996)
Increase in accounts payable and accrued expenses ................... 56,354 123,813 76,087
Increase (decrease) in deferred revenue and other current liabilities (2,155) 38,018 13,807
Increase (decrease) in other long-term liabilities .................. (4,841) 322 11,242
--------- --------- ---------
Net cash used in operating activities .................................... (91,812) (82,752) (158,885)
--------- --------- ---------
Cash flows used in investing activities:
Purchase of property and equipment ..................................... (36,357) (181,937) (207,667)
Acquisition of subsidiaries ............................................ (77,813) (287,044) (66,442)
Net redemptions (purchases) of marketable securities for sale .......... 54,167 (74,834) 25,796
Proceeds from maturities of restricted marketable securities ........... 41,038 29,141 21,132
Proceeds from sale of property and equipment ........................... 144 5,236 679
--------- --------- ---------
Net cash used in investing activities .................................... (18,821) (509,438) (226,502)
--------- --------- ---------
Cash flows provided by financing activities:
Proceeds from issuance of Notes ........................................ -- 791,992 170,835
Proceeds from sales of subsidiaries stock .............................. -- -- 143,952
Proceeds from notes payable ............................................ -- 1,306 10,850
Proceeds from long-term debt ........................................... -- 13,386 5,231
Payment of long-term debt and notes payable ............................ (12,750) (1,548) (43,657)
Principal payments under capital lease obligations ..................... (2,757) (5,241) (16,253)
Proceeds from issuance of common and preferred stock and warrants ...... 182,160 180,807 2,124
Payment of offering costs and fees ..................................... (14,618) (21,071) (2,670)
Payment for consent solicitation ....................................... -- -- (6,810)
Payment of premium and principal on the 1996 Notes ..................... -- (144,155) --
--------- --------- ---------
Net cash provided by financing activities ................................ 152,035 815,476 263,602
--------- --------- ---------
Increase in cash and cash equivalents .................................... 41,402 223,286 (121,785)
Effects of foreign currency exchange rates on cash ....................... (576) (357) (7,314)
Cash and cash equivalents at beginning of period ......................... 104,068 144,894 367,823
--------- --------- ---------
Cash and cash equivalents at end of period ............................... $ 144,894 $ 367,823 $ 238,724
========= ========= =========
Supplemental disclosure of cash flows information: Cash paid for:
Interest ............................................................ $ 41,285 $ 146,930 $ 97,111
========= ========= =========
Income tax .......................................................... $ 401 $ 1,334 $ 5,807
========= ========= =========
Supplemental schedule of noncash investing and financing activities:
Assets acquired under capital lease obligations ........................ $ 13,060 $ 65,728 $ 48,333
========= ========= =========
Issuance of Class A Common Stock ....................................... $ 41,635 $ 54,524 $ 33,399
========= ========= =========
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, 1997, 1998 and 1999
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." We are a rapidly growing facilities-based
communications company that provides a broad range of the voice, data/Internet
and value-added product and service solutions primarily to small and medium
sized businesses and residential customers in selected markets around the globe.
The Company currently has revenue producing operations and provides services in
the Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong
Kong, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Portugal, Spain,
Sweden, Switzerland, Mexico, the United Kingdom, United States, and Venezuela.
In 1997, approximately 70% of the world's international long distance
telecommunications minutes originated in these markets.
2. Acquisitions
1999 Acquisitions
Multilink
In January 1999, our subsidiary RSL COM Italia acquired 51% of Multilink s.r.l.
a reseller of long distance telecommunications services in Italy for $1.1
million and recorded a similar amount as goodwill.
Access Communication
In May 1999, our subsidiary RSL COM Canada acquired 100% of Access
Communications Inc., for approximately $1.3 million in cash and recorded the
same amount as goodwill. Access offers local access and long distance
telecommunications services to small and medium size businesses.
Cisneros Group
During 1997,we formed a joint venture with entities controlled by the Cisneros
Group of Companies to pursue our Latin American expansion and through June of
1999 we owned 51% of this joint venture. In June, 1999 we acquired the minority
interest from the Cisneros Group in exchange for 1.03 million shares of our
common stock and recorded goodwill of $23.9 million representing the fair market
value of the shares plus $4 million cash.
Advanced Telecom
In October 1999, our subsidiary RSL COM UK Ltd. purchased 100% of Advanced
Telecom Plc, a UK telecommunications reseller for approximately $14.4 million
and recorded approximately the same amount as goodwill.
Cetel
During 1999, our subsidiary RSL COM Spain acquired a 33% interest of Consoricao
Europeo para las Telecomunicaciones S.A. (Cetel) for approximately $9.6 million.
Cetel is a nationwide telecommunications services provider in Spain. We account
for our investment in Cetel under the equity method.
F-7
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the years ended December 31, 1997, 1998 and 1999
2. Acquisitions--(Continued)
VIP
In December, 1999 our subsidiary RSL COM Finland Oy, purchased 51% of the equity
of VIP Tietoverkot Oy ("VIP") for a cash purchase price of approximately $0.9
million. VIP offers internet access, web hosting and value-added application
services in all major cities in Finland. In connection with this acquisition, we
recorded approximately $0.8 million as goodwill.
In addition, during 1999 we acquired minority interests of several subsidiaries
primarily in Australia, Austria, Finland and the U.S. for cash and common stock
of $33.9 million.
1998 Acquistions
Telecenter OY
In January, 1998 our subsidiary RSL COM Finland Oy, purchased 90% of the equity
of Telecenter OY, an independent sales agent in Finland. We 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, our subsidiary RSL COM Australia Pty. Ltd. 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 our subsidiary RSL COM Sweden AB, 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 we 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, we recorded approximately
$129.5 million as goodwill.
Westel Telecommunications Ltd.
In July, 1998 we 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, we recorded approximately $9.0 million as goodwill.
F-8
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the years ended December 31, 1997, 1998 and 1999
2. Acquisitions--(Continued)
MK Telecom Network Inc.
In connection with the Westel Acquisition and in compliance with the Canadian
Telecommunications Act (the "Telecom Act"), we 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. We recorded our investment in MK Network as
an equity investment which was completed through a transfer of assets, which we
recorded at our historical cost basis (which also approximates net realizable
value). The assets transferred consist of telecommunications microwave
facilities. Westel, MK Network and their respective owners are not related
parties.
Comesa
In July 1998, our subsidiary RSL COM Italia S.r.l. ("RSL Italy"), acquired 75%
of the equity of Comesa, a telecommunications company located in Northern Italy.
We paid approximately $1.0 million and recorded approximately $1.5 million as
goodwill.
Geovox SARL
In July 1998, our subsidiary RSL COM France S.A., 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 we recorded
approximately $4.7 million as goodwill.
TC Telecom GmbH
In July 1998, our subsidiary RSL COM Austria AG, 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 we 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. We 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, we 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, we acquired the business of TDL, a reseller of
telecommunications services based in the United Kingdom. We 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-9
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the years ended December 31, 1997, 1998 and 1999
2. Acquisitions--(Continued)
Telegate Holding GmbH
In May 1998, we 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, we increased our
shareholdings in Telegate Holding to 50.2%; no additional contribution was paid
related to this increment. We paid $33.6 million and recorded approximately
$35.6 million as goodwill.
1997 Acquisitions/New Operations
deltathree.com
During 1997, we acquired a majority interest in deltathree.com an internet
telephony service provider. We paid approximately $8.8 million for approximately
72% ownership of deltathree.com We acquired the remaining 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, we recorded
approximately $15.4 million as goodwill. In November, 1999 deltathree.com
completed an initial public offering and our equity interest was decreased to
68%. We recorded our share of the net proceeds from the sale of deltathree.com's
shares as an increase in our paid in capital.
Maxitel
In April 1997, our subsidiary 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 in
1998 increased its ownership interest in Maxitel to 39% in 1998 for an
additional $1.3 million.
Pacific Star Communications Limited
In April 1997, we acquired substantially all of the commercial customer
contracts of Pacific Star Communications Limited, an Australian based company.
We paid approximately $1.5 million in cash and recorded this amount as a
customer base.
Newtelco
In August 1997, our subsidiary 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, our subsidiary RSL Europe acquired 85% of the stock in RSL
Italy, an Italian telecommunications reseller. We paid approximately $1.7
million for our investment in RSL Italy.
EZI Phonecard Holdings Pty. Limited
In October 1997, our subsidiary 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.
F-10
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the years ended December 31, 1997, 1998 and 1999
2. Acquisitions--(Continued)
Call Australia Group
In October 1997, our wholly-owned subsidiary, RSL Australia acquired 100% of the
issued capital of each of Call Australia Pty. Ltd., Associated Service Providers
Pty. Limited, Digiplus Pty. Limited, Power Serve Communications Consultants Pty.
Limited, Talk 2000 Networks Pty. Limited and Telephone Bill Pty. Limited
(collectively the "Call Australia Group"), leading Australian switchless
resellers, for approximately $24.5 million. In 1998, we made 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, we acquired 100% of the outstanding common stock of LDM
Systems, Inc. ("LDM"). In connection with this acquisition, we 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, we
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"). We
paid approximately $18.6 million in 1997 and $0.3 million in 1998 for this
acquisition and recorded approximately $19.1 million as goodwill.
Accounting Treatment
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 five to twenty years. The valuation of our acquired assets and
liabilities for the 1999 acquisitions are preliminary and as a result, the
allocation of the acquisition costs among the tangible and intangible assets may
change.
Marketing Agreement
In June 1998, we 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 us in promoting, marketing, selling and distributing 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 connection with its alliance with us, 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 our Class A Common Stock (based on value for value) and
purchased an equal number of Class A Common Stock from certain of our
shareholders. In the aggregate at December 31, 1999, Metro Holding holds
approximately 5.8% of our outstanding stock, which it is required to hold until
at least April 1, 2001. We have recorded in the consolidated financial
statements the issuance of such equity at fair market value, $45 million, based
on the quoted market value of our stock at the time of the
F-11
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the years ended December 31, 1997, 1998 and 1999
2. Acquisitions--(Continued)
transaction, and have 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. All significant intercompany transactions have been eliminated in
consolidation.
We have majority ownership of all of our subsidiaries except for Maxitel, MK
Network and Cetel which we account for under the equity method of accounting.
Management Assumptions--The preparation of the consolidated financial statements
requires us 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 our 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. We utilize a net settlement process with our
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 gains for the year ended December 31,1999 were $17 million
as compared to losses for the year ended December 31, 1998 of $11 million
primarily as a result of the decrease in the Deutsche mark against the U.S.
dollar in 1999 as compared with an increase in the Deutsche mark against the
U.S. dollar in 1998 in connection with our 1998 Deutsche mark denominated Senior
Discount Notes.
Cash and Cash Equivalents--We consider 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, 1997, 1998 and 1999
3. Summary of Significant Accounting Policies--(Continued)
Accounts Receivable--Accounts receivable are stated net of the allowance for
doubtful accounts of approximately $26,000,000 and $37,000,000 at December 31,
1998 and 1999, respectively. We recorded bad debt expense of approximately
$10,900,000, $9,000,000 and $18,000,000 for the years ended December 31, 1997,
1998 and 1999, respectively.
Accrued Expenses--Accrued expenses for the years ended December 31, 1998 and
1999 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 the lower of amortized cost or market value, 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 $9,794,000,
$32,439,000 and $90,477,000 for the years ended December 31, 1997, 1998 and
1999, respectively.
Impairment of Assets-- Our 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, we
measure 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,
we 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. We determined that, as of December
31, 1998 and 1999, 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 five to twenty years. We periodically review
the value of our goodwill to determine if an impairment has occurred. We measure
the potential impairment of recorded goodwill by the undiscounted value of
expected future cash flows in relation to our net goodwill in our subsidiary.
Based on our review, we do not believe that an impairment of our goodwill has
occurred as of December 31, 1998 and 1999.
Other Intangible Assets--Other intangible assets acquired through purchase
acquisitions include distribution rights, customer bases and operating licenses
which are being amortized over lives ranging from two to five years using the
straight-line method. Deferred financing costs incurred in connection with the
Senior Notes are being amortized on a straight-line basis over ten years.
Deposits and Other Assets--Deposits consist principally of amounts paid to our
carrier vendors.
F-13
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the years ended December 31, 1997, 1998 and 1999
3. Summary of Significant Accounting Policies--(Continued)
Revenue Recognition and Deferred Revenue--We record revenue based on minutes (or
fractions thereof) of customer usage. We record 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 value-added tax and
payroll and related benefits obligations.
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 our cellular businesses, are amortized over the average lives of the
contracts of approximately twelve months. Such costs are recorded in selling,
general and administrative expenses in our consolidated statements of operations
and comprehensive loss.
Income Taxes--We account 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. Our foreign subsidiaries file separate
income tax returns in the jurisdiction of their operations. Our United States
subsidiaries file stand-alone United States income tax returns.
Loss per Common Share-- Our 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 antidilutive.
Sales of Subsidiary Stock-- During 1999 our subsidiaries Telegate AG and
deltathree.com issued common shares in connection with their intial public
offerings raising $144.0 million in the aggregate. We recorded our share of the
net proceeds of these sales as additional paid in capital.
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, 2000. We have not
participated in any hedging activities in connection with foreign currency
exposure.
Reclassification
Certain previously reported amounts have been reclassified to conform with the
current period presentation.
F-14
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the years ended December 31, 1997, 1998 and 1999
4. 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 is 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. These expenses appear in the accompanying year ended
December 31, 1999 income statement as $30.1 million in the special charge line
item and $2.0 million in the cost of services line item. During the fourth
quarter of 1999, we incurred $3.0 million for terminating leases, $5.8 million
for the severance of 76 telemarketing employees and 104 other staff employees
and $6.6 million for asset write downs including inventory. As of December 31,
1999 the reserve balance was $16.7 million, of which $10.1 million is for
terminating leases and $6.6 million is for severance payments to be paid out
primarily to former employees who have already been severed, during the first
three quarters of 2000 in accordance with local country requirements.
5. Concentration of Credit Risk
We are subject to significant concentrations of credit risk which consist
principally of trade accounts receivable, cash and cash equivalents, and
marketable securities. Our 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, our operating results could
be adversely affected.
We maintain our cash with high quality credit institutions, and our cash
equivalents and marketable securities are in high quality securities.
6. Marketable Securities
A summary of our available for sale marketable securities at December 31, 1998
and December 31, 1999 is as follows (in thousands):
December 31, 1998 December 31, 1999
----------------------- -----------------------
Amortized Market Amortized Market
Cost Value Cost Value
---------- -------- ---------- --------
Corporate Notes .......... $ 6,651 $ 6,640 $ -- $ --
Medium-Term Notes ........ 5,023 5,006 -- --
Commercial Paper ......... 86,963 86,997 50,203 50,210
Federal Agency Notes ..... -- -- 22,640 22,603
-------- -------- -------- --------
98,637 98,643 72,843 72,813
Mutual Funds--Long-Term... 13,950 12,911 13,950 11,341
-------- -------- -------- --------
$112,587 $111,554 $ 86,793 $ 84,154
======== ======== ======== ========
We have recorded our 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 (deficit).
The carrying value of the available for sale marketable securities by maturity
date at December 31, 1998 and December 31, 1999 is as follows (in thousands):
F-15
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the years ended December 31, 1997, 1998 and 1999
6. Marketable Securities--(Continued)
December 31, December 31,
1998 1999
------------ ------------
Matures in one year.............................. $ 98,637 $72,813
Matures after one year through three years....... 12,911 11,341
-------- -------
Total............................................ $111,548 $84,154
======== =======
Proceeds from the sale of available for sale marketable securities for the years
ended December 31, 1997, 1998 and 1999 were $27,675,000, $35,757,000 and
$41,840,000, respectively. Gross gains (losses) of $(2,000), $(367,000) and
$11,000 were realized on these sales for the years ended December 31, 1997, 1998
and 1999.
7. Income Taxes
We have incurred consolidated losses since inception for both book and tax
purposes. Several of our subsidiaries which are profitable have recorded income
tax expense in the aggregate of approximately $401,000, $1,334,000 and
$3,341,000 for the years ended December 31, 1997, 1998 and 1999, respectively.
As of December 31, 1997, 1998 and 1999, we had net operating loss carryforwards
generated primarily in the United States and the United Kingdom of approximately
$147 million, $367 million and $725 million, respectively. The net operating
loss carryforwards will expire at various dates beginning in 2010 through 2014
if not utilized. The utilization of the net operating loss carryforwards is
subject to certain limitations.
In accordance with SFAS No. 109, we have computed the components of deferred
income taxes as of December 31, 1998 and 1999 as follows (in thousands):
December 31,
-------------------------
1998 1999
---- ----
Deferred tax assets............................. $147,000 $ 290,000
Less valuation allowance........................ (147,000) (290,000)
-------- ---------
Net deferred tax assets......................... $ -- $ --
======== =========
Our net operating losses generated the deferred tax assets. At December 31, 1998
and 1999, a valuation allowance of $147,000,000 and $290,000,000, respectively,
is provided as the realization of the deferred tax assets is not assured.
8. 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, 1997, 1998 and 1999
8. Notes Payable and Long-term Debt--(Continued)
Such unamortized discount was $1,783,000 and $1,553,000 at December 31, 1998 and
December 31, 1999, 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, we used approximately $101.0 million of the net proceeds from our
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, we 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, we were required to maintain
restricted marketable securities in order to make the first six scheduled
interest payments on the 1996 Notes. Such restriction was ended with the sixth
semi - annual payment made in November 1999 and the securities matured.
On February 27, 1998, RSL PLC completed concurrent offerings (the "1998 U.S.
Offerings") of $200.0 million principal amount of 91/8% Senior Notes due 2008
and $328.1 million principal amount at maturity ($200.0 million initial accreted
value) of 101/8% Senior Discount Notes due 2008 (together, the "1998 U.S.
Notes"). The 1998 U.S. Offerings generated gross proceeds to us 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 gross proceeds to us of $99.0 million.
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 us 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 us of approximately $198.5 million.
In May, 1999 RSL PLC issued (the "9 7/8 % Notes Offering") $ 175 million
aggregate principal amount at maturity of 9 7/8% Senior Notes due 2009. The 9
7/8% Notes generated gross proceeds to us of approximately $170.8 million.
In September, 1999, pursuant to a consent solicitation, we obtained the consent
of holders of our outstanding debt and amended our indentures governing our
debt. These amendments were to permit the issuance and sale of capital stock of
deltathree.com and our Australian subsidiary in public or private transactions
without restricting the use of proceeds solely to investments in
telecommunications assets. In connection with the consent solicitation, total
fees paid were approximately $6.8 million. We recorded these fees as a reduction
in paid in capital received by deltathree.com in connection with its initial
public offering.
F-17
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the years ended December 31, 1997, 1998 and 1999
8. Notes Payable and Long-term Debt--(Continued)
In connection with the New 1998 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, the New 1998 Notes and the 1999 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 us.
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 our ability to obtain
funds by dividends or loans from our subsidiaries.
At December 31, 1998 and 1999, we were in compliance with the above restrictive
covenants.
Credit Facilities
Through LDM, we have a $10.0 million revolving credit facility all of which was
available at December 31,1999. This facility accrues interest at the prime rate
plus 2.5% per annum.
At December 31, 1999, Telegate had $26 million of revolving credit facilities
with various banks that accrue interest at a rate of 6.0%, all of which was
available.
Through RSL COM Canada, we have a $6.9 million revolving credit facility of
which $5.3 million was used for the lease of telecommunications equipment. The
lease terms provide for monthly payments through February 2006 at an interest
rate of 8.7% per annum.
F-18
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the years ended December 31, 1997, 1998 and 1999
8. Notes Payable and Long-term Debt--(Continued)
Vendor Financing
One of our primary equipment vendors has provided some of our subsidiaries
approximately $85 million in vendor financing to fund the purchase of additional
switching and related telecommunications capital equipment. At December 31,
1999, all available amounts were utilized under this facility. Borrowings from
this equipment vendor accrue interest at a rate of LIBOR, plus 3.50% to 5.25% or
STIBOR plus 3.50% depending on the equipment purchased and whether the loan is
guaranteed by the Swedish Export Credits Guarantee Board. We plan to repay
approximately $32 million of the outstanding balance by the end of the first
quarter of 2000.
Long-term debt maturities at December 31, 1999 are as follows (in thousands):
Year Ended
-----------
2000............................................. $ 1,190
2001............................................. 1,150
2002............................................. 3,237
2003 ............................................ --
2004 ............................................ --
2005 and thereafter.............................. 1,327,862
----------
Total............................................ 1,333,439
Less Discount................................... (140,959)
Less Current Maturities.......................... (1,190)
----------
Long-Term Debt................................... $1,191,290
==========
At December 31, 1999, the Notes had a fair value of approximately $1,099
million. The decline in the fair value is primarily due to changes in the
interest rate environment. The remainder of our long-term debt had fair values
which approximated their carrying amounts.
Interest expense on the above notes was approximately $37,136,000, $70,860,000
and $118,379,000 for the years ended December 31, 1997, 1998 and 1999,
respectively.
9. Goodwill and Other Intangible Assets
Goodwill and other intangible assets at December 31, 1998 and 1999 consist of
the following (in thousands):
December 31,
-----------------------
1998 1999
---- ----
Goodwill..................................... $ 513,068 $601,573
Customer base................................ 49,822 52,924
Deferred financing costs..................... 19,902 22,572
Distribution right........................... 47,281 47,459
Other intangibles............................ 13,837 19,195
--------- ---------
643,910 743,723
Less accumulated amortization................ (54,393) (137,684)
--------- --------
Goodwill and Other Intangible Assets--Net.... $ 589,517 $606,039
========= =========
F-19
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the years ended December 31, 1997, 1998 and 1999
9. Goodwill and Other Intangible Assets--(Continued)
Amortization expense for the years ended December 31, 1997, 1998 and 1999 was
$9,980,000 $43,006,000, and $87,388,000, respectively.
10. Shareholders' Equity
Common Stock
On September 30, 1997, we revised our 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, we 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 us of $167,542,000.
On November 30, 1998, we 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 us 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, we 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, we 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 1997, 1998 an 1999 we issued 39,740, 242,943 and 179,445
shares of Class A Common Stock upon the exercise of warrants, respectively.
In connection with the marketing and distribution services agreement entered
into with Metro Holding in June 1998, as mentioned in Note 2, we 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, 1997, 1998 and 1999
10. Shareholders' Equity--(Continued)
During 1998 and 1999, we issued 1,232,339 and 783,229 shares of Class A Common
Stock upon the exercise of options, respectively. In addition, we issued 54,750
shares in both 1998 and in 1999 of Class A Common Stock upon the vesting of
restricted stock.
During 1998 and 1999, in connection with the acquisition of certain minority
interests, we issued 428,272 and 1,492,314 shares of Class A Common Stock,
respectively.
Preferred Stock
During 1995, we issued 9,243,866 shares of our preferred stock to the holders of
our Class B Common Stock for cash of $13,354,000. The preferred stock ranked
senior to our 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 our
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, 1998 and 1999, there was no preferred
stock outstanding.
11. Capital Lease Obligations
Future minimum annual payments applicable to assets held under capital lease
obligations for years subsequent to December 31, 1999 are as follows (in
thousands):
Year Ended
-------------
2000................................................... $ 26,287
2001................................................... 24,152
2002................................................... 18,596
2003................................................... 12,841
2004................................................... 10,726
2005 and thereafter.................................... 23,880
---------
Total minimum lease obligations........................ 116,482
Less interest.......................................... (11,653)
---------
Present value of future minimum lease obligations...... 104,829
Less current portion................................... (22,158)
--------
Long-term lease obligations............................ $ 82,671
========
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 $76,087,000 and $109,020,000 at
December 31, 1998 and 1999, respectively. At December 31, 1998 and 1999, the
related accumulated depreciation was $4,895,000 and $18,512,000 respectively.
F-21
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the years ended December 31, 1997, 1998 and 1999
12. Related Party Transactions
During 1999 RSL Management Corporation ("RSL Management"), which is wholly owned
by Ronald S. Lauder, the Chairman of the Board of the Company and our principal
shareholder, sublet an aggregate of 7,500 square feet of office space to us at
an annual rent of $591,000 per annum. RSL Management sublet 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 of the Board of Directors of Estee Lauder. Fred
Langhammer, a director, is the President and Chief Executive Officer of Estee
Lauder. This sublease agreement will be terminated without penalty on March 31,
2000. In addition, RSL Management provides payroll and benefit services to the
Company for an annual fee of $6,000, $9,000 and $12,000 for the years ended
December 31, 1997, 1998 and 1999, respectively.
We have employment contracts with certain of our executive officers. These
agreements expire beginning December 2000 through January, 2003 unless
terminated earlier by the executive or by us, and provide for annual salaries,
and bonuses based on our performance. Salary expense for executive officers was
approximately $1.6 million, $2.1 million and $2.3 million for the years ended
December 31, 1997, 1998 and 1999, respectively. The aggregate commitment for
annual future salaries pursuant to the employment agreements at December 31,
1999, excluding bonuses, is approximately $2.1 million, $2.2 million and $2.3
million for 2000, 2001 and 2002, respectively.
13. Employee Benefit Plans
In 1996, we instituted a defined 401(k) contribution plan which provides
retirement benefits for most of our U.S. employees. Our 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, 1997, 1998 and 1999. Our 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, 1999.
14. Stock Option Plans
1995 Stock Option Plan
In April 1995, we established an Incentive Stock Option Plan (as amended and
restated, the "1995 Plan") to reward employees, nonemployee consultants and
directors for service to us and to provide incentives for future service and
enhancement of shareholder value. The 1995 Plan is administered by the
Compensation Committee of our Board of Directors (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 our Class A Common Stock.
The options granted under the 1995 Plan terminate on the tenth anniversary of
the date of grant. As of December 31,1999 a total of 2,716,617 options have been
granted of which 444,868 were outstanding (and 327,703 were outstanding and
exercisable) under this plan. In connection with the initial public offering of
our Class A Common Shares in 1997, this plan was replaced by our other existing
plans. We will not grant further options under the 1995 Plan.
F-22
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the years ended December 31, 1997, 1998 and 1999
14. Stock Option Plans--(Continued)
1997 Stock Incentive Plan
The 1997 Stock Incentive Plan (the "1997 Stock Plan") was adopted in conjunction
with the initial public offering of our Class A common shares in 1997 to
attract, retain and motivate our key employees. 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, 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 8,100,000, with no more than
500,000 options or stock appreciation rights to be granted to any one
participant in a calendar year. In March, 1999 the 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 the awards granted will immediately
become fully vested and excercisable or, at the Committee's sole discretion, the
award may be exchanged 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, provided certain conditions are met. 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,
1999, a total of 4,605,617 options and 164,250 shares of restricted stock have
been granted under this plan.
1997 Performance Incentive Compensation Plan
During 1997, we 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, we adopted the 1997 Directors' Compensation Plan (the "1997
Directors' Plan"). Under the 1997 Directors' Plan, each non-employee Director
will be granted options annually 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 have a ten-year term and vest over a five-year period, subject to
certain acceleration provisions. A total of 103,365 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. We record stock option grants under the 1997 Plans based on the fair
market value of the underlying security on the date of grant. We used the
expected life of the underlying security to calculate the fair market value of
such security.
F-23
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the years ended December 31, 1997, 1998 and 1999
14. Stock Option Plans--(Continued)
<TABLE>
<CAPTION>
Weighted
Number of Average
Options Exercise Price Exercise Price
------------ --------------- --------------
<S> <C> <C> <C>
Outstanding at December 31, 1996 ... 1,707,324 $ .000457-2.06 $ 0.82
Granted ....................... 1,459,195 $ .00457-26.15 $ 9.675
Exercised ..................... (712,142) $ .000457 $.000457
Rescinded/Canceled ............ -- $ -- $ --
---------- --------------- --------
Outstanding at December 31, 1997 ... 2,454,377 $ .000457-26.15 $ 5.94
Granted ....................... 675,822 $ .043-26.15 $ 21.974
Exercised ..................... (1,232,339) $.000457-18.625 $ 1.32
Rescinded/Canceled ............ (20,929) $ 12.142-22.00 $ 13.747
---------- --------------- --------
Outstanding at December 31, 1998 ... 1,876,931 $ .000457-26.15 $ 14.655
Granted ....................... 3,583,258 $ 0.043-31.44 $ 20.96
Exercised ..................... (798,475) $.000457-18.265 $ 1.459
Rescinded/Canceled ............ (235,459) $ 24.26 $ 24.26
---------- --------------- --------
Outstanding at December 31, 1999 ... 4,426,255 $ .000457-31.44 $ 21.633
========== =============== ========
</TABLE>
Number Of Weighted
Shares Average
Exercisable Exercise Price
------------ --------------
December 31, 1997............................. 459,607 $ 0.44
December 31, 1998............................. 397,115 $ 4.11
December 31, 1999............................. 754,522 $ 12.40
The following table summarizes information concerning the remaining options
granted under the 1995 Plan and the 1997 Plans outstanding as of December 31,
1999.
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
- --------------- ------------ --------- ----------- ----------- ---------
$ 0.000457 174,293 $ 0.00 5.3 174,293 $ 0.00
$ 0.00457 121,978 $ 0.00 7.5 48,978 $ 0.00
$ 0.01 54,750 $ 0.01 9.6 54,750 $ 0.01
$ 2.05 29,600 $ 2.05 6.6 29,600 $ 2.05
$12.14-17.00 88,687 $ 12.36 6.9 49,060 $ 12.37
$18.26-26.15 3,556,947 $ 23.25 6.0 397,841 $ 21.84
$28.88-31.44 400,000 $ 29.74 6.1 0 $ 0
- -------------------------------------------------------------------------------
$0.000457-31.44 4,426,255 $ 21.63 6.1 754,522 $ 12.40
At December 31, 1999, we have authorized and reserved the following amounts for
future grants: approximately 3,514,842 shares of Class A Common Stock under the
1997 Stock Plan, 400,000 under the 1997 Performance Plan and 150,044 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 we have. Adoption of the
recognition provisions of SFAS No. 123 is optional; however, pro forma
disclosures as if we adopted the cost recognition requirements under SFAS No.
123 are presented below.
F-24
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the years ended December 31, 1997, 1998 and 1999
14. Stock Option Plans--(Continued)
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 0.7 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 our 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, 1997, 1998 and
1999, 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. Our 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,
---------------------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Net loss:
As reported............................................... $(100,199) $(219,224) $(358,227)
Pro forma................................................. $(118,176) $(224,197) $(380,929)
Net loss per common share:
As reported............................................... $ (5.27) $ (4.99) $ (6.63)
Pro forma................................................. $ (6.22) $ (5.11) $ (7.05)
Weighted average fair value of options granted during
the period................................................ $ 12.32 $ 7.36 $ 12.01
</TABLE>
We 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 our discretion.
As of December 31, 1999, 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 our subsidiaries is estimated to be
approximately 1,099,000. As of December 31, 1999, vested and exercisable
Restricted Units which may be converted, based on the valuations attributed to
the Company's subsidiaries is estimated to be 447,000 at a weighted average
exercise price of $2.47.
Upon completion of deltathree.com's initial public offering, shares of its Class
A common stock were issued in exchange for vested restricted units on a
one-for-one basis upon payment of the related exercise price. In addition,
options were issued to purchase shares of deltathree.com's Class A common stock
in exchange for unvested restricted units on a one-for-one basis, with the same
exercise prices and vesting schedules as the corresponding restricted units.
Pursuant to generally accepted accounting principles, the restricted units were
considered variable grants. Consequently, the changes in the fair value of the
underlying shares at each balance date affected the aggregate amount of deferred
compensation recorded by deltathree.com and by us.
F-25
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the years ended December 31, 1997, 1998 and 1999
14. Stock Option Plans--(Continued)
In April 1999, deltathree.com granted options to purchase an aggregate of 1.1
million shares of its common stock to executive officers of deltathree.com,
subject to completion of its initial public offering. Such options vest over a
three-year period from the date of grant and are exercisable for a period of
seven years from the date of grant. We recorded deferred compensation expense of
$23.6 million in 1999 primarily related to the deltathree.com restricted units
and options. As of December 31, 1999 $8.3 million was deferred and is included
as a reduction of stockholders' equity and is being amortized by charges to
operations over the three-year vesting period.
In addition, in November 1999, deltathree.com adopted the 1999 Stock Incentive
Plan ("the Plan"). Under the Plan, 4,000,000 shares were reserved for issuance
upon the exercise of awards to be granted. In addition, deltathree.com's
compensation committee may grant both incentive and non-incentive stock options
for common stock of deltathree.com. The options generally have a term of seven
years and become exercisable in three equal installments commencing on the first
anniversary of the date of the grant. The purchase price per share payable upon
exercise of an option is no less than the fair market value of the share at the
date of grant. As of December 31, 1999, options to purchase 502,800 shares of
deltathree.com were outstanding with exercise prices of $15 and $25 per share.
15. Commitments and Contingencies
At December 31, 1999, we were committed to unrelated parties for the rental of
office space under operating leases. Minimum annual lease payments with respect
to the leases is as follows (in thousands):
Year Ended
-----------
2000................................................. $11,769
2001................................................. 8,539
2002................................................. 6,458
2003................................................. 5,445
2004 and Thereafter.................................. 5,419
-------
$37,630
=======
Rent expense on the above leases for the years ended December 31, 1997, 1998 and
1999 was $3,842,000, $4,724,000 and $8,668,000 respectively.
We are also committed to pay for transmission capacity under certain operating
leases. The minimum annual lease payments with respect to these agreements is as
follows (in thousands):
Year Ended
-----------
2000............................................. $135,286
2001............................................. 43,653
2002............................................. 29,678
2003 and Thereafter.............................. 3,220
--------
$211,837
========
We recorded expenses in connection with such commitments for the years ended
December 31, 1997, 1998 and 1999 of approximately $9,100,000, $81,997,000 and
$141,781,000 respectively.
Commitments and Contingencies -- On October 8, 1999, Aerotel, Ltd. and
Aerotel U.S.A. commenced a suit against us, deltathree.com and one of our U.S.
subsidiaries in the United States District Court for the Southern District of
New York. Aerotel alleges that we are infringing on a patent issued to Aerotel
in November 1987 by making, using, selling and offering for sale prepaid
telephone card products in the United States. Aerotel seeks an injunction to
stop us from using technology covered by this patent, monetary damages in an
unspecified amount and reimbursement of attorneys' fees. We have answered the
complaint and the parties are currently engaged in pre-trial discovery. As we
continue to evaluate these claims, we believe that we have meritorious defenses
to the claims and intend to defend the lawsuit vigorously. However, the outcome
of the litigation is inherently unpredictable and an unfavorable result may have
a material adverse effect on us. Regardless of the ultimate outcome, the
litigation could result in substantial expenses to us and significant diversion
of efforts by our managerial and other personnel.
F-26
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the years ended December 31, 1997, 1998 and 1999
15. Commitments and Contingencies--(Continued)
We are, from time to time, a party to litigation that arises in the normal
course of our business operations. Except as previously described, we are not
presently a party to any litigation that we believe could reasonably be expected
to have a material adverse effect on our business or results of operations.
We are involved in various claims that arose in the ordinary course of our
businesses. The expected settlements from certain of these matters have been
accrued and are recorded as Other Liabilities. In our opinion, the settlement of
such claims would not have a material adverse effect on our consolidated
financial position or results of its operations.
In connection with the acquisition of one of our United States subsidiaries, we
recorded what we believed to be our best estimate of the unfavorable portion
related to certain transmission capacity agreements. During 1997, we
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.
We are a party to separate stockholder agreements with certain minority
stockholders of our subsidiaries, pursuant to which we have 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 us and
in certain cases require us to purchase these interests in certain of our
subsidiaries. Certain of the minority stockholders have the option to require us
to purchase their interests at any time in exchange for cash or Class A Common
Stock (in most instances, at our sole discretion) and have the right to require
us 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 us for
any reason. Generally, the minority stockholder remains employed by us and
receives a salary and a performance based bonus. We have issued put rights to
substantially all of our subsidiaries' minority stockholders at the time we
acquired a majority shareholding in the entity acquired or formed. Such put
rights were issued to create an incentive for our minority shareholders to
maximize the long term value of their respective subsidiaries and to provide
liquidity to the shareholders at the time of exercise.
Our 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 us, 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 our sole discretion. Solely for the purpose of illustration, if
all such options were in effect on December 31, 1999, our aggregate purchase
obligation is estimated to be approximately $50.3 million at that date.
16. Significant Customer
For the years ended December 31, 1997, 1998 and 1999 no customer accounted for
more than 10% of our revenues.
17. Segment Reporting and Geographic Information
General Information
We have four reportable segments: three regional segments in, Europe, North
America and Asia,Pacific and other operations (which include immaterial
operations in Latin America) and deltathree.com, our global internet telephony
subsidiary. Revenues from deltathree.com have been immaterial to us. However
with the proceeds of deltathree.com's initial public offering in November 1999,
it will incur significant marketing and infrastructure costs as it executes its
expansion plans. The Company's three regional segments are strategic business
units that offer primarily identical products and services. They are managed
separately because each business within the regions 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, we have aggregated similar operating segments into the three regional
segments.
F-27
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the years ended December 31, 1997, 1998 and 1999
17. Segment Reporting and Geographic Information--(Continued)
(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. We evaluate performance based on the
profit or loss from operations.
We account 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. We do not systematically allocate assets or a proportionate allocation
of indebtedness to the divisions of the subsidiaries constituting our
consolidated group.
General corporate expenses are included within selling, general and
administrative expenses in the statements of operations and comprehensive loss.
The following table provides certain segment data on our operations for the
years ended December 31, 1997, 1998 and 1999 (in thousands).
Operating
Revenue Loss Total Assets
---------- ---------- ------------
Year Ended December 31, 1997
Europe .......................... $ 73,653 $ (35,905) $ 106,746
North America ................... 194,129 (24,954) 109,960
Asia/Pacific and Other .......... 32,625 (3,430) 58,030
deltathree.com .................. 389 (1,166) 8,403
---------- --------- ----------
$ 300,796 $ (65,455) $ 283,139
========== ========= ==========
Year Ended December 31, 1998
Europe .......................... $ 306,289 $ (56,391) $ 450,596
North America ................... 448,232 (14,746) 399,843
Asia/Pacific and Other .......... 129,675 (14,163) 90,073
deltathree.com .................. 1,742 (6,415) 25,676
---------- --------- ----------
$ 885,938 $ (91,715) $ 966,188
========== ========= ==========
Year Ended December 31, 1999
Europe .......................... $ 736,274 $ (60,873) $ 774,193
North America ................... 546,615 (59,220) 433,548
Asia/Pacific and Other .......... 183,338 (36,442) 155,769
deltathree.com .................. 3,622 (38,334) 126,833
---------- --------- ----------
$1,469,849 $(194,869) $1,490,343
========== ========= ==========
F-28
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the years ended December 31, 1997, 1998 and 1999
17. Segment Reporting and Geographic Information--(Continued)
(b) Reconciliations (in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1998 1999
--------- ---------- ---------
<S> <C> <C> <C>
Loss from Operations
Total loss from operations for reportable segments ...... $(65,455) $(91,715) $(194,869)
Unallocated amounts:
Loss from operations of corporate headquarters ....... (15,601) (38,535) (49,069)
-------- --------- --------
Total consolidated loss from operations ................. $(81,056) $(130,250) $(243,938)
======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------
1998 1999
---- ----
<S> <C> <C>
Assets
Total assets for reportable segments.................................. $ 966,188 $1,490,343
Other operational segment assets...................................... 30,371 --
Unallocated amounts:
Net assets of corporate headquarters............................... 718,034 312,965
---------- ----------
Total consolidated assets............................................. $1,714,593 $1,803,308
========== ==========
</TABLE>
18. Summarized Financial Information
The following presents summarized financial information of RSL PLC, as of
December 31, 1998 and 1999 and for the years ended December 31, 1997, 1998 and
1999. RSL PLC is a wholly owned subsidiary of ours. RSL PLC had no independent
operations other than serving solely as a foreign holding company for certain of
our U.S. and European operations. The Notes issued by RSL PLC are fully and
unconditionally guaranteed by us. Our financial statements are, except for our
capitalization, corporate overhead expenses, certain operations and available
credit facilities, identical to the financial statements of RSL PLC (in
thousands).
December 31, 1998 December 31, 1999
----------------- -----------------
Current Assets......................... $ 686,727 $ 520,411
Non-current Assets..................... 877,696 972,319
Current Liabilities.................... 411,667 453,089
Non-current Liabilities................ 1,479,159 1,635,765
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1997 December 31, 1998 December 31, 1999
----------------- ------------------ ------------------
<S> <C> <C> <C>
Revenue............................. $ 266,142 $ 754,970 $ 1,282,889
Loss Before Extraordinary Item...... (95,824) (169,372) (269,870)
Extraordinary Item.................. -- (20,800) --
Net Loss............................ (95,824) (190,172) (269,870)
</TABLE>
F-29
<PAGE>
RSL COMMUNICATIONS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the years ended December 31, 1997, 1998 and 1999
19. Subsequent Event
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 $111.0 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. 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 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 issuances 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.
20. Supplemental Financial Information (Unaudited)
The following table sets forth selected unaudited quarterly financial
information for the years ended December 31, 1997, 1998 and 1999.
<TABLE>
<CAPTION>
(in thousands, except loss per share)
Year Ended December 31, 1997 First Second Third Fourth
----- ------ ----- ------
<S> <C> <C> <C> <C>
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
========== ========== ========== ===========
Year Ended December 31, 1999
Revenues............................................... $ 340,281 $ 367,700 $ 368,831 $ 393,037
========== ========== ========== ===========
Net loss............................................... $ (56,966) $ (72,855) $(118,897) $ (109,510)
========== ========== ========== ===========
Net loss per share of Common Stock..................... $ (1.08) $ (1.36) $ (2.17) $ (2.00)
========== ========== ========== ===========
Weighted average number of shares of Common
Stock outstanding................................... 52,930 53,394 54,702 54,891
========== ========== ========== ===========
</TABLE>
F-30
<PAGE>
SCHEDULE I
CONDENSED FINANCIAL INFORMATION
RSL COMMUNICATIONS PLC
CONDENSED BALANCE SHEETS
As of December 31,
($ in thousands)
<TABLE>
<CAPTION>
1998 1999
---------- ----------
Assets
<S> <C> <C>
Current Assets.................................................................. $ 686,727 $ 520,411
Restricted Marketable Securities................................................ 20,159 --
Property and Equipment - Net.................................................... 278,646 410,636
Other Assets.................................................................... 578,891 561,683
---------- ----------
Total ....................................................................... $1,564,423 $1,492,730
========== ==========
Liabilities and Shareholder's Deficiency
Current
Liabilities..................................................................... $ 411,667 $ 453,089
Long-term Debt.................................................................. 471,504 448,861
Senior Notes - Net.............................................................. 1,007,655 1,186,904
Shareholder's Deficiency........................................................ (326,403) (596,124)
---------- ----------
Total ....................................................................... $1,564,423 $1,492,730
========== ==========
</TABLE>
S-1
<PAGE>
RSL COMMUNICATIONS PLC
CONDENSED STATEMENTS OF OPERATIONS
For the year ended December 31,
($ in thousands)
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenues............................................................ $ 266,142 $ 754,970 $1,282,889
Cost of Services.................................................... 235,150 598,378 908,958
Expenses............................................................ 100,118 253,735 521,150
--------- ------- -------
Income (Loss) from Operations................................... (69,126) (97,143) (147,219)
Interest Expense................................................ (39,576) (75,129) (131,668)
Interest Income................................................. 13,565 15,333 19,342
Foreign Exchange Transaction (Loss) Gain........................ -- (10,663) 16,719
Minority Interest............................................... 88 2,284 (7,424)
Loss in Equity Interest of Unconsolidated Subsidiaries.......... -- (3,276) (4,717)
Other Income (Expense) - Net ................................... (375) 554 (13,348)
Income taxes.................................................... (400) (1,332) (1,555)
----- ------- -------
Loss Before Extraordinary Item.................................. (95,824) (169,372) (269,870)
Extraordinary Item.............................................. -- (20,800) --
--------- -------- ----------
Net Loss.................................................... $ (95,824) $(190,172) $ (269,870)
</TABLE>
S-2
<PAGE>
RSL COMMUNICATIONS PLC
CONDENSED STATEMENTS OF CASH FLOWS
For the year ended December 31,
($ in thousands)
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Net loss.......................................................................... $(190,172) $(269,870)
Depreciation and amortization.................................................. 65,748 143,734
Working capital change and other............................................... 29,569 (43,547)
--------- ---------
Net cash provided by (used in) operations......................................... (94,855) (169,683)
--------- ---------
Purchases of property and equipment............................................ (142,953) (167,897)
Acquisitions of subsidiaries................................................... (272,940) (52,696)
Net redemptions (purchases) of marketable securities........................... (74,834) 37,063
Proceeds from restricted marketable securities................................. 29,141 21,132
Other.......................................................................... 4,324 --
--------- ---------
Net cash provided by (used in) investing activities............................... (457,262) (162,398)
--------- ---------
Proceeds from issuance of Notes................................................ 791,992 170,835
Payment of long-term debt ..................................................... (1,547) (29,023)
Proceeds from long-term debt .................................................. 13,386 5,231
Net-change in short-term debt ................................................. 1,039 (18,580)
Proceeds from sale of subsidiary stock......................................... -- 50,090
Payment of premium and principal on the 1996 Notes............................. (144,155) --
Advances from (payments to) Parent............................................. 125,098 (75,829)
Offering cost and other........................................................ (4,720) (5,231)
--------- ---------
Net cash provided by financing activities......................................... 781,093 97,493
--------- ---------
Net Increase (Decrease) in cash and cash equivalents.............................. 228,976 (234,588)
Effects of foreign currency on cash and cash equivalents.......................... 819 1,650
Cash and cash equivalents at beginning of period.................................. 129,380 359,175
--------- ---------
Cash and cash equivalents at end of period........................................ $ 359,175 $ 126,237
========= =========
</TABLE>
S-3
<PAGE>
SCHEDULE II
RSL COMMUNICATIONS, LTD.
SCHEDULE OF VALUATION ALLOWANCES
($ in thousands)
<TABLE>
<CAPTION>
Balance at Charged to Costs Charged to Other Balance at
January 1, 1999 and Expenses Accounts Deductions December 31, 1999
--------------- ------------ -------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts $26,373 $18,021 -- $(7,636) $36,758
<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>
Allowance for Doubtful Accounts $12,333 $ 9,043 $12,378 $(7,381) $26,373
<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>
Allowance for Doubtful Accounts $3,881 $10,908 -- $(2,456) $12,333
</TABLE>
S-4
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Exchange Act, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York on the 29th day of March, 2000.
RSL COMMUNICATIONS, LTD.
By: /s/ Itzhak Fisher
--------------------------
Name: Itzhak Fisher
Title: President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Itzhak Fisher and Donald Shassian his
true and lawful attorney-in-fact, each acting alone, with full power of
substitution and resubstitution for him and in his name, place and stead, in any
and all capacities to sign any and all amendments to this report, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that said attorneys-in-fact or their substitutes, each acting
alone, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been duly signed by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Director and Chairman of the
/s/ Ronald S. Lauder Board of Directors March 29, 2000
- -----------------------
(Ronald S. Lauder)
Director, President and Chief
/s/ Itzhak Fisher Executive Officer (Principal March 29, 2000
- ----------------------- Executive Officer)
(Itzhak Fisher)
Chief Operating Officer,
Executive Vice President,
/s/ Donald R. Shassian Chief Financial Officer March 29, 2000
- ----------------------- and Treasurer
(Donald R. Shassian) (Principal Financial Officer)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Global Controller (Controller and
/s/ Joel Beckoff Principal Accounting Officer) March 29, 2000
- -----------------------
(Joel Beckoff)
/s/ Jacob Z. Schuster Director March 29, 2000
- -----------------------
(Jacob Z. Schuster)
/s/ Gustavo A. Cisneros
- ----------------------- Director March 29, 2000
(Gustavo A. Cisneros)
/s/ Fred H. Langhammer
- ----------------------- Director March 29, 2000
(Fred H. Langhammer)
/s/ Leonard A. Lauder
- ----------------------- Director March 29, 2000
(Leonard A. Lauder)
/s/ Eugene A. Sekulow
- ----------------------- Director March 29, 2000
(Eugene Sekulow)
/s/ Nicolas G. Trollope
- ----------------------- Director March 29, 2000
(Nicolas G. Trollope)
</TABLE>
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
*3.1 Certificate of Incorporation of RSL Communications, Ltd., issued by
the Bermuda Registrar of Companies on March 14, 1996.
*3.2 Memorandum of Association of RSL Communications, Ltd., filed with
the Bermuda Registrar of Companies on March 14, 1996.
#3.3 Bye-Laws of RSL Communications, Ltd., as amended.
**4.1 Form of Class A Common Share Certificate.
*10.1 Indenture, dated October 3, 1996, by and among RSL Communications
PLC, RSL Communications, Ltd. and the Chase Manhattan Bank, as
Trustee containing, as exhibits, specimens of 12 1/4 % Senior Notes
due 2006.
*10.2 Note Deposit Agreement, dated October 3, 1996, by and among RSL
Communications PLC, RSL Communications, Ltd. and the Chase
Manhattan Bank, as Book Entry Depositary.
*10.3 Collateral Pledge and Security Agreement, dated October 3, 1996, by
and among RSL Communications PLC and Trustee.
++++10.4 Note Deposit Agreement, dated as of February 27, 1998, among RSL
Communications PLC, RSL Communications, Ltd. and The Chase
Manhattan Bank as Book-Entry Depositary.
++++10.5 Note Deposit Agreement, dated as of February 27, 1998, among RSL
Communications PLC, RSL Communications, Ltd. and The Chase
Manhattan Bank as Book-Entry Depositary.
++++10.6 Indenture, dated as of February 27, 1998, by RSL Communications PLC
and RSL Communications, Ltd. to the Chase Manhattan Bank as
Trustee.
++++10.7 Indenture, dated as of February 27, 1998, by RSL Communications PLC
and RSL Communications, Ltd. to the Chase Manhattan Bank as
Trustee.
++++10.8 Note Deposit Agreement, dated as of March 16, 1998, by and between
RSL Communications PLC and The Chase Manhattan Bank as Book-Entry
Depositary.
++++10.9 Indenture, dated as of March 16, 1998, by RSL Communications PLC
and RSL Communications, Ltd. to The Chase Manhattan Bank as
Trustee.
*10.10 Warrant Agreement, dated October 3, 1996, between RSL
Communications, Ltd., as Issuer, and The Chase Manhattan Bank, as
warrant agent.
*10.11 Warrant Registration Rights Agreement, dated October 3, 1996,
between RSL Communications, Ltd., as Issuer, and The Chase
Manhattan Bank, as warrant agent.
*10.12 Subordinated Promissory Note dated September 10, 1996, from RSL
Communications, Ltd. to Ronald S. Lauder.
*10.13 Warrant for 210,000 shares of Class B Common Stock of RSL
Communications, Ltd. issued to Ronald S. Lauder on September 10,
1996.
*10.14 RSL Communications, Ltd.'s 1995 Amended and Restated Stock Option
Plan.
*10.15 Memorandum of Agreement, dated July 30, 1996, between International
Telecommunications Corporation and Codetel.
*10.16 General Purchase Agreement , dated September 14, 1995, between
Ericsson Inc. and International Telecommunications Corporation.
*10.17 Lease Agreement between AB LM Ericsson Finans and International
Telecommunications Corporation.
*10.18 Lease Agreement, dated April 10, 1996, between RSL COM Europe Ltd.
and AB LM Ericsson Finans.
*10.19 Lease Agreement, dated December 30, 1996, between RSL COM Europe
Ltd. and AB LM Ericsson Finans.
*10.20 Asset Purchase Agreement, dated as of May 8, 1996 by and between
RSL COM France S.A. and Sprint Telecommunications France Inc.
*10.21 Asset Purchase Agreement, dated as of May 8, 1996, by and among
Siena Vermogensverwaltungs-GmbH, Sprint Telecommunications Services
GmbH, and Sprint Fon Inc.
*10.22 Asset Purchase Agreement, August 12, 1996, by and between RSL COM
UK Limited and Incom (UK) Ltd.
*10.23 Stock Purchase Agreement, dated July 3, 1996, between RSL
Communications Limited, Charles Piluso and International
Telecommunication Group, Ltd.
*10.24 Stock Purchase Agreement, dated September 9, 1996, between RSL
Communications PLC, Richard Rebetti, Jr, and International
Telecommunications Group, Ltd.
*10.25 Agreement and Plan of Reorganization, dated September 9, 1996,
among RSL Communications PLC, RSL Communications, Ltd. and Charles
Piluso.
<PAGE>
*10.26 Tax Agreement, dated September 9, 1996, between RSL Communications
PLC, RSL Communications, Ltd. and Charles Piluso.
*10.27 Stock Purchase Agreement, dated September 22, 1995, by and between
RSL Communications, Inc. and Charles Piluso.
*10.28 Stock Purchase Agreement, dated September 22, 1995, by and between
Richard Rebetti and RSL Communications, Inc.
*10.29 Amendment to the Stock Purchase Agreement, dated September 22,
1995, between and among International Telecommunications Group,
Ltd., International Telecommunications Corporation and RSL
Communications, Inc.
*10.30 Stock Purchase Agreement, dated March 10, 1995, between RSL
Communications, Inc., International Telecommunications Group, Ltd.
and International Telecommunications Corporation.
*10.31 Indemnity Agreement, dated March 10, 1995, between and among
International Telecommunications Group, Ltd., International
Telecommunications Corporations and RSL Communications, Inc.
*10.32 Sublease, dated July 18, 1996, between RSL Communications, Ltd.,
and RSL Management Corporation.
*10.33 Lease, dated as of January 15, 1997, between Longstreet Associates
L.P. and RSL COM U.S.A., Inc.
*10.34 Amendment of Lease, dated as of December 6, 1995, between Hudson
Telegraph Associates and International Telecommunications
Corporation.
**10.35 Shareholders Agreement of RSL Communications, Latin America, Ltd.,
dated August 4, 1997, between and among RSL Communications, Latin
America, Ltd., RSL Communications, Ltd. and Coral Gates Investments
Ltd.
+10.36 RSL Communications, Ltd. 1997 Performance Incentive Plan.
++10.37 RSL Communications, Ltd. 1997 Stock Incentive Plan, as amended.
**10.38 Lease Agreement, dated June 19, 1997 for property at 430 Park
Avenue, New York, New York.
**10.39 Stock Purchase Agreement of Delta Three, Inc.
**10.40 Employment Agreement, dated September 2, 1997, between Itzhak
Fisher and RSL Communications, Ltd.
**10.41 Employment Agreement, dated September 2, 1997, between Itzhak
Fisher and International Telecommunications Group, Ltd.
+10.42 RSL Communications, Ltd. 1997 Directors' Compensation Plan.
**10.43 Registration Rights Agreement, dated September 2, 1997, among RSL
Communications, Ltd., Ronald S. Lauder, Itzhak Fisher and Coral
Gate Investments Ltd.
**10.44 International Telecommunication Services Agreement, dated July 1,
1995,between International Telecommunications Corporation and
TELECOM Denmark.
**10.45 International Telecommunications Operating Agreement, dated July
15, 1995 between Telenor Carrier Services A.S. and International
Telecommunications Corporation.
**10.46 International Telecommunication Services Agreement, dated May 10,
1994, Between Mercury Communications Limited and International
Telecommunications Corporation.
**10.47 Agreement Concerning Voice Distribution of International Telophony
Traffic, undated, Between Unicource Carrier Services AG and
International telecommunications Corporation.
**10.48 International Telecommunications Services Agreement, dated May 31,
1994, between Compania Dominicana De Telefonos, C. Por A. and
International Telecommunications Corporation.
**10.49 Second Supplementary Agreement to the UK-Netherlands 14 Cable
System Construction & Maintenance Agreement, effective February 18,
1997 among the parties on the Annex thereto.
**10.50 Fourth Supplementary Agreement to the ODIN Construction and
Maintenance Agreement, dated October 24, 1996, among the
parties on the Annex thereto.
**10.51 Second Supplementary Agreement to Antillas I Construction &
Maintenance Agreement, dated February 13, 1997, among the parties
on the Annex thereto.
**10.52 Canus I Cable System Indefeasible Right of Use Agreement and
Communications, Inc. and International Telecommunications
Corporation.
**10.53 Cantat - 3 Cable System Indefeasible Right of Use Agreement and
Financing Agreement, dated March 12, 1996, between Teleglobe Cantat
- 3 Inc. and International Telecommunications Corporation.
**10.54 PTAT - 1 Submarine System Indefeasible Right of Use Agreement,
dated May 12, 1994, between PrivateTransatlantic Telecommunications
System, Inc. and International Telecommunications Corporation.
<PAGE>
**10.55 Third Supplementary Agreement to the TAT - 12/TAT - 13 Cable
Network Construction and Maintenance Agreement, dated October
17,1995, among the parties on the Annex thereto.
*10.56 Placement Agreement, dated as of September 30, 1996, by and among
RSL Communications PLC, RSL Communications, Ltd. and Morgan Stanley
& Co. Incorporated, Bear Stearns Co. Inc. and Dillon Read & Co.
Inc..
+++10.57 Asset Purchase Agreement, dated as of April 23, 1998 by and between
CBS Corporation and RSL COM U.S.A., Inc.
*****10.58 Restated Umbrella Agreement, dated as of June 26, 1998, among
Motorola Limited, SA Motorola NV, Motorola Electronic GmbH,
Motorola SA and RSL Communications, Ltd.
***10.59 Share Subscription, Share Option and Shareholders Agreement, dated
June 10, 1998, among RSL COM Europe Ltd., RSL Communications, Ltd.
and Metro Holding AG.
***10.60 Marketing and Distribution Services Agreement, dated as of June 10,
1998, between RSL Com Europe Ltd. and Metro Holding AG.
***10.61 Exchange Agreement, dated July 22, 1998, among Ligapart AG, Metro
Holding AG and RSL Communications, Ltd.
***10.62 Amended and Restated Share Subscription, Share Option and
Shareholders Agreement, dated July 22, 1998, among RSL COM Europe
Ltd., RSL Communications, Ltd. and Metro Holding AG.
***10.63 Share Purchase Agreement, dated June 24, 1998, between British
Columbia Railway Company and RSL Com Holdings Canada, Inc.
****10.64 Note Deposit Agreement, dated November 9, 1998, among RSL
Communications PLC, RSL Communications, Ltd. and The Chase
Manhattan Bank as Book-Entry Depositary.
****10.65 Indenture, dated November 9, 1998, by RSL Communications PLC and
RSL Communications, Ltd. to The Chase Manhattan Bank as Trustee.
******10.66 Note Deposit Agreement, dated December 8, 1998, among RSL
Communications PLC, RSL Communications , Ltd., and The Chase
Manhattan Bank as Book-Entry Depository.
******10.67 Indenture, dated December 8, 1998, by RSL Communications PLC and
RSL Communications, Ltd. to The Chase Manhattan Bank as Trustee.
#10.68 Employment Agreement Between RSL Communications, Ltd. and David
Hardwick.
******10.69 Employment Agreement Between RSL Communications, Ltd. and Donald
Shassian.
#10.70 Employment Agreement Between RSL COM U.S.A., Inc., and Michael
Marino.
@10.71 Registration Rights Agreement dated September 1, 1999, between RSL
Communications, Ltd. and deltathree.com, Inc.
@10.72 Amended and Restated Services Agreement by and between RSL
Communications, Ltd. and deltathree.com, Inc., dated September 3,
1999.
@10.73 Credit Facility dated September 1, 1999, between RSL
Communications, Ltd. and deltathree.com, Inc.
@10.74 Management Agreement dated as of November 1, 1999 between
deltathree.com, Inc. and RSL Communications, Ltd.
@10.75 Amendment to Services Agreement by and between RSL Communications,
Ltd. and deltathree.com, Inc., dated November 1, 1999
@10.76 Co-Branding and Services Agreement effective as of October 1, 1999,
between RSL COM PrimeCall, Inc. and deltathree.com, Inc.
@10.77 Intercompany Compliance Agreement dated as of November 1, 1999,
between RSL Communications, Ltd., RSL Communications PLC and
deltathree.com, Inc
@10.78 Form of Proposed Release and Indemnification Agreement between RSL
Communications, Ltd. and deltathree.com, Inc.
@@10.79 First Supplemental Indenture, dated as of September 28, 1999, by
RSL Communications PLC and RSL Communications, Ltd. to The Chase
Manhattan Bank, as Trustee, regarding 9 7/8% Senior Notes due 2009
@@10.80 First Supplemental Indenture, dated as of September 24, 1999, by
RSL Communications PLC and RSL Communications, Ltd. to The Chase
Manhattan Bank, as Trustee regarding 10 1/2% Senior Notes due 2008
@@10.81 First Supplemental Indenture, dated as of September 24, 1999, by
RSL Communications PLC and RSL Communications, Ltd. to The Chase
Manhattan Bank, as Trustee, regarding 9 1/8% Senior Notes due 2008
@@10.82 First Supplemental Indenture, dated as of September 28, 1999, by
RSL Communications PLC and RSL Communications, Ltd. to The Chase
Manhattan Bank, as Trustee, regarding 12 1/4% Senior Notes due 2006
<PAGE>
@@10.83 First Supplemental Indenture, dated as of September 28, 1999, by
RSL Communications PLC and RSL Communications, Ltd. to The Chase
Manhattan Bank, as Trustee, regarding 12% Senior Notes due 2008
@@10.84 First Supplemental Indenture, dated as of September 28, 1999, by
RSL Communications PLC and RSL Communications, Ltd. to The Chase
Manhattan Bank, as Trustee, regarding 10 1/8% Senior Discount Notes
due 2008
@@10.85 First Supplemental Indenture, dated as of September 28, 1999, by
RSL Communications PLC and RSL Communications, Ltd. to The Chase
Manhattan Bank, as Trustee, regarding 10% Senior Discount Notes due
2008
#21.1 Subsidiaries of the Registrant.
#27.1 Financial Data Schedule.
* Incorporated by reference to Registrant's Registration Statement on
Form S-4 (Registration No.333-25749).
** Incorporated by reference to Registrant's Registration Statement on
Form S-1 (Registration No.333-34281).
*** Incorporated by reference to Registrant's Registration Statement on
Form S-1 (Registration No. 333-62325)
**** Incorporated by reference to Registrant's Registration Statement on
Form S-1 (Registration No. 333-62325).
***** Incorporated by reference to the Registrant's report on Form 8-K dated
August 14, 1998.
****** Incorporated by reference to Registrant's Registration Statement on
Form S-4 (Registration No. 333-70023).
+ Incorporated by reference to Registrant's Registration Statement on
Form S-8 (Registration No. 333-40085).
++ Incorporated by reference to Registrant's Definitive Proxy Statement
filed with the Commission on April 30, 1999.
+++ Incorporated by reference to Registrant's Report on Form 8-K/A dated
August 12, 1998.
++++ Incorporated by reference to Registrant's Registration Statement on
Form S-1 (Registration No. 333-46125).
@ Incorporated by reference to deltathree.com, Inc.'s Registration
Statement on Form S-1 (Registration No. 333-86503)
# Filed herewith.
@@ Incorporated by reference to Registrant's Registration Statement on
Form S-4 (Registration No. 333-90039).
<PAGE>
Exhibit 3.3
Bye-Laws
of
RSL Communications, Ltd.
TABLE OF CONTENTS
Bye-Law
Page
1 Interpretation 1
2 Board of Directors 3
3 Management of the Company 3
4 Power to appoint managing director
or chief executive officer 3
5 Power to appoint manager 4
6 Power to authorise specific actions 4
7 Power to appoint attorney 4
8 Executive Committee and Other Committees 4
9 Power to appoint and dismiss employees 6
10 Power to borrow and charge property 6
11 Exercise of power to purchase shares of or
discontinue the Company 6
12 Election of Directors 7
13 Defects in appointment of Directors 7
14 Alternate Directors 7
15 Removal of Directors 8
16 Vacancies on the Board 8
17 Notice of meetings of the Board 9
18 Quorum at meetings of the Board 10
19 Meetings of the Board 10
20 Unanimous written resolutions 10
21 Contracts and disclosure of Directors' interests 10
22 Remuneration of Directors 11
23 Officers of the Company 11
24 Appointment of Officers 12
25 Remuneration of Officers 12
26 Duties of Officers 12
27 Chairman of meetings 12
28 Register of Directors and Officers 12
29 Obligations of Board to keep minutes 13
30 Indemnification of Directors and Officers of the Company 14
31 Waiver of claim by Member 14
32 Notice of annual general meeting 15
33 Notice of special general meeting 15
34 Accidental omission of notice of general meeting 15
35 Meeting called on requisition of members 16
<PAGE>
(ii)
36 Short notice 16
37 Postponement of meetings 16
38 Quorum for general meeting 16
39 Adjournment of meetings 17
40 Attendance at meetings 17
41 Written resolutions 17
42 Attendance of Directors 18
43 Voting at meetings 19
44 Voting on show of hands 19
45 Decision of chairman 19
46 Demand for a poll 19
47 Seniority of joint holders voting 21
48 Instrument of proxy 21
49 Representation of corporations at meetings 22
50 Rights of shares 22
51 Power to issue shares 25
51A Warrants 27
52 Variation of rights, alteration of share capital and purchase
of shares of the Company 27
53 Registered holder of shares 28
54 Death of a joint holder 28
55 Share certificates 29
56 Calls on shares 29
57 Forfeiture of Shares 30
58 Contents of Register of Members 30
59 Inspection of Register of Members 31
60 Determination of record dates 31
61 Instrument of transfer 31
62 Restriction on Transfer 32
63 Transfers by joint holders 32
64 Representative of deceased Member 32
65 Registration on death or bankruptcy 33
66 Declaration of dividends by Board 33
67 Other distributions 34
68 Reserve fund 34
69 Deduction of amounts due to the Company 34
70 Issue of bonus shares 34
71 Records of account 35
72 Financial year end 35
73 Financial statements 35
<PAGE>
(iii)
74 Appointment of Auditor 36
75 Remuneration of Auditor 36
76 Vacation of office of Auditor 36
77 Access to books of the Company 36
78 Report of the Auditor 36
79 Notices to Members of the Company 37
80 Notices to joint Members 37
81 Service and delivery of notice 37
82 The seal 38
83 Manner in which seal is to be affixed 38
84 Winding-up/distribution by liquidator 38
85 Alteration of Bye-laws 39
<PAGE>
INTERPRETATION
1. Interpretation
(1) In these Bye-laws the following words and expressions shall,
where not inconsistent with the context, have the following meanings
respectively:-
(a) "Act" means the Companies Act 1981 as amended from time
to time;
(b) "Alternate Director" means an alternate Director
appointed in accordance with these Bye-laws;
(c) "Auditor" includes any individual or partnership;
(d) "Board" means the Board of Directors appointed or
elected pursuant to these Bye-laws and acting by
resolution in accordance with the Act and these Bye-laws
or the Directors present at a meeting of Directors at
which there is a quorum;
(e) "Company" means the company for which these Bye-laws are
approved and confirmed;
(f) "Director" means a director of the Company and shall
include an Alternate Director;
(g) "Member" means the person registered in the Register of
Members as the holder of shares in the Company and, when
two or more persons are so registered as joint holders
of shares, means the person whose name stands first in
the Register of Members as one of such joint holders or
all of such persons as the context so requires;
(h) "notice" means written notice as further defined in
these Bye-laws unless otherwise specifically stated;
(i) "Officer" means any person appointed by the Board to
hold an office in the Company;
(j) "Register of Directors and Officers" means the Register
of Directors and Officers referred to in these Bye-laws;
<PAGE>
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(k) "Register of Members" means the Register of Members
referred to in these Bye-laws; and
(l) "Secretary" means the person appointed to perform any or
all the duties of secretary of the Company and includes
any deputy or assistant secretary.
(2) In these Bye-laws, where not inconsistent with the context:-
(a) words denoting the plural number include the singular
number and vice versa;
(b) words denoting the masculine gender include the feminine
gender;
(c) words importing persons include companies, associations
or bodies of persons whether corporate or not;
(d) the word:-
(i) "may" shall be construed as permissive;
(ii) "shall" shall be construed as imperative; and
(e) unless otherwise provided herein words or expressions
defined in the Act shall bear the same meaning in these
Bye-laws.
(3) Expressions referring to writing or written shall, unless the
contrary intention appears, include facsimile, printing, lithography,
photography and other modes of representing words in a visible form.
(4) Headings used in these Bye-laws are for convenience only and are
not to be used or relied upon in the construction hereof.
BOARD OF DIRECTORS
------------------
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2. Board of Directors
The business of the Company shall be managed and conducted by the Board.
3. Management of the Company
(1) In managing the business of the Company, the Board may exercise all
such powers of the Company as are not, by statute or by these Bye-laws, required
to be exercised by the Company in general meeting subject, nevertheless, to
these Bye-laws, the provisions of any statute and to such regulations as may be
prescribed by the Company in general meeting.
(2) No regulation or alteration to these Bye-laws made by the Company in
general meeting shall invalidate any prior act of the Board which would have
been valid if that regulation or alteration had not been made.
(3) The Board may procure that the Company pays all expenses incurred
in promoting and incorporating the Company.
4. Power to appoint managing director or chief executive officer
The Board may from time to time appoint one or more Directors to the
office of managing director or chief executive officer of the Company who shall,
subject to the control of the Board, supervise and administer all of the general
business and affairs of the Company.
5. Power to appoint manager
The Board may appoint a person to act as manager of the Company's day to
day business and may entrust to and confer upon such manager such powers and
duties as it deems appropriate for the transaction or conduct of such business.
<PAGE>
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6. Power to authorise specific actions
The Board may from time to time and at any time authorise any company,
firm, person or body of persons to act on behalf of the Company for any specific
purpose and in connection therewith to execute any agreement, document or
instrument on behalf of the Company.
7. Power to appoint attorney
The Board may from time to time and at any time by power of attorney
appoint any company, firm, person or body of persons, whether nominated directly
or indirectly by the Board, to be an attorney of the Company for such purposes
and with such powers, authorities and discretions (not exceeding those vested in
or exercisable by the Board) and for such period and subject to such conditions
as it may think fit and any such power of attorney may contain such provisions
for the protection and convenience of persons dealing with any such attorney as
the Board may think fit and may also authorise any such attorney to sub-delegate
all or any of the powers, authorities and discretions so vested in the attorney.
Such attorney may, if so authorised under the seal of the Company, execute any
deed or instrument under such attorney's personal seal with the same effect as
the affixation of the seal of the Company.
8. Executive Committee and Other Committees
(1) The Board may designate one or more Committees, including an
Executive Committee, each such Committee to consist of such number of Directors
as from time to time may be fixed by the Board. Any such Committee may be
abolished or re-designated from time to time by the Board. Each member of any
such Committee shall hold office until his or her successor shall have been
designated or he or she shall cease to be a Director, or until his or her
earlier death, resignation or removal.
<PAGE>
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(2) During the intervals between the meetings of the Board, the
Executive Committee, except as otherwise provided in this Bye-law, shall have
and may exercise all the powers and authority of the Board in the management of
the business of the Company. Each such other Committee may exercise such powers
of the Board as may be provided by resolution of the Board. Neither the
Executive Committee nor any such other Committee shall have the power or
authority to:
(a) amend the Company's Memorandum of Association or
Bye-laws;
(b) adopt an agreement of merger or consolidation or approve
the sale, lease or exchange of all or substantially all
of the Company's property and assets; or
(c) approve or recommend to the Members a dissolution of the
Company.
The members of the Executive Committee shall be unless changed
in accordance with Bye-law 8(1): Itzhak Fisher, Andrew Gaspar, Ronald S Lauder,
Jacob Z Schuster and Eugene Sekulow.
(3) Each such Committee may fix its own rules of procedures and may meet
at such place, and such time, and upon such notice if any, as it shall determine
from time to time. The presence of a majority of the authorised members of a
Committee shall constitute a quorum for the transaction of business.
The act of the majority of the members present at any meeting at which a
quorum is present shall be the act of such Committee. Any action required or
permitted to be taken at any meeting of any such Committee may be taken without
a meeting, if all members of such Committee shall consent to such action in
writing. Members of any Committee may participate in a meeting of such Committee
by means of conference telephone or similar
<PAGE>
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communications equipment by means of which all persons participating in a
meeting can hear each other, and participating in a meeting pursuant to this
provision shall constitute presence in person at such meeting.
9. Power to appoint and dismiss employees
The Board may appoint, suspend or remove any manager, secretary, clerk,
agent or employee of the Company and may fix their remuneration and determine
their duties.
10. Power to borrow and charge property
The Board may exercise all the powers of the Company to borrow money and
to mortgage or charge its undertaking, property and uncalled capital, or any
part thereof, and may issue debentures, debenture stock and other securities
whether outright or as security for any debt, liability or obligation of the
Company or any third party.
11. Exercise of power to purchase shares of or discontinue the Company
(1) The Board may exercise all the powers of the Company to purchase all
or any part of its own shares pursuant to Section 42A of the Act.
(2) The Board may exercise all the powers of the Company to discontinue
the Company to a named country or jurisdiction outside Bermuda pursuant to
Section 132G of the Act.
12. Election of Directors
The Board shall consist of not less than two Directors or such number in
excess thereof as the Members may from time to time determine who shall be
elected or appointed in the first place at the statutory meeting of the Company
and thereafter, except in the case of casual vacancy, at the annual general
meeting or at any special general meeting called for the purpose and who shall
hold office for such term as the Members may determine or,
<PAGE>
- 7 -
in the absence of such determination, until the next annual general meeting or
until their successors are elected or appointed or their office is otherwise
vacated, and any general meeting may authorise the Board to fill any vacancy in
their number left unfilled at a general meeting.
13. Defects in appointment of Directors
All acts done bona fide by any meeting of the Board or by a committee of
the Board or by any person acting as a Director shall, notwithstanding that it
be afterwards discovered that there was some defect in the appointment of any
Director or person acting as aforesaid, or that they or any of them were
disqualified, be as valid as if every such person had been duly appointed and
was qualified to be a Director.
14. Alternate Directors
(1) Any general meeting of the Company may elect a person or persons to
act as a Director in the alternative to any one or more of the Directors of the
Company or may authorise the Board to appoint such Alternate Directors. Unless
the Members otherwise resolve, any Director may appoint a person or persons to
act as a Director in the alternative to himself or herself by notice in writing
deposited with the Secretary. Any person so appointed shall have all the rights
and powers of the Director or Directors for whom such person is appointed in the
alternative provided that such person shall not be counted more than once in
determining whether or not a quorum is present.
(2) An Alternate Director shall be entitled to receive notice of all
meetings of the Board and to attend and vote at any such meeting at which a
Director for whom such Alternate Director was appointed in the alternative is
not personally present and generally to perform at such meeting all the
functions of such Director for whom such Alternate Director was appointed.
<PAGE>
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(3) An Alternate Director shall cease to be such if the Director for
whom such Alternate Director was appointed ceases for any reason to be a
Director but may be re-appointed by the Board as alternate to the person
appointed to fill the vacancy in accordance with these Bye-laws.
15. Removal of Directors
(1) Subject to any provision to the contrary in these Bye-laws, the
Members may, at any special general meeting convened and held in accordance with
these Bye-laws, remove a Director provided that the notice of any such meeting
convened for the purpose of removing a Director shall contain a statement of the
intention so to do and be served on such Director not less than 14 days before
the meeting and at such meeting such Director shall be entitled to be heard on
the motion for such Director's removal.
(2) A vacancy on the Board created by the removal of a Director under
the provisions of subparagraph (1) of this Bye-law may be filled by the Members
at the meeting at which such Director is removed and, in the absence of such
election or appointment, the Board may fill the vacancy.
16. Vacancies on the Board
(1) The Board shall have the power from time to time and at any time to
appoint any person as a Director to fill a vacancy on the Board occurring as the
result of the death, disability, disqualification or resignation of any Director
and to appoint an Alternate Director to any Director so appointed.
(2) The Board may act notwithstanding any vacancy in its number but, if
and so long as its number is reduced below the number fixed by these Bye-laws as
the quorum necessary for the transaction of business at meetings of the Board,
the continuing Directors
<PAGE>
- 9 -
or Director may act for the purpose of (i) summoning a general meeting of the
Company or (ii) preserving the assets of the Company.
(3) The office of Director shall be vacated if the Director:-
(a) is removed from office pursuant to these Bye-laws or is
prohibited from being a Director by law;
(b) is or becomes bankrupt or makes any arrangement or
composition with his creditors generally;
(c) is or becomes of unsound mind or dies;
(d) resigns his or her office by notice in writing to the
Company.
17. Notice of meetings of the Board
(1) The Chairman, the President and CEO or the Secretary on the
requisition of any two directors may at any time summon a meeting of the Board
on two days' notice.
(2) Notice of a meeting of the Board shall be deemed to be duly given to
a Director if it is given to such Director verbally in person or by telephone or
otherwise communicated or sent to such Director by post, cable, telex,
telecopier, facsimile or other mode of representing words in a legible and
non-transitory form at such Director's last known address or any other address
given by such Director to the Company for this purpose.
18. Quorum at meetings of the Board
The quorum necessary for the transaction of business at a meeting of the
Board shall be a majority of the Directors at the time in office.
19. Meetings of the Board
<PAGE>
- 10 -
(1) The Board may meet for the transaction of business, adjourn and
otherwise regulate its meetings as it sees fit.
(2) Directors may participate in any meeting of the Board by means of
such telephone, electronic or other communication facilities as permit all
persons participating in the meeting to communicate with each other
simultaneously and instantaneously, and participation in such a meeting shall
constitute presence in person at such meeting.
(3) A resolution put to the vote at a meeting of the Board shall be
carried by the affirmative votes of a majority of the votes cast and in the case
of an equality of votes the resolution shall fail.
20. Unanimous written resolutions
A resolution in writing signed by all the Directors which may be in
counterparts, shall be as valid as if it had been passed at a meeting of the
Board duly called and constituted, such resolution to be effective on the date
on which the last Director signs the resolution. For the purposes of this
Bye-law only, "Director" shall not include an Alternate Director.
21. Contracts and disclosure of Directors' interests
(1) Any Director, or any Director's firm, partner or any company with
whom any Director is associated, may act in a professional capacity for the
Company and such Director or such Director's firm, partner or such company shall
be entitled to remuneration for professional services as if such Director were
not a Director, provided that nothing herein contained shall authorise a
Director or Director's firm, partner or such company to act as Auditor of the
Company.
<PAGE>
- 11 -
(2) A Director who is directly or indirectly interested in a contract or
proposed contract or arrangement with the Company shall declare the nature of
such interest as required by the Act.
(3) Following a declaration being made pursuant to this Bye-law, and
unless disqualified by the chairman of the relevant Board meeting, a Director
may vote in respect of any contract or proposed contract or arrangement in which
such Director is interested and may be counted in the quorum at such meeting.
22. Remuneration of Directors
The remuneration, (if any) of the Directors shall be determined by the
Company in general meeting and shall be deemed to accrue from day to day. The
Directors may also be paid all travel, hotel and other expenses properly
incurred by them in attending and returning from meetings of the Board, any
committee appointed by the Board, general meetings of the Company, or in
connection with the business of the Company or their duties as Directors
generally.
OFFICERS
--------
23. Officers of the Company
The Officers of the Company shall consist of a President and a Vice
President or a Chairman and a deputy Chairman, a Treasurer, a Secretary and such
additional Officers as the Board may from time to time determine all of whom
shall be deemed to be Officers for the purposes of these Bye-laws.
24. Appointment of Officers
<PAGE>
- 12 -
(1) The Board shall, as soon as possible after the statutory meeting of
Members and after each annual general meeting appoint a President and Vice
President or a Chairman and Deputy Chairman who shall be Directors.
(2) The Secretary and additional Officers, if any, shall be appointed by
the Board from time to time.
25. Remuneration of Officers
The Officers shall receive such remuneration as the Board may from time
to time determine.
26. Duties of Officers
The Officers shall have such powers and perform such duties in the
management, business and affairs of the Company as may be delegated to them by
the Board from time to time.
27. Chairman of meetings
Unless otherwise agreed by a majority of those attending and entitled to
attend and vote thereat, the Chairman, if there be one, and if not the President
shall act as chairman at all meetings of the Members and of the Board at which
such person is present. In their absence the Deputy Chairman or Vice President,
if present, shall act as chairman and in the absence of all of them a chairman
shall be appointed or elected by those present at the meeting and entitled to
vote.
28. Register of Directors and Officers
(1) The Board shall cause to be kept in one or more books at its
registered office a Register of Directors and Officers and shall enter therein
the following particulars with respect to each Director and the President, each
Vice-President, the Chairman, and
<PAGE>
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each Deputy Chairman, provided that each such person is a Director and the
Secretary, that is to say:
(a) first name and surname; and
(b) address.
(2) The Board shall, within the period of fourteen days from the
occurrence of -
(a) any change among its Directors, the President, any
Vice-President, the Chairman, and any Deputy Chairman,
provided that each such person is a Director, and in the
Secretary; or
(b) any change in the particulars contained in the Register
of Directors and Officers,
cause to be entered on the Register of Directors and Officers the particulars of
such change and the date on which such change occurred.
(3) The Register of Directors and Officers shall be open to inspection
at the office of the Company on every business day, subject to such reasonable
restrictions as the Board may impose, so that not less than two hours in each
business day be allowed for inspection.
MINUTES
-------
29. Obligations of Board to keep minutes
The Board shall cause minutes to be duly entered in books provided for
the purpose:-
(a) of all elections and appointments of Officers;
<PAGE>
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(b) of the names of the Directors present at each meeting of
the Board and of any committee appointed by the Board;
and
(c) of all resolutions and proceedings of general meetings
of the Members, meetings of the Board, meetings of
managers and meetings of committees appointed by the
Board.
INDEMNITY
---------
30. Indemnification of Directors and Officers of the Company
The Directors, Secretary and other Officers for the time being of the
Company and the liquidator or trustees (if any) for the time being acting in
relation to any of the affairs of the Company and every one of them, and their
heirs, executors and administrators, shall be indemnified and secured harmless
out of the assets of the Company from and against all actions, costs, charges,
losses, damages and expenses which they or any of them, their heirs, executors
or administrators, shall or may incur or sustain by or by reason of any act
done, concurred in or omitted in or about the execution of their duty, or
supposed duty, or in their respective offices or trusts, and none of them shall
be answerable for the acts, receipts, neglects or defaults of the others of them
or for joining in any receipts for the sake of conformity, or for any bankers or
other persons with whom any moneys or effects belonging to the Company shall or
may be lodged or deposited for safe custody, or for insufficiency or deficiency
of any security upon which any moneys of or belonging to the Company shall be
placed out on or invested, or for any other loss, misfortune or damage which may
happen in the execution of their respective offices or trusts, or in relation
thereto, PROVIDED THAT this indemnity shall not extend to any matter in respect
of any fraud or dishonesty which may attach to any of said persons.
31. Waiver of claim by Member
Each Member agrees to waive any claim or right of action such Member
might have, whether individually or by or in the right of the Company, against
any Director or Officer on account of any action taken by such Director or
Officer, or the failure of such Director or
<PAGE>
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Officer to take any action in the performance of his duties with or for the
Company, PROVIDED THAT such waiver shall not extend to any matter in respect of
any fraud or dishonesty which may attach to such Director or Officer.
MEETINGS
--------
32. Notice of annual general meeting
The annual general meeting of the Company shall be held in each year
other than the year of incorporation at such time and place as the President or
the Chairman or any two Directors or any Director and the Secretary or the Board
shall appoint. At least five days notice of such meeting shall be given to each
Member stating the date, place and time at which the meeting is to be held, that
the election of Directors will take place thereat, and as far as practicable,
the other business to be conducted at the meeting.
33. Notice of special general meeting
The President or the Chairman or any two Directors or any Director and
the Secretary or the Board may convene a special general meeting of the Company
whenever in their judgment such a meeting is necessary, upon not less than five
days' notice which shall state the date, time, place and the general nature of
the business to be considered at the meeting.
34. Accidental omission of notice of general meeting
The accidental omission to give notice of a general meeting to, or the
non-receipt of notice of a general meeting by, any person entitled to receive
notice shall not invalidate the proceedings at that meeting.
<PAGE>
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35. Meeting called on requisition of Members
Notwithstanding anything herein, the Board shall, on the requisition of
Members holding at the date of the deposit of the requisition not less than
one-tenth of such of the paid-up share capital of the Company as at the date of
the deposit carries the right to vote at general meetings of the Company,
forthwith proceed to convene a special general meeting of the Company and the
provisions of section 74 of the Act shall apply.
36. Short notice
A general meeting of the Company shall, notwithstanding that it is
called by shorter notice than that specified in these Bye-laws, be deemed to
have been properly called if it is so agreed by (i) all the Members entitled to
attend and vote thereat in the case of an annual general meeting; and (ii) by a
majority in number of the Members having the right to attend and vote at the
meeting, being a majority together holding not less than 95% in nominal value of
the shares giving a right to attend and vote thereat in the case of a special
general meeting.
37. Postponement of meetings
The Board may postpone any general meeting called in accordance with the
provisions of these Bye-laws (other than a meeting requisitioned under these
Bye-laws) provided that notice of postponement is given to each Member before
the time for such meeting. Fresh notice of the date, time and place for the
postponed meeting shall be given to each Member in accordance with the
provisions of these Bye-laws.
38. Quorum for general meeting
At any general meeting of the Company two persons present in person and
representing in person or by proxy in excess of 50% of the total issued voting
shares in the Company throughout the meeting shall form a quorum for the
transaction of business, PROVIDED that if the Company shall at any time have
only one Member, one Member
<PAGE>
- 17 -
present in person or by proxy shall form a quorum for the transaction of
business at any general meeting of the Company held during such time. If within
half an hour from the time appointed for the meeting a quorum is not present,
the meeting shall stand adjourned to the same day one week later, at the same
time and place or to such other day, time or place as the Board may determine.
39. Adjournment of meetings
The chairman of a general meeting may, with the consent of the Members
at any general meeting at which a quorum is present (and shall if so directed),
adjourn the meeting. Unless the meeting is adjourned to a specific date and
time, fresh notice of the date, time and place for the resumption of the
adjourned meeting shall be given to each Member in accordance with the
provisions of these Bye-laws.
40. Attendance at meetings
Members may participate in any general meeting by means of such
telephone, electronic or other communication facilities as permit all persons
participating in the meeting to communicate with each other simultaneously and
instantaneously, and participation in such a meeting shall constitute presence
in person at such meeting.
41. Written resolutions
(1) Subject to subparagraph (6), anything which may be done by
resolution of the Company in general meeting or by resolution of a meeting of
any class of the Members of the Company, may, without a meeting and without any
previous notice being required, be done by resolution in writing signed by, or,
in the case of a Member that is a corporation whether or not a company within
the meaning of the Act, on behalf of, all the Members who at the date of the
resolution would be entitled to attend the meeting and vote on the resolution.
<PAGE>
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(2) A resolution in writing may be signed by, or, in the case of a
Member that is a corporation whether or not a company within the meaning of the
Act, on behalf of, all the Members, or any class thereof, in as many
counterparts as may be necessary.
(3) For the purposes of this Bye-law, the date of the resolution is the
date when the resolution is signed by, or, in the case of a Member that is a
corporation whether or not a company within the meaning of the Act, on behalf
of, the last Member to sign and any reference in any Bye-law to the date of
passing of a resolution is, in relation to a resolution made in accordance with
this Bye-law, a reference to such date.
(4) A resolution in writing made in accordance with this Bye-law is as
valid as if it had been passed by the Company in general meeting or by a meeting
of the relevant class of Members, as the case may be, and any reference in any
Bye-law to a meeting at which a resolution is passed or to Members voting in
favour of a resolution shall be construed accordingly.
(5) A resolution in writing made in accordance with this Bye-law shall
constitute minutes for the purposes of sections 81 and 82 of the Act.
(6) This Bye-law shall not apply to:-
(a) a resolution passed pursuant to section 89(5) of the
Act; or
(b) a resolution passed for the purpose of removing a
Director before the expiration of his term of office
under these Bye-laws.
42. Attendance of Directors
The Directors of the Company shall be entitled to receive notice of and
to attend and be heard at any general meeting.
<PAGE>
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43. Voting at meetings
(1) Subject to the provisions of the Act and these Bye-laws, any
question proposed for the consideration of the Members at any general meeting
shall be decided by the affirmative vote of a majority of the votes cast in
accordance with the provisions of these Bye-laws and in the case of an equality
of votes the resolution shall fail.
(2) No Member shall be entitled to vote at any general meeting unless
such Member has paid all the calls on all shares held by such Member.
44. Voting on show of hands
At any general meeting a resolution put to the vote of the meeting
shall, in the first instance, be voted upon by a show of hands and, subject to
any rights or restrictions for the time being lawfully attached to any class of
shares and subject to the provisions of these Bye-laws, every Member present in
person and every person holding a valid proxy at such meeting shall be entitled
to one vote and shall cast such vote by raising his or her hand.
45. Decision of chairman
At any general meeting a declaration by the chairman of the meeting that
a question proposed for consideration has, on a show of hands, been carried, or
carried unanimously, or by a particular majority, or lost, and an entry to that
effect in a book containing the minutes of the proceedings of the Company shall,
subject to the provisions of these Bye-laws, be conclusive evidence of that
fact.
46. Demand for a poll
(1) Notwithstanding the provisions of the immediately preceding two
Bye-laws, at any general meeting of the Company, in respect of any question
proposed for the consideration of the Members (whether before or on the
declaration of the result of a
<PAGE>
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show of hands as provided for in these Bye-laws), a poll may be demanded by any
of the following persons:-
(a) the chairman of such meeting; or
(b) at least three Members present in person or represented
by proxy; or
(c) any Member or Members present in person or represented
by proxy and holding between them not less than
one-tenth of the total voting rights of all the Members
having the right to vote at such meeting; or
(d) any Member or Members present in person or represented
by proxy holding shares in the Company conferring the
right to vote at such meeting, being shares on which an
aggregate sum has been paid up equal to not less than
one-tenth of the total sum paid up on all such shares
conferring such right.
(2) Where, in accordance with the provisions of subparagraph (1) of this
Bye-law, a poll is demanded, subject to any rights or restrictions for the time
being lawfully attached to any class of shares, every person present at such
meeting shall have one vote for each share of which such person is the holder or
for which such person holds a proxy and such vote shall be counted in the manner
set out in sub-paragraph (4) of this Bye-Law or in the case of a general meeting
at which one or more Members are present by telephone in such manner as the
chairman of the meeting may direct and the result of such poll shall be deemed
to be the resolution of the meeting at which the poll was demanded and shall
replace any previous resolution upon the same matter which has been the subject
of a show of hands.
(3) A poll demanded in accordance with the provisions of subparagraph
(1) of this Bye-law, for the purpose of electing a chairman or on a question of
adjournment, shall be taken forthwith and a poll demanded on any other question
shall be taken in such
<PAGE>
- 21 -
manner and at such time and place as the chairman may direct and any business
other than that upon which a poll has been demanded may be proceeded with
pending the taking of the poll.
(4) Where a vote is taken by poll, each person present and entitled to
vote shall be furnished with a ballot paper on which such person shall record
his or her vote in such manner as shall be determined at the meeting having
regard to the nature of the question on which the vote is taken, and each ballot
paper shall be signed or initialled or otherwise marked so as to identify the
voter and the registered holder in the case of a proxy. At the conclusion of the
poll, the ballot papers shall be examined and counted by a committee of not less
than two Members or proxy holders appointed by the chairman for the purpose and
the result of the poll shall be declared by the chairman.
47. Seniority of joint holders voting
In the case of joint holders the vote of the senior who tenders a vote,
whether in person or by proxy, shall be accepted to the exclusion of the votes
of the other joint holders, and for this purpose seniority shall be determined
by the order in which the names stand in the Register of Members.
48. Instrument of proxy
The instrument appointing a proxy shall be in writing in the form, or as
near thereto as circumstances admit, of Form "A" in the Schedule hereto, under
the hand of the appointor or of the appointor's attorney duly authorised in
writing, or if the appointor is a corporation, either under its seal, or under
the hand of a dulyauthorised officer or attorney. The decision of the chairman
of any general meeting as to the validity of any instrument of proxy shall be
final.
49. Representation of corporations at meetings
<PAGE>
- 22 -
A corporation which is a Member may, by written instrument, authorise
such person as it thinks fit to act as its representative at any meeting of the
Members and the person so authorised shall be entitled to exercise the same
powers on behalf of the corporation which such person represents as that
corporation could exercise if it were an individual Member. Notwithstanding the
foregoing, the chairman of the meeting may accept such assurances as he or she
thinks fit as to the right of any person to attend and vote at general meetings
on behalf of a corporation which is a Member.
SHARE CAPITAL AND SHARES
------------------------
50. Rights of shares
The Company shall be authorized to issue preferred shares (the
"Preferred Shares") and Class A common shares and Class B common shares (the
"Common Shares") which shall have the following powers, designations,
preferences, rights, limitations and qualifications:
(a) Preferred Shares
The Board shall have the power, without any action by the Members, to provide
for the issue of the Preferred Shares in one or more series, and to establish
from time to time the number of shares to be included in such series, and to fix
the designations, the currency denomination, powers, preferences and rights of
the shares of each such series and the qualifications, limitations or
restrictions thereof. The authority of the Board with respect to each series
shall include, but not be limited to, determination of the following:
(i) the number of shares constituting that series and the distinctive
designation of that series;
<PAGE>
- 23 -
(ii) the dividend rate on the shares of that series, whether dividends shall be
cumulative, and, if so, from which date or dates, and the relative rights of
priority, if any, of payment of dividends on shares of that series;
(iii) whether that series shall have voting rights, and if so the terms of such
voting rights;
(iv) whether that series shall have conversion or exchange privileges
(including, without limitation, conversion into Class A Common Shares), and, if
so, the terms and conditions of such conversion or exchange, including provision
for adjustment of the conversion or exchange rate in such events as the Board
shall determine;
(v) whether or not the shares of that series shall be redeemable and, if so, the
terms and conditions of such redemption;
(vi) the rights of the shares of that series in the event of a winding- up or
dissolution of the Company, whether voluntary or involuntary or for the purpose
of reorganisation or otherwise or upon any distribution of capital, and the
relative rights of priority, if any, of payment of shares of that series; and
(vii) any other relative participating, optional or other special rights,
qualifications, limitations or restrictions of that series.
(b) Common Shares
The Common Shares of the Company shall be divided into Class A Common
Shares and Class B Common Shares.
<PAGE>
- 24 -
(i) Dividends The holders of Common Shares shall be entitled to receive
dividends when, as and if declared by the Directors out of funds legally
available therefor with dividends being paid equally on the Class A
Common Shares and the Class B Common Shares after the payment of any
dividends declared but unpaid on any Preferred Shares.
(ii) Voting Rights The holders of Class A Common Shares shall be entitled to
cast one vote per Class A Common Share on all matters submitted for the
vote of the Members of the Company and as otherwise required by law and
shall vote as a single class with the holders of the Class B Common
Shares and the Preferred Shares on all matters subject to approval of
the Members and any matter requiring class voting under the Act. The
holders of Class B Common Shares shall be entitled to cast ten votes per
Class B Common Share held on all matters submitted for the vote of the
Members of the Company and as otherwise required by law and shall vote
as a single class with the holders of the Class A Common Shares and the
Preferred Shares on all matters subject to approval of the Members and
any matter requiring class voting under the Act.
(iii) Liquidation In the event of the voluntary or involuntary liquidation or
winding up of the Company, the holders of Common Shares are entitled to
share ratably in all 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 any Preferred Shares then
outstanding.
(iv) Convertibility The holders of Class A Common Shares have no rights to
convert their Class A Common Shares into any other securities. The Class
B Common Shares shall be convertible into Class A Common Shares on a one
for one basis at the option of the holder thereof.
<PAGE>
- 25 -
(v) Transfer Class B Common Shares may be transferred only to other original
holders of Class B Common Shares or to a member of the family of the
original holder by gift, devise or otherwise through laws of
inheritance, descent, distribution or to a trust established by the
holder for the holder's family members, to corporations the majority of
beneficial owners of which are or will be owned by the holders of Class
B Common Shares, to their shareholders or partners as the case may be.
Any purported transfer of Class B Common Shares other than in accordance
with this sub-clause (v) shall be void. For the purposes of this
sub-clause (v), "member of the family" means a spouse, a sibling,
brother, sister, mother, or father.
51. Power to issue shares
(1) Subject to these Bye-laws and to any resolution of the Members to
the contrary and without prejudice to any special rights previously conferred on
the holders of any existing shares or class of shares, the Board shall have
power to issue any unissued shares of the Company on such terms and conditions
as it may determine and any shares or class of shares may be issued with such
preferred, deferred or other special rights or such restrictions, whether in
regard to dividend, voting, return of capital or otherwise as the Company may
from time to time by resolution of the Members prescribe.
(2) The Board shall, in connection with the issue of any share, have the
power to pay such commission and brokerage as may be permitted by law.
(3) The Company shall not give, whether directly or indirectly, whether
by means of loan, guarantee, provision of security or otherwise, any financial
assistance for the purpose of a purchase or subscription made or to be made by
any person of or for any shares in the Company, but nothing in this Bye-Law
shall prohibit transactions mentioned in Sections 39A, 39B and 39C of the Act.
<PAGE>
- 26 -
(4) The Company may from time to time do any one or more of the
following things:
(a) make arrangements on the issue of shares for a
difference between the Members in the amounts and times
of payments of calls on their shares;
(b) accept from any Member the whole or a part of the amount
remaining unpaid on any shares held by him, although no
part of that amount has been called up;
(c) pay dividends in proportion to the amount paid up on
each share where a larger amount is paid up on some
shares than on others; and
(d) issue its shares in fractional denominations and deal
with such fractions to the same extent as its whole
shares and shares in fractional denominations shall have
in proportion to the respective fractions represented
thereby all of the rights of whole shares including (but
without limiting the generality of the foregoing) the
right to vote, to receive dividends and distributions
and to participate in a winding up.
51A. Warrants
The Board may issue warrants conferring the rights upon the holders
thereof to subscribe for any class of shares or securities in the capital of the
Company on such terms as it may from time to time determine.
52. Variation of rights, alteration of share capital and purchase of shares of
the Company
(1) Subject to the provisions of Sections 42 and 43 of the Act any
preference shares may be issued or converted into shares that, at a determinable
date or at the option of the Company, are liable to be redeemed on such terms
and in such manner as the Company before the issue or conversion may by
resolution of the Members determine.
<PAGE>
- 27 -
(2) If at any time the share capital is divided into different classes
of shares, the rights attached to any class (unless otherwise provided by the
terms of issue of the shares of that class) may, whether or not the Company is
being wound-up, be varied with the consent in writing of the holders of
three-fourths of the issued shares of that class or with the sanction of a
resolution passed by a majority of the votes cast at a separate general meeting
of the holders of the shares of the class in accordance with Section 47 (7) of
the Act. The rights conferred upon the holders of the shares of any class issued
with preferred or other rights shall not, unless otherwise expressly provided by
the terms of issue of the shares of that class, be deemed to be varied by the
creation or issue of further shares ranking pari passu therewith.
(3) The Company may from time to time by resolution of the Members
change the currency denomination of, increase, alter or reduce its share capital
in accordance with the provisions of Sections 45 and 46 of the Act. Where, on
any alteration of share capital, fractions of shares or some other difficulty
would arise, the Board may deal with or resolve the same in such manner as it
thinks fit including, without limiting the generality of the foregoing, the
issue to Members, as appropriate, of fractions of shares and/or arranging for
the sale or transfer of the fractions of shares of Members.
(4) The Company may from time to time purchase its own shares in
accordance with the provisions of Section 42A of the Act.
53. Registered holder of shares
(1) The Company shall be entitled to treat the registered holder of any
share as the absolute owner thereof and accordingly shall not be bound to
recognise any equitable or other claim to, or interest in, such share on the
part of any other person.
<PAGE>
- 28 -
(2) Any dividend, interest or other moneys payable in cash in respect of
shares may be paid by cheque or draft sent through the post directed to the
Member at such Member's address in the Register of Members or, in the case of
joint holders, to such address of the holder first named in the Register of
Members, or to such person and to such address as the holder or joint holders
may in writing direct. If two or more persons are registered as joint holders of
any shares any one can give an effectual receipt for any dividend paid in
respect of such shares.
54. Death of a joint holder
Where two or more persons are registered as joint holders of a share or
shares then in the event of the death of any joint holder or holders the
remaining joint holder or holders shall be absolutely entitled to the said share
or shares and the Company shall recognise no claim in respect of the estate of
any joint holder except in the case of the last survivor of such joint holders.
55. Share certificates
(1) Every Member shall be entitled to a certificate under the seal of
the Company (or a facsimile thereof) specifying the number and, where
appropriate, the class of shares held by such Member and whether the same are
fully paid up and, if not, how much has been paid thereon. The Board may by
resolution determine, either generally or in a particular case, that any or all
signatures on certificates may be printed thereon or affixed by mechanical
means.
(2) The Company shall be under no obligation to complete and deliver a
share certificate unless specifically called upon to do so by the person to whom
such shares have been allotted.
<PAGE>
- 29 -
(3) If any such certificate shall be proved to the satisfaction of the
Board to have been worn out, lost, mislaid or destroyed the Board may cause a
new certificate to be issued and request an indemnity for the lost certificate
if it sees fit.
56. Calls on shares
(1) The Board may from time to time make such calls as it thinks fit
upon the Members in respect of any monies unpaid on the shares allotted to or
held by such Members and, if a call is not paid on or before the day appointed
for payment thereof, the Member may at the discretion of the Board be liable to
pay the Company interest on the amount of such call at such rate as the Board
may determine, from the date when such call was payable up to the actual date of
payment. The joint holders of a share shall be jointly and severally liable to
pay all calls in respect thereof.
(2) The Board may, on the issue of shares, differentiate between the
holders as to the amount of calls to be paid and the times of payment of such
calls.
57. Forfeiture of shares
(1) If any Member fails to pay, on the day appointed for payment
thereof, any call in respect of any share allotted to or held by such Member,
the Board may, at any time thereafter during such time as the call remains
unpaid, direct the Secretary to forward to such Member a notice in the form, or
as near thereto as circumstances admit, of Form "B" in the Schedule hereto.
(2) If the requirements of such notice are not complied with, any such
share may at any time thereafter before the payment of such call and the
interest due in respect thereof be forfeited by a resolution of the Board to
that effect, and such share shall thereupon become the property of the Company
and may be disposed of as the Board shall determine.
<PAGE>
- 30 -
(3) A Member whose share or shares have been forfeited as aforesaid
shall, notwithstanding such forfeiture, be liable to pay to the Company all
calls owing on such share or shares at the time of the forfeiture and all
interest due thereon.
REGISTER OF MEMBERS
-------------------
58. Contents of Register of Members
The Board shall cause to be kept in one or more books a Register of
Members and shall enter therein the following particulars:-
(a) the name and address of each Member, the number and, where
appropriate, the class of shares held by such Member and the
amount paid or agreed to be considered as paid on such shares;
(b) the date on which each person was entered in the Register of
Members; and
(c) the date on which any person ceased to be a Member for one
year after such person so ceased.
59. Inspection of Register of Members
The Register of Members shall be open to inspection at the registered
office of the Company on every business day, subject to such reasonable
restrictions as the Board may impose, so that not less than two hours in each
business day be allowed for inspection. The Register of Members may, after
notice has been given by advertisement in an appointed newspaper to that effect,
be closed for any time or times not exceeding in the whole thirty days in each
year.
60. Determination of record dates
Notwithstanding any other provision of these Bye-laws, the Board may fix
any date as the record date for:-
<PAGE>
- 31 -
(a) determining the Members entitled to receive any dividend; and
(b) determining the Members entitled to receive notice of and to
vote at any general meeting of the Company.
TRANSFER OF SHARES
------------------
61. Instrument of transfer
(1) An instrument of transfer shall be in the form or as near thereto as
circumstances admit of Form "C" in the Schedule hereto or in such other common
form as the Board may accept. Such instrument of transfer shall be signed by or
on behalf of the transferor and transferee provided that, in the case of a fully
paid share, the Board may accept the instrument signed by or on behalf of the
transferor alone. The transferor shall be deemed to remain the holder of such
share until the same has been transferred to the transferee in the Register of
Members.
(2) The Board may refuse to recognise any instrument of transfer unless
it is accompanied by the certificate in respect of the shares to which it
relates and by such other evidence as the Board may reasonably require to show
the right of the transferor to make the transfer.
62. Restriction on transfer
(1) The Board shall refuse to register a transfer unless all applicable
consents, authorisations and permissions of any governmental body or agency in
Bermuda have been obtained.
(2) If the Board refuses to register a transfer of any share the
Secretary shall, within three months after the date on which the transfer was
lodged with the Company, send to the transferor and transferee notice of the
refusal.
<PAGE>
- 32 -
63. Transfers by joint holders
The joint holders of any share or shares may transfer such share or
shares to one or more of such joint holders, and the surviving holder or holders
of any share or shares previously held by them jointly with a deceased Member
may transfer any such share to the executors or administrators of such deceased
Member.
TRANSMISSION OF SHARES
----------------------
64. Representative of deceased Member
In the case of the death of a Member, the survivor or survivors where
the deceased Member was a joint holder, and the legal personal representatives
of the deceased Member where the deceased Member was a sole holder, shall be the
only persons recognised by the Company as having any title to the deceased
Member's interest in the shares. Nothing herein contained shall release the
estate of a deceased joint holder from any liability in respect of any share
which had been jointly held by such deceased Member with other persons. Subject
to the provisions of Section 52 of the Act, for the purpose of this Bye-law,
legal personal representative means the executor or administrator of a deceased
Member or such other person as the Board may in its absolute discretion decide
as being properly authorised to deal with the shares of a deceased Member.
65. Registration on death or bankruptcy
Any person becoming entitled to a share in consequence of the death or
bankruptcy of any Member may be registered as a Member upon such evidence as the
Board may deem sufficient or may elect to nominate some person to be registered
as a transferee of such share, and in such case the person becoming entitled
shall execute in favour of such nominee an instrument of transfer in the form,
or as near thereto as circumstances admit, of Form "D" in the Schedule hereto.
On the presentation thereof to the Board, accompanied by such evidence as the
Board may require to prove the title of the
<PAGE>
- 33 -
transferor, the transferee shall be registered as a Member but the Board shall,
in either case, have the same right to decline or suspend registration as it
would have had in the case of a transfer of the share by that Member before such
Member's death or bankruptcy, as the case may be.
DIVIDENDS AND OTHER DISTRIBUTIONS
---------------------------------
66. Declaration of dividends by the Board
The Board may, subject to these Bye-laws and in accordance with Section
54 of the Act, declare a dividend to be paid to the Members, in proportion to
the number of shares held by them, and such dividend may be paid in cash or
wholly or partly in specie in which case the Board may fix the value for
distribution in specie of any assets.
67. Other distributions
The Board may declare and make such other distributions (in cash or in
specie) to the Members as may be lawfully made out of the assets of the Company.
68. Reserve fund
The Board may from time to time before declaring a dividend set aside,
out of the surplus or profits of the Company, such sum as it thinks proper as a
reserve fund to be used to meet contingencies or for equalising dividends or for
any other special purpose.
69. Deduction of Amounts due to the Company
The Board may deduct from the dividends or distributions payable to any
Member all monies due from such Member to the Company on account of calls or
otherwise.
CAPITALISATION
--------------
<PAGE>
- 34 -
70. Issue of bonus shares
(1) The Board may resolve to capitalise any part of the amount for the
time being standing to the credit of any of the Company's share premium or other
reserve accounts or to the credit of the profit and loss account or otherwise
available for distribution by applying such sum in paying up unissued shares to
be allotted as fully paid bonus shares pro rata to the Members.
(2) The Company may capitalise any sum standing to the credit of a
reserve account or sums otherwise available for dividend or distribution by
applying such amounts in paying up in full partly paid shares of those Members
who would have been entitled to such sums if they were distributed by way of
dividend or distribution.
ACCOUNTS AND FINANCIAL STATEMENTS
---------------------------------
71. Records of account
The Board shall cause to be kept proper records of account with respect
to all transactions of the Company and in particular with respect to:-
(a) all sums of money received and expended by the Company and the
matters in respect of which the receipt and expenditure
relates;
(b) all sales and purchases of goods by the Company; and
(c) the assets and liabilities of the Company.
Such records of account shall be kept at the registered office of the Company
or, subject to Section 83 (2) of the Act, at such other place as the Board
thinks fit and shall be available for inspection by the Directors during normal
business hours.
<PAGE>
- 35 -
72. Financial year end
The financial year end of the Company may be determined by resolution of
the Board and failing such resolution shall be 31st December in each year.
73. Financial statements
Subject to any rights to waive laying of accounts pursuant to Section 88
of the Act, financial statements as required by the Act shall be laid before the
Members in general meeting.
AUDIT
-----
74. Appointment of Auditor
Subject to Section 88 of the Act, at the annual general meeting or at a
subsequent special general meeting in each year, an independent representative
of the Members shall be appointed by them as Auditor of the accounts of the
Company. Such Auditor may be a Member but no Director, Officer or employee of
the Company shall, during his or her continuance in office, be eligible to act
as an Auditor of the Company.
75. Remuneration of Auditor
The remuneration of the Auditor shall be fixed by the Company in general
meeting or in such manner as the Members may determine.
76. Vacation of office of Auditor
If the office of Auditor becomes vacant by the resignation or death of
the Auditor, or by the Auditor becoming incapable of acting by reason of illness
or other disability at a time when the Auditor's services are required, the
Board shall, as soon as practicable, convene a special general meeting to fill
the vacancy thereby created.
77. Access to books of the Company
<PAGE>
- 36 -
The Auditor shall at all reasonable times have access to all books kept
by the Company and to all accounts and vouchers relating thereto, and the
Auditor may call on the Directors or Officers of the Company for any information
in their possession relating to the books or affairs of the Company.
78. Report of the Auditor
(1) Subject to any rights to waive laying of accounts or appointment of
an Auditor pursuant to Section 88 of the Act, the accounts of the Company shall
be audited at least once in every year.
(2) The financial statements provided for by these Bye-laws shall be
audited by the Auditor in accordance with generally accepted auditing standards.
The Auditor shall make a written report thereon in accordance with generally
accepted auditing standards and the report of the Auditor shall be submitted to
the Members in general meeting.
(3) The generally accepted auditing standards referred to in
subparagraph (2) of this Bye-law may be those of a country or jurisdiction other
than Bermuda. If so, the financial statements and the report of the Auditor must
disclose this fact and name such country or jurisdiction.
NOTICES
-------
79. Notices to Members of the Company
A notice may be given by the Company to any Member either by delivering
it to such Member in person or by sending it to such Member's address in the
Register of Members or to such other address given for the purpose. For the
purposes of this Bye-law, a notice may be sent by mail, courier service, cable,
telex, telecopier, facsimile or other mode of representing words in a legible
and non-transitory form.
<PAGE>
- 37 -
80. Notices to joint Members
Any notice required to be given to a Member shall, with respect to any
shares held jointly by two or more persons, be given to whichever of such
persons is named first in the Register of Members and notice so given shall be
sufficient notice to all the holders of such shares.
81. Service and delivery of notice
Any notice shall be deemed to have been served at the time when the same
would be delivered in the ordinary course of transmission and, in proving such
service, it shall be sufficient to prove that the notice was properly addressed
and prepaid, if posted, and the time when it was posted, delivered to the
courier or to the cable company or transmitted by telex, facsimile or other
method as the case may be.
SEAL OF THE COMPANY
-------------------
82. The seal
The seal of the Company shall be in such form as the Board may from time
to time determine. The Board may adopt one or more duplicate seals for use
outside Bermuda.
83. Manner in which seal is to be affixed
The seal of the Company shall not be affixed to any instrument except
attested by the signature of a Director and the Secretary or any two Directors,
or some other person appointed by the Board for the purpose, provided that any
Director, or Officer, may affix the seal of the Company attested by such
Director or Officer's signature only to any authenticated copies of these
Bye-laws, the incorporating documents of the Company, the minutes of any
meetings or any other documents required to be authenticated by such Director or
Officer.
<PAGE>
- 38 -
WINDING-UP
----------
84. Winding-up/distribution by liquidator
If the Company shall be wound up the liquidator may, with the sanction
of a resolution of the Members, divide amongst the Members in specie or in kind
the whole or any part of the assets of the Company (whether they shall consist
of property of the same kind or not) and may, for such purpose, set such value
as he or she deems fair upon any property to be divided as aforesaid and may
determine how such division shall be carried out as between the Members or
different classes of Members. The liquidator may, with the like sanction, vest
the whole or any part of such assets in trustees upon such trusts for the
benefit of the Members as the liquidator shall think fit, but so that no Member
shall be compelled to accept any shares or other securities or assets whereon
there is any liability.
ALTERATION OF BYE-LAWS
----------------------
85. Alteration of Bye-laws
No Bye-law shall be rescinded, altered or amended and no new Bye-law
shall be made until the same has been approved by a resolution of the Board and
by a resolution of the Members.
*****
***
*
<PAGE>
- 39 -
SCHEDULE - FORM A (Bye-law 48)
-----------------
..............................................
P R O X Y
I
of
the holder of share in the above-named Company hereby
appoint .................................................... or failing him/her
................................................. or failing him/her
................................................. as my proxy to vote on my
behalf at the General Meeting of the Company to be held on the day of
, 19 , and at any adjournment thereof.
Dated this day of , 19
*GIVEN under the seal of the company
*Signed by the above-named
- ---------------------------------
- ---------------------------------
Witness
*Delete as applicable.
<PAGE>
- 40 -
SCHEDULE - FORM B (Bye-law 57)
------------------------------
NOTICE OF LIABILITY TO FORFEITURE FOR NON PAYMENT OF CALL
---------------------------------------------------------
You have failed to pay the call of [amount of call] made on the ......
day of ........, 19.. last, in respect of the [number] share(s) [numbers
in figures] standing in your name in the Register of Members of the
Company, on the ...... day of ........., 19.. last, the day appointed
for payment of such call. You are hereby notified that unless you pay
such call together with interest thereon at the rate of .......... per
annum computed from the said ....... day of ........., 19... last, on or
before the ....... day of ........., 19... next at the place of business
of the said Company the share(s) will be liable to be forfeited.
Dated this ....... day of .............., 19...
[Signature of Secretary]
By order of the Board
<PAGE>
- 41 -
SCHEDULE - FORM C (Bye-law 61)
-----------------
TRANSFER OF A SHARE OR SHARES
-----------------------------
FOR VALUE RECEIVED .....................................................[amount]
....................................................................[transferor]
hereby sell assign and transfer unto................................[transferee]
of ....................................................................[address]
............................................................. [number of shares]
shares of .....................................................[name of Company]
Dated ...................................................
......................................
(Transferor)
In the presence of:
.................................
(Witness)
......................................
(Transferee)
In the presence of:
.................................
(Witness)
<PAGE>
- 42 -
SCHEDULE - FORM D (Bye-law 65)
------------------------------
TRANSFER BY A PERSON BECOMING ENTITLED ON DEATH/BANKRUPTCY
----------------------------------------------------------
OF A MEMBER
-----------
I/We having become entitled in consequence of the [death/bankruptcy]
of [name of the deceased Member] to [number] share(s) numbered
[number in figures] standing in the register of members of [Company]
in the name of the said [name of deceased Member] instead of being
registered myself/ourselves elect to have [name of transferee] (the
"Transferee") registered as a transferee of such share(s) and I/we do
hereby accordingly transfer the said share(s) to the Transferee to
hold the same unto the Transferee his or her executors administrators
and assigns subject to the conditions on which the same were held at
the time of the execution thereof; and the Transferee does hereby
agree to take the said share(s) subject to the same conditions.
WITNESS our hands this ........ day of ..........., 19...
Signed by the above-named )
[person or persons entitled] )
in the presence of: )
Signed by the above-named )
[transferee] )
in the presence of: )
<PAGE>
EXECUTION COPY
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (this "Agreement"), dated as of August 10, 1999
(the "Commencement Date"), by and between RSL Communications, Ltd., a Bermuda
company (the "Company"), and David Hardwick ("Executive").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, RSL COM Europe, Ltd. ("RSL Europe"), a subsidiary of the
Company, and Executive are parties to an Employment Agreement, dated as of
August 21, 1997 (the "Old Employment Agreement"), a Stock Unit Award Agreement,
entered into as of October 1, 1997, pursuant to which Executive was initially
granted 5,764.29 restricted units at an initial value of $0.15 per unit (the
"Existing Award Agreement"), and a Stock Unit Award Agreement, entered into as
of October 1, 1997, pursuant to which Executive was granted 5,764.29 restricted
units at an initial value per stock unit based on capital invested in RSL Europe
(the "Old Award Agreement", and together with the Old Employment Agreement, the
"Old Agreements");
WHEREAS, the Company and Executive desire to modify the terms of
Executive's employment with the Company and to terminate the Old Agreements upon
the execution and delivery of this Agreement and to keep in place the Existing
Award Agreement (a copy of which is attached hereto as Exhibit A);
WHEREAS, this Agreement shall 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 August 1, 2002,
<PAGE>
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." If the Employment Period or any extension thereof expires without being
renewed, the Executive agrees not to bring any claim for a redundancy payment or
for unfair dismissal.
2. Position and Duties.
(a) In general. Executive shall be employed as Vice President - Global
Network Services of the Company 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 Operating Officer (the "COO"). 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 COO. Executive's principal office shall be located in the London,
England 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. Executive shall not be engaged in any other business activity which, in
the reasonable judgment of the COO, conflicts with the duties of the Executive
under this Agreement and shall not serve on the Board of Directors of any other
company. 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 150,000 pounds sterling; provided
that, Executive's annual base salary shall be increased as of January 1 of each
year, commencing January 1, 2001, 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
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year. The "Cost of Living Index" means the Retail Prices Index for
the London metropolitan area published by the Office of National Statistics for
the preceding 12 month period, or if such index is no longer available, such
other generally available index measuring changes in consumer purchasing power
(in the London 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. During the Employment Period, Executive
shall be eligible to participate in the Company's 1997 Performance Incentive
Plan (the "Bonus Plan") and be given an opportunity to earn up to one times Base
Salary upon the achievement of targets determined by the Compensation Committee.
Up to 80% of the total bonus in any given year under the Bonus Plan shall be
based on Company targets. The remainder will be based on Executive's
performance. The discretionary portion of the bonus shall be determined by the
Compensation Committee.
(c) Equity Participation.
(i) The Company shall grant Executive a non-qualified stock option (the
"Option") under the Company's 1997 Stock Incentive Plan (the "Stock Plan") to
purchase 75,000 shares of the Company's Class A Common Stock at an exercise
price of US$19.316 per share, the Fair Market Value (as defined in the Stock
Plan) on August 10, 1999, the date of grant. The Option shall become vested and
exercisable as set forth below, provided that Executive is employed by the
Company on such date (except as otherwise provided below), 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
First Anniversary of the Commencement Date 33 1/3%
Second Anniversary of the Commencement Date 66 2/3%
Third Anniversary of the Commencement Date 100%
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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; provided, however,
that no acceleration of exercisability or vesting shall occur with respect to
the Option if the Compensation Committee reasonably determines in good faith
prior to the occurrence of a Change in Control that the Option shall be honored
or assumed, or a new stock option substituted therefor (such honored, assumed or
substituted option hereinafter called an "Alternative Option") by the
Executive's new employer (or the parent or a subsidiary of such employer)
immediately following the Change in Control (the "Successor"). If following a
Change in Control, Executive is Terminated other than for Cause or Successor
conditions Executive's continued employment on relocation of Executive's
principal place of employment outside of the London, England metropolitan area,
the Option shall become immediately exercisable in full. Except as otherwise
provided in the stock option agreement relating to the Option, the exercisable
portion of the Option shall, following any termination of Executive's employment
(other than for Cause), remain exercisable for the lesser of 90 days and the
remaining term of the Option.
(ii) The Existing Award Agreement shall remain in full force and effect.
The Old Award Agreement is terminated and shall be of no further force and
effect. In exchange for the Old Award Agreement, the Company shall issue to
Executive 90,000 shares of Restricted Stock (as defined under, and in accordance
with, the Stock Plan) (the "Restricted Stock"). The Restricted Stock grant date
shall be the date the Restricted Stock grant is approved by the Compensation
Committee of the Board. The Restricted Stock shall vest in its entirety on
September 1, 2000. The Restricted Stock shall become immediately vested in its
entirety in the event that Executive's employment with the Company is terminated
(i) by the Company other than for Cause or (ii) by reason of the death or
Disability of the Executive, however, in the event that Executive's employment
with the Company terminates for any other reason prior to such date, then the
Executive shall immediately forfeit all rights with respect to the Restricted
Stock and all the Restricted Stock will be immediately canceled, without any
payment or other obligation by or of the Company in respect thereof.
Additionally, the Restricted Stock shall become immediately vested in full upon
a Change in Control; provided, however, that no acceleration of vesting shall
occur with respect to the Restricted Stock if the Compensation Committee
reasonably determines in good faith prior to the occurrence of a Change in
Control that the Restricted Stock shall be honored or assumed, or new restricted
stock substituted therefor (such honored, assumed or substituted restricted
stock hereinafter called the "Alternative Restricted Stock") by the Successor.
If following a Change in Control, Executive is Terminated other than for Cause
or Successor conditions Executive's continued employment on relocation of
Executive's principal place of employment outside of the London, England
metropolitan area, the Restricted Stock shall
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become immediately vested in full. Until such time as the Restricted Stock shall
have vested, such shares of Restricted Stock shall be nontransferable.
The grant of the Restricted Stock shall initially be evidenced by a stock
certificate registered in Executive's name (the "Initial Certificate"). The
Initial Certificate shall be held by the Company for the benefit of Executive
until such time as all of the shares of the Restricted Stock shall have vested.
The Restricted Stock shall be subject to and governed by the terms and
conditions of the Stock Plan.
4. Benefits, Perquisites and Expenses.
(a) Benefits. During the Employment Period:
--------
(i) The Company will provide Executive with an annual car allowance
of 10,000 pounds sterling. Executive may at his option use his
own car or have the Company provide a leased car or contract hire
car. In addition to the car allowance, the Company will also pay
for insurance together with personal and business petrol costs.
Executive shall be liable for any personal taxes levied for use
of the car, shall take good care of the car and will be
responsible for ensuring that it remains, at all times, in
road-worthy condition.
(ii) The Executive will belong to a suitable Personal Pension Scheme
nominated by Executive and approved by the Board of Inland
Revenue of the United Kingdom. The Executive's pension
entitlement shall be 12.5% of Executive's Base Salary as does not
exceed the allowable maximum as defined in Section 640A(2) of the
Income and Corporation Taxes Act 1988.
(iii) The Company shall continue to provide Executive and his family
with full private medical coverage as Executive currently
receives.
(iv) The Company shall arrange and pay for life insurance for the
Executive in the value of four times his Base Salary for the
benefit of Executive's family on the Executive's death. The
Company may arrange for life insurance to the same amount for the
benefit of the Company at the cost of the Company.
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
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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 such coverage would be additive or duplicative to the benefits Executive is
provided pursuant to clauses (ii) or (iii) above 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 Executive shall not receive any other benefit relating to automobiles other
than is provided pursuant to clause (i) of Section 4(a) above. Executive shall
not be entitled to receive remuneration for unused vacation and shall not be
permitted to carry-over unused vacation to the following year. Notwithstanding
the foregoing, upon termination of this Agreement for any reason whatsoever,
Executive shall be entitled to be paid for each day of vacation time that may
remain after deducting from accrued vacation entitlement the amount of vacation
already taken in the calendar year in which the employment ceases. Accrued
vacation entitlement shall be calculated by taking for each complete calendar
month of employment during the calendar year in which the employment ceases,
1/12th of the annual vacation to which the Executive would have been entitled
for that year.
(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.
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
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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 and, should Executive fail to tender his
resignation within two days of the request, the Company is irrevocably
authorized to appoint an agent in his name and on his behalf to sign any
documents and do anything necessary or desirable to give effect to his
resignation.
(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
benefits referred to in Section 4(a)(iii), 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 or
(z) one year.
(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. The payments to be made
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<PAGE>
to Executive during the period of disability prior to termination are intended
to comply with the Disability Discrimination Act.
(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 his 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:
"Change in Control" means the occurrence of (i) a sale or other
disposition of stock of the Company, other than a spin-off or any other form of
distribution of the Company's shares, 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 Exchange Act), other than the Company, or Ronald S. Lauder ("Lauder"), or
any of his controlled entities, is or becomes the beneficial owner of more than
50% of the total voting power of the Company and those persons who are members
of the Board of Directors of the Company immediately prior to the closing of
such transaction constitute less than one half of the membership of the Board of
Directors of the Company immediately following the closing of such transaction,
(ii) any merger, consolidation or reorganization following which those persons
who are members of the Board of Directors of the Company immediately
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prior to the closing of such transaction constitute less than one half of the
membership of the board of directors of the surviving entity immediately
following the closing of such transaction, (iii) a transaction pursuant to which
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 him, or (iv) a complete liquidation of the
Company.
"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, the CEO, or the COO; (iv) a willful and material breach of
Executive's duties
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or obligations under this Agreement, including, without limitation, Executive's
failure to devote full business time to the Company in accordance with Section
2(b) of this Agreement; or (v) Executive being disqualified from acting as a
company director. 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 Bonus 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; or (iii) a material breach of this Agreement by the Company.
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) or (iii) 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 or (z) if the
opportunity under the Bonus Plan is reduced by action of the Compensation
Committee or Board of Directors of the Company. 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 the Change in Control.
"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
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resolution of a contingency, and expenses incurred prior to termination of
employment that are reimbursable under Section 4(c).
(f) Adjustment to Notice. The Company reserves the right to make a payment
in lieu of notice should it so wish, or require Executive to remain away from
work during the notice period, whichever it may deem appropriate. Any payment in
lieu of notice will have any appropriate PAYE tax and National Insurance
Contributions deducted at source.
(g) 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 one year
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 telecommunication services and solutions in any country which is a member of
the European Union during the period of Executive's employment with the Company,
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 one year 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,
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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
Competing 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 Competing Business, then (i) Executive shall not engage in such Competing
Business during the one year period following expiration of the Employment
Period, and (ii) the Company shall pay Executive, during such one year 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. "Confidential 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 Company. "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; advertising, 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 secrets; 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
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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, or members of the
Board of 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
Confidential Information (as defined above), and any other property
or Confidential 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.
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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 twelve 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
Any dispute, controversy or claim arising out of, relating to or in connection
with this Agreement, or the breach, termination or validity thereof, shall be
finally resolved by binding arbitration. The arbitration shall be held in London
England. Except to the extent inconsistent with this Agreement, the arbitration
shall be conducted in accordance with the Rules of the London Court of
International Arbitration ("LCIA") then in effect at the time of the
arbitration. The arbitration shall be conducted by one arbitrator who shall be
acceptable to both the Company and the Executive. If the parties cannot agree on
an acceptable arbitrator within 30 days, the dispute shall be heard by a panel
of three arbitrators, one appointed by each of the parties within 30 days
thereafter and the third appointed by the other two arbitrators. If one party
names an arbitrator and the other fails to do so in the required time period,
the arbitrator so appointed shall act as sole arbitrator. If the two arbitrators
do not appoint a third arbitrator within 30 days after the last of the two
arbitrators has been appointed, the third arbitrator shall be appointed by the
LCIA. The arbitral award shall be in writing and shall be final and binding on
the parties. The award may include an award of costs, including reasonable
attorney's fees and disbursements, unless the arbitrators conclude that matters
of equity or important considerations of fairness dictate otherwise. The parties
expressly agree that leave to appeal under Section 69(1) or an application for
the determination of a preliminary point of law under Section 45 of the
Arbitration Act of 1996 may not be sought with respect to
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any question of law arising from an award. Judgement upon the award may be
entered by any court having jurisdiction thereof or having jurisdiction over the
parties or their assets.
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 its 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.
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(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:
26 Sheen Common Drive
Richmond, Surrey
if to the Company, to the Company at
Clarendon House
Church Street
Hamilton HM CX
Bermuda
Fax: (441) 292-4720
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Attention: Michael Ashford
with a copy to:
c/o RSL Communications, N. America, Inc.
Suite 4300
767 Fifth Avenue
New York, New York 10153
Fax: (212) 317-0600
Attention: Corporate Counsel
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. Executive acknowledges
that, excepting the Existing Award Agreeement, he is not entitled to any
compensation, unvested stock options or "phantom" grants or benefits of any kind
pursuant to the Old Agreements, and upon execution of this Agreement, the Old
Agreements are hereby terminated and are of no further force or effect.
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 be an original.
22. English 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 England.
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IN WITNESS WHEREOF, this Agreement has been executed by Executive
and then by the Company on the dates shown below, but effective as of the date
and year first above written.
EXECUTIVE
/s/ David Hardwick
Date:_____________ _________________________
David Hardwick
RSL COMMUNICATIONS, LTD.
/s/ Itzhak Fisher
Date:_____________ BY:______________________
President and Chief
Executive Officer
Title:___________________
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Exhibit 10.70
EXECUTION COPY
EMPLOYMENT AGREEMENT
--------------------
EMPLOYMENT AGREEMENT (this "Agreement"), dated as of November 1,
1999, by and between RSL COM U.S.A., Inc., a Delaware corporation (the
"Company"), and Michael A. Marino ("Executive").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Company desires to employ Executive, effective as of
January 3, 2000 (the "Commencement Date") and 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 enter into 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 January 3, 2003, 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 President and Chief
Executive Officer of the Company and shall perform such duties and services,
consistent with such position for the Company and as may be assigned to him from
time to time by the Company's Board of Directors and the Chief Operating Officer
(the "COO") of RSL Communications, Ltd., a company organized under the laws of
Bermuda ("RSL COM"). The duties of the Executive shall include serving as an
officer or director for any Affiliate
<PAGE>
(as defined herein) of the Company as requested by the Company. Executive shall
report to the COO of RSL COM and the Board of Directors of the Company.
(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 COO, conflicts with the duties of the Executive
under this Agreement and shall not serve on the Board of Directors of any other
company; provided however that with the Company's consent (which shall not be
unreasonably withheld) Executive shall be permitted to serve on the board of
directors of a reasonable number of nonprofit organizations and/or other
charitable activities so long as such activities do not interfere with the
performance of his duties hereunder. Executive shall be required to relocate to
Pittsburgh in connection with the commencement of his employment hereunder, and
may thereafter be required to relocate to the New York Metropolitan area, in the
sole discretion of the Company. 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$375,000; provided that,
Executive's annual base salary shall be increased as of January 1 of each year,
commencing January 1, 2001, 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.
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<PAGE>
(b) Performance Incentive Plan. During the Employment Period, Executive
shall be eligible to participate in RSL COM's 1997 Performance Incentive Plan
(the "Bonus Plan") and be given an opportunity to earn up to one times Base
Salary upon the achievement of targets determined by RSL COM's Compensation
Committee (the "Compensation Committee").
(c) Equity Participation. RSL COM, by action of the Compensation
Committee, shall grant Executive a non-qualified stock option (the "Option")
under RSL COM's 1997 Stock Incentive Plan (the "Stock Plan") to purchase 200,000
shares of the Company's Class A Common Stock (the "Common Stock") at an exercise
price of US $20.91 per share (the "Exercise Price"), the "Fair Market Value" as
defined in the Stock Plan on November 1, 1999, the date of grant, with the
quantity of shares and exercise price being subject to adjustment in accordance
with Section 4(c) of the Stock Plan. The option price adjustment set forth in
the first sentence of Section 5(b) of the Stock Plan shall not be applied. The
Option shall become vested and 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 for Cause (as hereinafter defined):
Date First Exercisable Percentage Exercisable
---------------------- ----------------------
First Anniversary of the Commencement Date 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 upon a Change in
Control; provided however, that no acceleration of exercisability or vesting
shall occur with respect to the Option if the Compensation Committee reasonably
determines in good faith prior to the occurrence of a Change in Control that the
Option shall be honored or assumed, or a new stock option substituted therefor
(such honored, assumed or substituted option hereinafter called an "Alternative
Option") by the Executive's new employer (or the parent or a subsidiary of such
employer) immediately following the Change in Control (the "Successor"). If
following a Change in Control, Executive is Terminated Without Cause or
Successor conditions Executive's continued employment on relocation of
Executive's principal place of employment outside of Pittsburgh or the New York
Metropolitan area, the Option shall become immediately exercisable in full. The
Option shall also become immediately exercisable in full in the event
Executive's employment with the Company is Terminated due to Disability or by
reason of the death of the Executive.
The exercisable portion of the Option shall, following any termination of
Executive's employment (other than Termination for Cause), expire and be no
longer
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<PAGE>
exercisable on the earlier of (x) 90 days after the Company provides
notice, following such termination, to Executive that the Fair Market Value of
the Common Stock has met or exceeded the Target Price (as defined below) for 10
consecutive business days (the "Trigger Date") and (y) the three year
anniversary of the Commencement Date; however, if Executive's employment does
not terminate before the three year anniversary of the Commencement Date, the
Option shall remain exercisable through April 3, 2003; provided, however, that
if Executive terminates his employment hereunder other than for Good Reason,
then the notice provision in the preceding sentence shall no longer be required.
Notwithstanding the foregoing, if the termination occurs by reason of
Executive's death, the Option shall expire 180 days following the later of the
date of death and the Trigger Date.
The Company shall make available to Executive a "cashless exercise"
procedure with respect to the Option, under which the exercise price and any
taxes payable by Executive at the time of exercise may be paid through the
disposition and/or withholding of shares otherwise deliverable to Executive upon
exercise, such that the Option may be exercised without any out-of-pocket cash
outlay by Executive.
In the sole and absolute discretion of, and subject to approval by, the
Compensation Committee, Executive shall also be eligible to receive additional
grants of options to purchase Common Stock from time to time. Such options, if
granted, would vest equally over a five year period beginning on the first
anniversary of the date of grant.
The Option, and any additional stock options granted to Executive during
the Term, shall be transferable to "Family Members" (as defined in the Stock
Plan), trusts for their exclusive benefit, and partnerships and limited
liability companies owned by Family Members, to the maximum extent permitted by
Section 11(c) of the Stock Plan and any similar provision of a successor plan
under which such options are issued; and any option so transferred shall be
exercisable by the transferee to the extent it would have been exercisable by
Executive but for such transfer.
(d) Guaranteed Return Amount. Subject to the terms and conditions set
forth in this Section 3(d):
(i) if the Option expires or is forfeited other than by reason of
Termination for Cause (within the scope of clauses (i) through (iv) of the
definition herein of "Termination for Cause") or Termination by Executive other
than for Good Reason, and during the three year period following the
Commencement Date the vested and exercisable portion thereof did not provide the
Executive with the opportunity (over a period of ten business days and with such
notice to the Executive as is required by clauses (ii) and (iii) below) to
exercise the Option, or a portion thereof, and realize a pre-tax gain of at
least $4,500,000 (the "Guaranteed Return Amount"), in exchange for the Option
the Company shall pay Executive (the "Guaranteed Return Payment") the Guaranteed
Return Amount less any Realizable Gain (as defined herein).
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<PAGE>
(ii) if at any time following the date that any portion of the
Option becomes vested and exercisable, the Fair Market Value of the Common Stock
equals or exceeds $43.41 (the "Target Price") and remains equal to or in excess
of the Target Price for ten consecutive business days, the Company's obligations
with respect to the Guaranteed Return Payment shall be reduced by an amount (the
"Realizable Gain") equal to the product of (x) the number of shares underlying
the portion of the Option that is vested and exercisable and (y) the difference
between the average of the Fair Market Value of the Common Stock during such ten
business day period and the Exercise Price of the vested and exercisable portion
of the Option. If the Fair Market Value of the Common Stock equals or exceeds
the Target Price for ten consecutive business days and as a result, the
aggregate Realizable Gain exceeds the Guaranteed Return Amount, the Company's
obligations with respect to the Guaranteed Return Payment shall cease and the
Company shall be under no obligation to pay the Guaranteed Return Payment to
Executive. The Company shall give Executive written notice that the Fair Market
Value of the Common Stock has equaled or exceeded the Target Price at least two
business days prior to the Target Price having been reached for ten consecutive
business days; provided, however that if the Company fails to give notice on a
timely basis, Executive shall have two business days from the date of such
notice before the Guaranteed Return Payment shall be reduced in accordance with
the provisions of this Section, and such reduction shall be made only if the
Fair Market Value of the Common Stock equals or exceeds the Target Price on each
of such two consecutive business days. After such notice has been given, if
Executive has not exercised the vested portion of the Option, the Realizable
Gain shall be calculated using the highest average of the Fair Market Value of
the Common Stock during any ten business day period after such notice until
Executive has exercised the vested portion of the Option.
(iii) if at any time after the Option is fully vested and
exercisable, there is a period during which for ten consecutive business days
the Realizable Gain equals or exceeds the Guaranteed Return Amount, the
Company's obligations with respect to the Guaranteed Return Payment shall cease
and the Company shall be under no obligation to pay the Guaranteed Return
Payment to Executive. The Company shall be subject to the same obligations with
respect to providing notice to Executive as are described in clause (ii) above.
(iv) if at any time during the term of the Option, Executive
exercises any portion thereof, the Company's obligations with respect to the
Guaranteed Return Payment shall be reduced by the greater of (a) the difference
between the Exercise Price and the Fair Market Value on the date of such
exercise (or, if applicable, calculated in accordance with the last sentence of
Section 3(d)(ii) hereof) multiplied by such number of shares of Common Stock
underlying the portion of the Option exercised by Executive and (b) the
difference between the Exercise Price and the Target Price on the date of such
exercise multiplied by such number of shares of Common Stock underlying the
portion of the Option exercised by Executive (it being understood that the
Company's obligation
5
<PAGE>
shall not be reduced under this paragraph (iv) by amounts which would duplicate
amounts previously taken into account under paragraph (ii) in reducing the
Guaranteed Return Payment).
Subject to the terms of this Agreement, the Guaranteed Return Payment, if
any, shall be payable in cash, in six equal monthly installments following
written notice by the Executive or his duly authorized representative or estate
at any time following expiration of the Option. In the event there is a Change
in Control where an Alternative Option is exchanged for the Option, the
Guaranteed Return Payment may be payable, at the Successor's option, in cash or
common stock of the Successor; provided that such stock is traded on a stock
exchange or other established securities market, is immediately tradable without
restriction, and has a fair market value on the date of delivery to Executive
(as determined in the manner described in the definition of Fair Market Value
herein) equal to the Guaranteed Return Payment.
The Target Price shall be adjusted in a manner consistent with adjustments
made under Section 4(c) of the Stock Plan to preserve the intended benefit to
Executive. For purposes of Section 3 of this Agreement, where the Fair Market
Value of the Common Stock equals or exceeds the Target Price for ten consecutive
business days and the Guaranteed Return Payment would otherwise be reduced, but
the Executive is prohibited (in a writing from the Company's legal counsel) from
exercising the Option on any one of such dates by terms of the Stock Plan, this
Agreement, Company policy, or applicable law, the Guaranteed Return Payment will
not be reduced in accordance with the provisions of this Section until after the
second consecutive business day in which Executive is thereafter no longer
subject to such prohibitions, provided that the Fair Market Value of the Common
Stock remains equal to or in excess of the Target Price on such two consecutive
days. The Executive shall be deemed to be prohibited from exercising the Option,
for purposes of the preceding sentence, if Executive delivers a completed notice
of exercise under the Stock Plan and Executive is prevented from exercising. In
such event exercise shall be deemed to be continued to be prohibited until such
exercise is permitted. The Company shall use reasonable efforts to assist in the
prompt administration of such exercise (it being understood that the Company
shall have no liability for expenses, losses or any claims by Executive due to
administrative delay so long as the Company is acting in good faith). For
purposes of the Stock Plan, this Agreement shall be considered to be an Award
Agreement described in Section 11(b) of the Stock Plan.
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, 401-K, profit sharing,
retirement, deferred compensation or savings plan
6
<PAGE>
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. The Company may amend or terminate any such plan
in its sole and absolute discretion.
(b) Perquisites. During the Employment Period, Executive shall be entitled
to four 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.
Executive shall not be entitled to receive remuneration for unused vacation and
shall not be permitted to carry-over unused vacation to the following year.
(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
Certificate of Incorporation and By-Laws in effect on the date hereof. The
Company shall provide directors and officers liability coverage in amounts
maintained on the Commencement Date for directors and officers of the Company
and its Affiliates in the United States.
(e) Relocation Expenses. The Company shall reimburse the Executive,
promptly following the Commencement Date up to a maximum of $50,000 for all
reasonable direct, out-of-pocket, moving costs, closing costs, traveling
expenses, and all other fees, costs or expenses incurred by the Executive and
members of his household in connection with the Executive's relocation to
Pittsburgh, including, without limitation, househunting trips; provided,
however, that Employee shall be obligated to return the $50,000 to the Company
if, before the first anniversary of the Commencement Date, Executive's
employment is terminated either pursuant to a Termination for Cause (within the
scope of clauses (i) through (iv) of the definition hereof of "Termination for
Cause") or a Termination by Executive other than for Good Reason, each as
defined in Section 5(e). In addition, Executive shall be reimbursed up to a
maximum of $3,000 per month, beginning on the first month anniversary of the
Commencement Date, for a maximum of six months, for all temporary housing costs
during such six month period. Reimbursements under this Section 4(e) shall be
made by the Company upon the presentation of appropriate documentation therefor.
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<PAGE>
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 and, should Executive fail to
tender his resignation within two days of the request, the Company is
irrevocably authorized to appoint an agent in his name and on his behalf to sign
any documents and do anything necessary or desirable to give effect to his
resignation.
(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 required pursuant to Section 3(d) hereof,
Executive shall be entitled to receive the Guaranteed Return Payment, or a
portion thereof, if any.
(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). In addition, if required pursuant to Section 3(d)
hereof, Executive shall be entitled to receive the Guaranteed Return Payment, or
a portion thereof, if any.
(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
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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.
In addition, if required pursuant to Section 3(d) hereof, Executive shall be
entitled to receive the Guaranteed Return Payment, or a portion thereof, if any.
(iv) Termination by Executive Other Than for Good Reason. In the
event of a Termination by Executive other than a Termination 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. In addition, if the termination is under
clause (v) of the definition herein of "Termination for Cause," Executive shall
still be entitled to receive the Guaranteed Return Payment, if any, in
accordance with the terms and subject to the conditions of Section 3(d) of this
Agreement.
(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. The Guaranteed Return Payment, if required pursuant
to Section 3(d) hereof, shall be payable in accordance with Section 3(d).
(d) Retention of monies owed. The Company may at any time during
Executive's employment or upon his 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 (other than expenses
properly incurred in connection with the employment of Executive under this
Agreement) 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:
"Affiliate" shall mean (i) Ronald S. Lauder and (ii) any person or
entity who directly or indirectly through one or more intermediaries, is
controlled by the Company or RSL COM.
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"Change in Control" means the occurrence of (i) a sale or other
disposition of stock of RSL COM, other than a spin-off or any other form of
distribution of RSL COM's shares, or an issuance of stock of RSL COM as a result
of which any "person" (as such term is used in section 13(d) and 14(d) of the
Exchange Act), other than RSL COM, or Ronald S. Lauder ("Lauder"), or any of his
controlled entities, is or becomes the beneficial owner of more than 50% of the
total voting power of RSL COM and those persons who are members of the Board of
Directors of RSL COM immediately prior to the closing of such transaction
constitute less than one half of the membership of the Board of Directors of RSL
COM immediately following the closing of such transaction, (ii) any merger,
consolidation or reorganization following which those persons who are members of
the Board of Directors of RSL COM immediately prior to the closing of such
transaction constitute less than one half of the membership of the board of
directors of the surviving entity immediately following the closing of such
transaction, (iii) a transaction pursuant to which more than 50% of the total
value of the assets of RSL COM and its consolidated subsidiaries are transferred
and the transferee of such assets is not Lauder or a company controlled by him,
or (iv) a complete liquidation of RSL COM.
"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.
"Fair Market Value" means on any date, the closing price of a share
of Common Stock as reported on the National Association of Securities Dealers
Automated Quotation/National Market System ("NASDAQ/NMS") (or on such other
recognized market or quotation system on which the trading prices of the Share
are traded or quoted at the relevant time) on such date.
"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
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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 of the Company, or the COO; (iv) a willful and material breach of
Executive's duties or obligations under this Agreement, including, without
limitation, Executive's failure to devote full business time to the Company in
accordance with Section 2(b) of this Agreement; or (v) material nonperformance
of Executive's duties as reasonably determined by the COO; provided, however;
that if Executive is Terminated for Cause under clause (v) above, he shall still
be entitled to receive the Guaranteed Return Payment in accordance with the
terms and subject to the conditions of Section 3(d) of 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 material reduction in
Executive's positions, duties, responsibilities or reporting lines from those
described in Section 2 hereof; or (ii) a material breach of this Agreement by
the Company; or (iii) a reduction in opportunity under the Bonus Plan below the
levels contemplated by Section 3(b). 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 60 days of his having
actual knowledge of the occurrence of one of the events specified in clause (i),
(ii) or (iii) 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
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have been cured within 30 days of the receipt of such notice or (z) if the
opportunity under the Bonus Plan is reduced by action of the Compensation
Committee or Board of Directors of the Company or RSL COM. Following a "Change
in Control", Executive shall not be deemed to have Good Reason under clause (i)
or (ii) above so long as he continues to receive the compensation and
substantially the same benefits as he is entitled to under this Agreement and
have substantially the responsibilities he had at the time of the Change in
Control and he is not required to relocate following the Change of Control.
"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 Options (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 one year
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 telecommunication services and solutions 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 telecommunications services and solutions
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 reasonable efforts to make
such opportunity available to the Company.
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(b) If, during the period of one year immediately following
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 Competing 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 Competing Business, then (i) Executive shall not engage in such
Competing Business during the one year period immediately following expiration
of the Employment Period, and (ii) the Company shall pay Executive, during such
one year 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. "Confidential 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 Company. "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; advertising, 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 secrets; salary, staffing, management organization or employment
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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 or other legal compulsion 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 its 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 or the Affiliates, members of the Board of Directors of
the Company, or members of the Boards of Directors of 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. If the Company learns that disparaging or derogatory remarks are being
made by the Affiliates, members of the Board of Directors of the Company, or
members of the Board of Directors of Affiliates, regarding Executive, the
Company shall use reasonable efforts to cause such remarks to cease.
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
Confidential Information (as defined above), and any other property
or Confidential 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 twelve 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, on the date of termination of
employment of Executive, or, for the six months prior to the end of the
Employment Period, 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 (to the extent set forth in the relevant provisions of this
Agreement) regardless of the manner in which his relationship with the Company
is terminated, whether voluntarily, pursuant to a Termination for Cause,
Termination for Good Reason, Termination 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 agreement 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. If such person is unable to
do so, or if such person is unavailable or unwilling to act, the
arbitrator shall be selected from a panel comprised of members of
JAMS/Endispute in a manner that approximates the means described
above.
(d) The Arbitrator, after appropriate consultation with the parties, shall
(i) determine, 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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(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) The arbitration proceeding and the provisions in this agreement
dealing with arbitration shall be governed by the United States (Federal)
Arbitration Act, 9 U.S.C. ss.ss. 1-16, the provisions of which shall be
controlling in the event of any conflict with provisions of New York Law.
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 its 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.
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.
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(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 and followed with a duplicate copy
promptly sent in the manner described in clause (a) or (c) of this Section), (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:
371 Pine Valley Road, NW
Winston-Salem, NC 27104-1809
with a copy to:
David E. Kahen, Esq.
Roberts & Holland LLP
825 Eighth Avenue, 37th Floor
New York, NY 10019-7416
if to the Company, to the Company at:
RSL COM U.S.A., Inc.
435 Park Avenue 5TH Floor
New York, NY 10022
with a copy to:
RSL Communications, N. America, Inc.
Suite 4300
767 Fifth Avenue
New York, New York 10153
Fax: (212) 317-0600
Attention: General Counsel
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,
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(i) in the case of personal delivery, on the date of delivery, (ii) in the case
of facsimile, on the date such facsimile is sent (provided confirmation of such
is received), (iii) in the case of delivery by air courier, on the first
business day following the day on which such communication was posted, and (iv)
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.
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
20
<PAGE>
(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.
21
<PAGE>
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.
EXECUTIVE
Date: 12-1-99 /s/ Michael A. Marino
------------------------
Michael A. Marino
RSL COM U.S.A., Inc.
Date: 12-1-99 BY: /s/ Itzhak Fisher
-----------------------
Title: Chairman
--------------------
22
<PAGE>
EXHIBIT 21.1
MATERIAL SUBSIDIARIES
RSL COM United States Operating Subsidiaries
- --------------------------------------------
Name State of Incorporation
- ---- ----------------------
RSL COM North America, Inc. Delaware
RSL COM U.S.A., Inc. Delaware
RSL COM PrimeCall, Inc. Delaware
deltathree.com, Inc. Delaware
LDM Systems, Inc. New York
RSL COM Foreign Operating Subsidiaries
- --------------------------------------
Name Country of Organization
- ---- -----------------------
RSL Communications PLC United Kingdom
RSL COM Europe Ltd. United Kingdom
RSL COM Telco UK Ltd. United Kingdom
Advanced Telecom Ltd. United Kingdom
RSL COM Sweden AB Sweden
RSL COM Finland OY Finland
Telecenter OY Finland
RSL COM France S.A. France
RSL COM Deutschland GmbH Germany
Telegate GmbH Germany
RSL COM Nederland B.V. Netherlands
RSL COM Denmark A/S Denmark
RSL COM Japan K.K. Japan
Maxitel Servicos e Gestao de
Telecomunicacoes, S.A. Portugal
RSL COM Italia S.r.L. Italy
RSL COM Venezuela C.A. Venezuela
Newtelco Telekom AG Austria
RSL Communications Spain, S.A. Spain
Consoricao Europe para las
Telecomunicaciones S.A. Spain
RSL COM de Mexico SA de CV Mexico
RSL COM Schweiz AG Switzerland
European Telecom S.A./N.V. Belgium
European Telecom SARL Luxembourg
RSL COM Canada, Inc. Canada
RSL Communications Australia Limited Australia
Call Australia Pty. Ltd.
RSL COM Australia Limited
Digiplus Pty. Ltd.
Power Serve Communications
Consultants Pty. Limited
Talk 2000 Networks Pty. Limited
Ezi Phonecard Pty Limited
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 238,724
<SECURITIES> 84,154
<RECEIVABLES> 295,741
<ALLOWANCES> 36,758
<INVENTORY> 0
<CURRENT-ASSETS> 687,449
<PP&E> 610,095
<DEPRECIATION> 134,559
<TOTAL-ASSETS> 1,803,308
<CURRENT-LIABILITIES> 523,719
<BONDS> 1,186,904
0
0
<COMMON> 252
<OTHER-SE> (83,360)
<TOTAL-LIABILITY-AND-EQUITY> 1,803,308
<SALES> 0
<TOTAL-REVENUES> 1,469,849
<CGS> 1,034,334
<TOTAL-COSTS> 1,713,787
<OTHER-EXPENSES> (764)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 133,244
<INCOME-PRETAX> (354,886)
<INCOME-TAX> 3,341
<INCOME-CONTINUING> (358,227)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (358,227)
<EPS-BASIC> (6.63)
<EPS-DILUTED> (6.63)
</TABLE>
