<PAGE>
APPENDIX A
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14D-9
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SOLICITATION/RECOMMENDATION STATEMENT
PURSUANT TO SECTION 14(D)(4) OF THE
SECURITIES EXCHANGE ACT OF 1934
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OZEMAIL LIMITED
(NAME OF SUBJECT COMPANY)
OZEMAIL LIMITED
(NAME OF PERSON(S) FILING STATEMENT)
ORDINARY SHARES AND AMERICAN DEPOSITARY SHARES,
EACH AMERICAN DEPOSITARY SHARE REPRESENTING TEN ORDINARY SHARES
(TITLE OF CLASS OF SECURITIES)
692674104 (AMERICAN DEPOSITARY SHARES)
(CUSIP NUMBER OF CLASS OF SECURITIES)
SEAN M. HOWARD
CHIEF EXECUTIVE OFFICER
OZEMAIL CENTRE
39 HERBERT STREET
ST. LEONARDS NEW SOUTH WALES 2065
AUSTRALIA
011-61-2-9433-2400
(NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON AUTHORIZED TO RECEIVE NOTICE
AND COMMUNICATIONS FILING STATEMENT)
WITH A COPY TO:
RONALD C. BARUSCH, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM (INTERNATIONAL)
LEVEL 13, 131 MACQUARIE STREET
SYDNEY NEW SOUTH WALES 2000
AUSTRALIA
011-61-2-9253-6000
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NOTICE
THIS STATEMENT IS MADE BY OZEMAIL LIMITED, AN AUSTRALIAN CORPORATION SUBJECT
TO BOTH UNITED STATES AND AUSTRALIAN DISCLOSURE REQUIREMENTS. THIS STATEMENT
HAS BEEN PREPARED IN ACCORDANCE WITH THE REQUIREMENTS OF THE U.S. SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED AND INCORPORATES BY REFERENCE THE PART B
STATEMENT (THE "PART B STATEMENT") WHICH IT ACCOMPANIES AND IS ATTACHED HERETO
AS EXHIBIT 4 AND IS INCORPORATED BY REFERENCE. THE PART B STATEMENT HAS BEEN
PREPARED IN ACCORDANCE WITH THE AUSTRALIAN CORPORATIONS LAW.
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ITEM 1. SECURITY AND SUBJECT COMPANY
The name of the subject company is OzEmail Limited (A.C.N. 066 387 157), a
public company incorporated under the laws of New South Wales, Australia (the
"Company" or "OzEmail"). The principal executive offices of the Company are
located at OzEmail Centre, 39 Herbert Street, St. Leonards, New South Wales
2065, Australia. The titles of the class of equity securities to which this
statement relates are the Company's ordinary shares (the "Ordinary Shares")
and American Depositary Shares, each representing ten Ordinary Shares (the
"ADSs," and together with the Ordinary Shares, the "Securities"), evidenced by
American Depositary Receipts ("ADRs").
ITEM 2. TENDER OFFER OF THE BIDDER
This statement relates to the tender offer by UUNET Holdings Australia Pty
Limited (A.C.N. 085 531 684) ("UUNET Australia"), a wholly owned subsidiary of
UUNET Technologies, Inc. ("Intermediate"), a Delaware corporation, which is in
turn, a wholly-owned subsidiary of MCI WORLDCOM, Inc., a Georgia corporation
("MCI WorldCom", and together with UUNET Australia and Intermediate, the
"Bidder"), as disclosed in a Part A Statement as registered on December 23,
1998 by the Australian Securities and Investments Commission (the "Part A
Statement") to purchase all of the issued and outstanding Securities at a
price of US$22.00 per ADS (or US$2.20 per Ordinary Share), net to the seller
in cash (the "Offer Price"), upon the terms and subject to the conditions set
forth in the Offer to Purchase to be dated January 8, 1998 (Sydney time) (the
"Offer to Purchase") and the related Acceptance and Transfer Form (relating to
the Ordinary Shares) and Letter of Transmittal (relating to the ADSs) (which
together constitute the "Offer") and are contained in the Part A Statement.
The Offer to Purchase will be mailed with this Statement to the holders of
Securities. Copies of the press releases issued by the Company and the Bidder
on December 14, 1998 with respect to the Offer are filed as Exhibit 1 hereto,
and incorporated herein by reference.
As set forth in the Part A Statement, the address of the principal executive
office of the UUNET Australia is 44 Martin Place, Sydney, New South Wales
2000, Australia.
ITEM 3. IDENTITY AND BACKGROUND
(a) The name and address of the Company, which is the person filing this
Statement, are set forth in Item 1 above.
(b)(1) Arrangements with Officers, Directors or Affiliates of the
Company. Certain contracts, arrangements and understandings between the
Company or its affiliates and certain of the Company's executive officers and
directors are described in Schedule 1 hereto. The interests of the directors
and executive officers of the Company in the share capital of the Company are
set forth in Schedule 2 hereto. Also, certain of the options held by Ian
McGregor, the Company's Chief Financial Officer, are not yet vested. The
Company is considering various alternatives for enabling employees who hold
unvested options to realize value of such options in connection with the
Offer. For a discussion of certain of these alternatives see Section 11,
"Changes in OzEmail's Financial Position" in the Part B Statement.
In addition, Malcolm Turnbull, the Chairman of the Company's Board of
Directors, is also the Chairman and Managing Director of Goldman Sachs
Australia L.L.C. ("Goldman Sachs") and is a partner of the Goldman Sachs Group
L.P. The Company has retained Goldman Sachs to assist the Company as its
financial adviser in connection with the Offer, as described in Item 5 below.
There are no other material contracts, agreements, arrangements or
understandings, or any actual or potential conflicts of interest between the
Company or its affiliates and its executive officers, directors or affiliates.
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(2) The Offer.
Subscription Agreement. The following summary of the Subscription Agreement
does not purport to be complete and is qualified in its entirety by reference
to the complete text of the Subscription Agreement which is attached as
Exhibit 2 hereto and is incorporated by reference.
Pursuant to the Subscription Agreement, the Company issued 21,863,174
Ordinary Shares (representing an aggregate of 14.9% of the Ordinary Shares
outstanding after such issuance) to UUNET Australia at a purchase price equal
to US$2.00 per share for a total subscription price of US$43,726,348.
Pursuant to the Subscription Agreement, the Company agreed further, that for
a period of three months from the date of the Subscription Agreement, not to
issue and allot any additional Ordinary Shares, except pursuant to existing
rights under any employee share option plan of the Company or an exercise of
existing options. The Company also agreed that in the event the Offer is
terminated or that UUNET Australia does not become entitled to proceed under
the Australian Corporations Law to compulsory acquisition of all of the
Ordinary Shares, the Company, upon request of UUNET Australia, will file a
registration statement under the U.S. Securities Act of 1933, relating to the
sale of the Ordinary Shares issued to it under the Subscription Agreement and
any other Ordinary Shares acquired by UUNET Australia pursuant to the Offer.
Pursuant to the Subscription Agreement, the parties terminated a
confidentiality agreement entered into in November 1998. However, UUNET
Australia has agreed not to disclose in the Offer any confidential information
provided by Goldman Sachs or the Company without the prior written approval of
the Company, except as required by law.
Other Understandings.
For a full description of the Bidder's intentions with respect to OzEmail,
see Section 11 of the Offer to Purchase.
(3) Other Commercial Arrangements.
For a discussion of certain commercial arrangements between the Company and
the Bidder, see Section 10, "Interests of Directors of OzEmail in Contracts
with UUNET" in the Part B Statement.
To the best knowledge of the Company, there are no other material contracts,
agreements, arrangements or understandings or any actual or potential
conflicts of interest between the Company or its affiliates and the Bidder or
its executive officers, directors or affiliates.
ITEM 4. THE SOLICITATION OR RECOMMENDATION
(a) Recommendation of the Board of Directors. The Company's Board of
Directors unanimously recommends that the Company's shareholders (other than
UUNET Australia) accept the Offer and tender all of their Securities pursuant
to the Offer, in the absence of a higher offer.
(b) Background; Reasons for the Recommendation. In the current competitive
environment and rapid technological development of the telecommunications
industry, the Company's Board of Directors has recognized for some time the
potential value of expanding the range of integrated communications services
it provides either through collaboration with a telecommunications company or
independent investment in communications projects.
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Since deregulation of the Australian telecommunications industry in mid 1997
the Company has been exploring various possible alternatives for investment
opportunities in synergistic communications projects, through joint ventures
or otherwise, to expand the scope of the Company's operations and reduce
costs. These alternatives have included capital raising in the form of equity
and/or debt; business combinations involving the Company; and the sale of the
Company.
In June 1997, representatives of the Bidder contacted Messrs. Turnbull and
Howard regarding a possible acquisition. In August 1997, the Company engaged
Goldman Sachs to act as its financial adviser in connection with a possible
strategic transaction. Between June 1997 and February 1998, discussions
regarding a possible acquisition continued intermittently between
representatives of the Bidder and Messrs. Turnbull and Howard. In February
1998, however, the Bidder terminated discussions due to its involvement in
other activities at that time.
In July 1998, the Company's management, in consultation with its financial
adviser, Goldman Sachs, began to consider various options for raising capital
in order to pursue a strategy to, among other things, acquire or construct
communications infrastructure in order to offer customers more efficient end
to end services, reduce costs and provide comprehensive value-added
telecommunications services. In a press release dated August 11, 1998, the
Company announced its intention to raise up to US$250 million in new capital
in the form of equity and debt, but stated that the decision as to issuing
equity and/or debt would be dependent on market conditions, the market price
of the Company's shares and other matters. On September 15, 1998, at a general
meeting of shareholders, the shareholders of the Company approved the issuance
of up to an additional 50,000,000 new shares in connection with an equity
capital raising. As a result of changed market conditions, beginning in August
and continuing through September, October and November, the Company decided to
defer the proposed capital raising.
Following the decision to defer a capital raising, in August and September
1998, the Company, in consultation with its financial adviser, reinitiated
discussions with the Bidder regarding a potential transaction. In late
September and early October, the Company provided to representatives of the
Bidder certain information about OzEmail.
On October 1, 1998, Mr. Turnbull contacted a representative of the Bidder by
telephone to inquire as to the status of MCI WorldCom's consideration of the
transaction. Mr. Turnbull was informed that representatives of the Bidder were
evaluating the Company and the potential of a possible acquisition.
On November 1, 1998, the Bidder and Goldman Sachs, on behalf of the Company,
entered into a confidentiality agreement.
On November 5 and 6, 1998, John W. Sidgmore, Vice Chairman of MCI WorldCom,
spoke with Mr. Turnbull by telephone to discuss MCI WorldCom's interest in the
possible acquisition of OzEmail. On November 12, 1998, Messrs. Sidgmore and
Turnbull discussed by telephone the possibility of meeting in person and
possible dates for such a meeting. On November 29, 1998, Messrs. Sidgmore and
Turnbull had a telephone conversation about a possible valuation range for
OzEmail. On December 4, 1998, Mr. Sidgmore and Charles T. Cannada, Senior Vice
President, Corporate Development of MCI WorldCom, met in New York with Mr.
Turnbull and representatives of Goldman Sachs. This meeting included
discussions of issues and structure of a possible acquisition. The parties
also discussed the possibility of MCI WorldCom acquiring a stake in the
Company.
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Between December 7 and December 11, 1998, Mr. Sidgmore and representatives
of the Company held a series of telephone conversations to discuss the
elements of a possible transaction, including valuation. In addition, between
December 8 and December 11, 1998, representatives of Merrill Lynch, financial
advisers to the Bidder, held a series of telephone discussions with
representatives of OzEmail and Goldman Sachs, regarding the structure and
terms of a possible acquisition, as well as the structure for a potential
acquisition of a stake in the Company by UUNET Australia.
On December 10 and December 11, 1998 (Sydney time), the Bidder and OzEmail,
and their respective financial and legal advisers, reviewed drafts of the
Subscription Agreement. On December 12, 1998 (Sydney time), Messrs. Sidgmore
and Turnbull discussed and agreed on a price at which 14.9% of the Company's
Ordinary Shares would be issued to UUNET Australia pursuant to the
Subscription Agreement. At a meeting on December 12, 1998 (Sydney time), the
Board of Directors of the Company approved the Subscription Agreement and the
issuance of 21,863,174 Ordinary Shares to UUNET Australia at a price of
US$2.00 per share. During their discussions, Mr. Sidgmore informed Mr.
Turnbull of the Bidder's Offer Price.
On December 13, 1998 (in the United States) and December 14, 1998 (in
Australia), prior to the opening of trading on the Nasdaq National Market and
the Australian Stock Exchange, MCI WorldCom and the Company issued separate
press releases announcing the issuance of Ordinary Shares to UUNET Australia
and the Bidder's intention to commence the Offer.
On December 14, 1998, Mr. Sidgmore spoke to management of the Company and,
on December 15, 1998, Mr. Sidgmore spoke to employees of the Company, in each
case, regarding MCI WorldCom's global strategy.
Since July 1997, certain representatives of the Company also continued to
have informal discussions and meetings with a number of other parties to
assess the feasibility of the Company's strategic alternatives and the
potential level of interest of such parties in a business combination, joint
venture, a sale of the Company or other alternatives.
In recommending that all shareholders accept the Offer and tender all of
their Securities pursuant to the Offer, in the absence of a higher offer, the
Company's Board of Directors considered a number of factors. For a discussion
of these factors, see "Directors' Recommendation in Relation to the Offer" in
the Part B Statement.
ITEM 5. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED
Pursuant to the terms of a letter agreement dated August 7, 1997 (the
"Engagement Letter"), the Company retained Goldman Sachs to assist the Company
as its financial adviser in considering the desirability and feasibility of
effecting various strategies for maximizing the Company's value to its
shareholders, including, among other things, a merger or sale of the Company.
For a summary of the Engagement Letter, see Section 9, "Other Agreements by
Directors of OzEmail" in the Part B Statement. This summary of the Engagement
Letter does not purport to be complete and is qualified in its entirety by
reference to the complete text of the Engagement Letter, a copy of which is
attached as Exhibit 3 hereto and is incorporated by reference.
ITEM 6. RECENT TRANSACTIONS AND INTENT WITH RESPECT TO SECURITIES
(a) Except as set forth in Item 4(b)(2) above and in Section 5 "Transactions
in OzEmail by Associates During Previous Four Months," in the Part B Statement
no transactions in the
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Securities have been effected during the past 60 days by the Company or, to
the best knowledge, by any executive officer, director, affiliate or
subsidiary of the Company, except pursuant to transactions effected in the
ordinary course pursuant to the Company's employee stock option plan.
(b) To the best knowledge of the Company, its executive officers, directors
and affiliates currently intend to tender all ADSs and Ordinary Shares which
are held of record or beneficially owned by such persons to the Bidder
pursuant to the Offer, subject to there being no more favorable offer.
ITEM 7. CERTAIN NEGOTIATIONS AND TRANSACTIONS BY THE SUBJECT COMPANY
(a) As set forth in Item 4(b) above, representatives of the Company have had
discussions with other entities that indicate that they might have an interest
in acquiring the Company. If any such parties, or other parties, are
interested in pursuing an acquisition of the Company which is more favorable
to the Company's shareholders than the Offer, the Company could provide
information to, and/or engage in negotiations and recommend or enter into a
transaction with such other party. The Board of Directors has determined that
disclosure with respect to the parties to, and the possible terms of any
transactions or proposals of the type referred to in the preceding sentence
might jeopardize any discussions or negotiations the Company might conduct.
Accordingly, the Company has adopted a resolution instructing management not
to disclose the possible terms of any such transactions or proposals, or the
parties thereto, unless and until an agreement in principle relating thereto
has been reached or, upon the advice of counsel, as required by law.
Except as set forth in this Schedule 14D-9, the Company is not engaged in
any negotiation in response to the Offer which relates to or would result in
(i) an extraordinary transaction, such as a merger or reorganization,
involving the Company or any subsidiary of the Company; (ii) a purchase, sale
or transfer of a material amount of assets by the Company or any subsidiary of
the Company; (iii) a tender offer for or other acquisition of securities by or
of the Company; or (iv) any material change in the present capitalization or
dividend policy of the Company.
(b) Except as described in Item 3(b) and Item 4 above (the provisions of
which are hereby incorporated by reference), there are no transactions, board
resolutions, agreements in principle or signed contracts in response to the
Offer which relate to or would result in one or more of the matters referred
to in paragraph (a) of this Item 7.
ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED
To the best of the Company's knowledge, there is no additional information
necessary to make the required statements herein, in light of the
circumstances under which they are made, not materially misleading.
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS
Exhibit 1--Press Releases
Exhibit 2--Subscription Agreement
Exhibit 3--Engagement Letter
Exhibit 4--Part B Statement
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SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this Statement is true, complete and
correct.
OzEmail Limited
/s/ Sean M. Howard
By: _________________________________
SEAN M. HOWARD
CHIEF EXECUTIVE OFFICER AND
DIRECTOR
Dated: January 5, 1999
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SCHEDULE 1
CERTAIN TRANSACTIONS
HISTORICAL CORPORATE STRUCTURE
On September 12, 1994, the Company was founded through a number of
simultaneous transactions. As a result of these transactions, the proprietary
online service previously controlled by Mr. Howard was transferred to the
Company (in exchange for all of the then outstanding ordinary shares of the
Company), and business entities affiliated with Messrs. Kennedy and Turnbull
each agreed to contribute A$500,000 in a joint venture related to the Company.
Mr. Howard and the business entities affiliated with Messrs. Kennedy and
Turnbull elected in November 1995 to terminate the joint venture arrangement
and certain related agreements as part of a reorganization of the Company into
it present corporate form. In connection with this reorganization, the
business entities affiliated with Messrs. Kennedy and Turnbull each
contributed A$500,000 and their respective interests in the joint venture to
the Company in exchange for an aggregate of the equivalent of 35,000,000
Ordinary Shares. The parties also entered into a shareholders agreement, with
each shareholder holding not less than 25% of the issued shares having the
right to appoint one director for each 25% of the shares held. The
shareholders agreement was terminated prior to consummation of the Company's
initial public offering in May 1996.
TRANSACTIONS WITH SUBSIDIARIES
In October 1998, the Company purchased the 20% equity interest in Voyager
New Zealand Limited ("Voyager") it did not own from two former directors of
Voyager (the "Minority Shareholders") pursuant to a September 1998 ruling of
the High Court of New Zealand regarding the fair market value of the shares.
The Company purchased the Minority Shareholders' shares for approximately
NZ$1,010,000 (A$861,000).
LOANS AND GUARANTEES AMONG RELATED PARTIES
OzEmail acts as guarantor on Voyager finance leases. As of December 31,
1997, the total rentals payable under these leases was NZ$124,000 (A$112,000).
ADDITIONAL TRANSACTIONS
On May 24, 1997, the Company and FTR, an entity affiliated with Mr. Malcolm
Turnbull, a director of the Company, entered into an agreement whereby the
Company agreed to pay FTR gross income based on 35% of all revenue received by
the Company in respect of OzEmail services delivered to subscribers in Western
Australia, net of referral fee amounts paid to third parties in connection
with the establishment of accounts with OzEmail for services. FTR agreed that
at least 28.6% of all revenues paid to it by the Company under the agreement
would be spent on marketing and promotion expenditure within Western
Australia. The agreement had an initial term of two years, during which either
party had a right to terminate on sixty days' notice. After the initial term,
the agreement would be automatically renewed until terminated by either party
on sixty days' notice in writing. The parties agreed that if the Company
exercised its right to terminate during the initial term, then FTR would
receive, in each month for a period of twelve months following expiry of the
agreement, gross income based on 25% of all revenue received by the Company in
respect of OzEmail services in Western Australia, net of referral fees paid to
third parties.
On September 10, 1997 OzEmail and FTR terminated this agreement and entered
into a new agreement whereby OzEmail purchased all of the issued share capital
of Microweb Pty
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Limited ("Microweb"), a subsidiary of FTR, for a lump sum of A$1.00 and
deferred consideration equal to approximately A$400,000.
In the year ended December 31, 1997, the Company paid A$186,000 to companies
affiliated with one of its non-executive directors for corporate advisory
services and related expenses associated with: the transfer of the assets of
the Web Wide Media business to Softbank Interactive Marketing Inc. in March,
1997; and corporate advisory services and related expenses associated with the
proposed listing of OzEmail on the ASX.
COMPANY POLICY CONCERNING TRANSACTIONS WITH AFFILIATES
The Company has adopted a policy that all transactions with directors,
executive officers and other affiliates will be on terms that are believed to
be at least as favorable to the Company as could be obtained from unaffiliated
third parties and that such transactions must be approved by a majority of the
Company's disinterested directors.
The Company believes that the foregoing transactions with directors,
executive officers and other affiliates were completed on terms as favorable
to the Company as could have been obtained from unaffiliated third parties.
COMPENSATION OF DIRECTORS AND OFFICERS
The aggregate compensation paid by the Company to the directors and
executive officers of the Company for services in all capacities for the years
ended December 31, 1997 and December 31, 1998 totaled A$839,906 and A$972,354,
respectively.
The Company is currently required by Australian law to contribute 7% of each
employee's salary to a pension fund for the employee's retirement. For the
year ended December 31, 1997, the percentage was 6%. The aggregate amount
accrued by the Company during the year ended December 31, 1998, for
contributions to the pension fund for directors and executive officers of the
Company totaled A$32,056.
OPTIONS TO PURCHASE SECURITIES
The Company's 1996 Stock Option Plan, as amended (the "1996 Plan") was
adopted by the Board of Directors (the "Board") and approved by the
shareholders on May 1, 1996. Under the 1996 Plan, employees (including
officers, but excluding directors) and consultants may, at the discretion of
the plan administrator, be granted options to purchase Ordinary Shares at an
exercise price not less than 85% of their fair market value on the grant date.
A total of 13,000,000 Ordinary Shares are authorized for issuance under the
1996 Plan, as amended, options to purchase 3,250,000 of which were granted in
June 1996 at an exercise price of the Australian dollar equivalent of US$1.40,
and options to purchase 195,000 of which were granted in November 1996 at an
exercise price of the Australian dollar equivalent of US$0.75. Of the options
granted in June 1996, 50% vested on June 30, 1996 and 50% vested on June 30,
1997. Of the options granted in November 1996, 50% vested on December 31, 1996
and 50% vested on December 31, 1997. As of December 31, 1997, a total of
3,069,990 Ordinary Shares had vested. The options with an exercise price of
US$1.40 and US$0.75 expire in July 2000 and November 2001, respectively. In
January 1998, a further grant of options to acquire 1,080,000 Ordinary Shares
was made under the 1996 Plan at an exercise price of A$1.20. Of these options,
50% vest in the option holders on December 31, 1998, and 50% vest on December
31, 1999. These options expire in January 2003.
In June 1998, the Board of Directors approved a grant of 500,000 options to
an employee to acquire 500,000 Ordinary Shares (equivalent to 50,000 ADSs)
under the 1996 Plan at an
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exercise price of A$2.52. Of these options, 50% vest in the option holder on
March 31, 1999 and 50% vest on March 31, 2000. These options expire in June
2003.
On November 2, 1998, the Board of Directors approved a grant of 4,184,000
options to various employees to acquire 4,184,000 Ordinary Shares (equivalent
to 418,400 ADSs) under the 1996 Plan at an exercise price of US$1.07 per
Ordinary Share approximately 14% above the market value of the Ordinary Shares
at the date of grant. Of these options, 50% vest in the option holder on
October 31, 1999 and 50% vest on October 31, 2000. The options expire on
November 1, 2003. Acceptances were received for options with respect to
4,120,000 Ordinary Shares in this grant.
In August 1995, Mr. David Spence, the President and Chief Operating Officer
of the Company, was granted options to purchase 5,675,600 Ordinary Shares at
an exercise price of A$0.33 which expire in July 2000, of which 300,000 and
3,333,000 were exercised on August 11, 1997 and March 25, 1998, respectively.
Mr. Spence sold 30,000 ADSs (representing 300,000 Ordinary Shares), 25,000
ADSs (representing 250,000 Ordinary Shares), 12,500 ADSs (representing 125,000
Ordinary Shares) and 12,500 ADSs (representing 125,000 Ordinary Shares) in
August 1997, May 1998, September 1998 and November 1998, respectively. Mr.
Spence's options expire in July 2000.
See Schedule 2 for information regarding interests of directors and
executive officers of the Company in the share capital of the Company.
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SCHEDULE 2
INTERESTS OF DIRECTORS AND
EXECUTIVE OFFICERS IN THE COMPANY
<TABLE>
<CAPTION>
ORDINARY
SHARES
BENEFICIALLY VESTED OPTIONS GRANTED
NAME POSITION OWNED OPTIONS BUT NOT VESTED
---- -------- ------------ --------- ---------------
<C> <S> <C> <C> <C>
Chief Executive Officer
Sean Howard.......... and Director 33,500,000(1) -- --
David Spence......... President, Chief 2,833,000 2,042,600(4) --
Operating Officer and
Director
Chairman of the Board of
Malcolm B. Turnbull.. Directors 16,750,000(2) -- --
Trevor J. Kennedy.... Director 16,750,000(3) -- --
Steven L. Ezzes...... Director 100,000 100,000(5) --
Ian McGregor......... Chief Financial Officer 4,000 100,000(6) 350,000(7)
</TABLE>
- --------
(1) Mr. Howard's Ordinary Shares are held through Arton No. 001 Pty Limited.
(2) Mr. Turnbull's Ordinary Shares are held through Barzepa Pty Limited.
(3) Mr. Kennedy's Ordinary Shares are held through Golden Research Pty Limited.
(4) The exercise price of the options held by Mr. Spence is A$0.33
(5) The exercise price of the options held by Mr. Ezzes is US$1.40
(6) Exercise price is A$1.20.
(7) Exercise price is A$1.20 with respect to 100,000 options and US$1.07 with
respect to 250,000 options.
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EXHIBIT 1
---------
Contacts:
For Media:
Jim Monroe, MCI WorldCom +1 202 887 2241
pager: 800 724 3624 pin # 1561552
For Investors:
Gary Brandt, MCI WorldCom +1 601 360 8544
MCI WORLDCOM ANNOUNCES INTENTION TO ACQUIRE AUSTRALIA'S OZEMAIL LIMITED
TELECOM FIRM HAS PURCHASED 14.9 PERCENT OF AUSTRALIAN ISP
Jackson, MS, December 13, 1998 and Sydney, Australia, December 14, 1998 - MCI
WorldCom, Inc. (Nasdaq: WCOM) today acquired 21,863,174 newly issued ordinary
shares in OzEmail Limited ("OzEmail") and announced that it will make a cash
offer for all of the issued ordinary shares (including ADSs) of OzEmail (Nasdaq:
OZEMY, ASX: OZM).
UUNET Holdings Australia Pty Limited, a wholly owned subsidiary of MCI WorldCom,
will make an all cash offer to acquire all of the issued ordinary shares of
OzEmail at a price of US$2.20 per share, currently equivalent to approximately
A$3.54 per share(1), including ADSs at a price of US$22.00 per ADS. OzEmail has
146,732,714 ordinary shares issued and outstanding after the placement to MCI
WorldCom, representing a total value for OzEmail's ordinary issued and
outstanding shares of approximately US$322.8 million, currently equivalent to
approximately A$520.0 million(1), based on MCI WorldCom's offer price.
MCI WorldCom acquired the relevant interest in 21,863,174 ordinary shares by way
of a share subscription agreement with OzEmail at US$2.00 per share, currently
equivalent to approximately A$3.22 per share(1). The share subscription
agreement gave MCI WorldCom a relevant interest in approximately 14.9 percent of
OzEmail's expanded issued and outstanding ordinary shares.
Subject to completion of the transaction, OzEmail would become the Australian
Internet operating arm of MCI WorldCom's UUNET subsidiary, a global leader in
Internet communications solutions.
"The Asia-Pacific region is of key strategic importance to us and the synergies
between OzEmail and MCI WorldCom are clear," said MCI WorldCom Vice Chairman
John Sidgmore. "The local fiber we are deploying in Australia complements
OzEmail's Internet presence and the vast international resources of MCI
WorldCom, particularly our worldwide Internet backbone, will bring improved
global connectivity to OzEmail's customers."
OzEmail is one of the most successful Internet Service Providers (ISPs) in
Australia. Based in Sydney, the firm offers a wide range of Internet services
throughout both Australia and New Zealand. OzEmail's network includes
approximately 80 Points of Presence (POPs) covering virtually the entire
Australian population, as well as 15 POPs in New Zealand, which provides equally
comprehensive coverage in that market. OzEmail's services include dial-up and
leased line Internet access, wholesale services to other ISPs, web hosting
services through its subsidiary WebCentral and Internet-based voice offerings.
The offer provides OzEmail shareholders with a premium of approximately 50
percent over the weighted average trading price of OzEmail shares over the last
three months on the Nasdaq National Market(2).
The offer will remain open, unless extended, for at least one month from the
date of the offer, which is expected to be in early January. Pending
commencement of the offer, a copy of any offering documents filed with the
Australian Securities and Investments Commission ("ASIC") will also be filed by
MCI WorldCom with the United States Securities and Exchange Commission ("SEC")
as a exhibit to its current report on Form 8-K, as soon as practicable after
their registration with the ASIC.
The offer will be conditional upon, among other things:
<PAGE>
MCI WorldCom being entitled to proceed, under the Australian Corporations Law,
to compulsory acquisition of all of OzEmail's shares at the expiration of the
offer;
all Australian and other necessary governmental and regulatory approvals being
received, including approval by the Foreign Investment Review Board in
Australia; and
no prescribed occurrences (as defined in the Australian Corporations Law)
(including, for example, the grant of options, liquidation or asset disposition)
occurring in relation to OzEmail or any of its subsidiaries during the offer
period.
Under the offer, OzEmail shareholders will be able to elect to receive payment
in either US ore Australian dollars. Australian dollar payment will be
converted from US dollars using the exchange rate when funds are paid by MCI
WorldCom.
Merrill Lynch & Co will act as Dealer Manager for the offer in the United States
and as financial adviser to MCI WorldCom. For further information in relation
to the offer, please contact Bruce McLennan or Fleur Jouault at Merrill Lynch in
Australia on +612 9226 5306/5342.
MCI WorldCom is a global communications company with revenue of more than $30
billion and established operations in over 65 countries encompassing the
Americas, Europe and the Asia-Pacific regions. MCI WorldCom is a premier
provider of facilities-based and fully integrated local, long distance,
international and Internet services. MCI WorldCom's global networks, including
its state-of-the-art pan-European network and transoceanic cable systems,
provide end-to-end high-capacity connectivity to more than 38,000 buildings
worldwide. For more information on MCI WorldCom, visit the World Wide Web at
http://www.mciworldcom.com or http://www.wcom.com.
(1) Exchange rate of US$1:A$0.6208 as of December 11, 1998.
(2) Per Bloomberg Financial Markets from Friday December 11, 1998.
<PAGE>
PRESS RELEASE
OZEMAIL ANNOUNCES ISSUE OF 14.9% STAKE TO MCI WORLD COM
OzEmail Limited announced that it has issued 21,863,174 ordinary shares
(equivalent to 2,186,317 ADSs), constituting approximately 14.9% of the
outstanding shares following the issuance, to UUNET Holdings Australia Pty
Limited, a wholly owned subsidiary of MCI WorldCom Inc., at a purchase price
equal to US$2.00 per share (equivalent to US$20.00 per ADS). OzEmail said that
its Board of Directors has approved the issue of the shares.
MCI WorldCom has advised the Company that MCI WorldCom intends to make a
takeover bid for all outstanding shares of the Company at a price of US$22.00
per ADS (US$2.20 per share) net to the seller in cash. At the OzEmail board
meeting, Malcolm Turnbull, Sean Howard, and Trevor Kennedy, directors of the
Company (who together beneficially owned approximately 54% of the outstanding
OzEmail shares prior to the MCI WorldCom issuance) indicated that, subject to
reviewing the offer documents to be prepared by MCI WorldCom and absent a more
favourable offer, they intended to accept the offer. The Board indicated that
it intends to make a recommenda tion to OzEmail shareholders after it has had
an opportunity to review MCI WorldCom's offer document and Part A Statement.
<PAGE>
EXHIBIT 2
---------
OZEMAIL LIMITED
UUNET HOLDINGS AUSTRALIA PTY LIMITED
SUBSCRIPTION AGREEMENT
MINTER ELLISON
Lawyers
Minter Ellison Building
44 Martin Place
SYDNEY NSW 2000
DX 117 SYDNEY
Telephone (02) 9210 4444
Facsimile (02) 235 2711
Ref: ECT:DLW:10733123
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
1. DEFINITIONS AND INTERPRETATION....................................................... 1
1.1 Definitions..................................................................... 1
1.2 Interpretation.................................................................. 1
2. AGREEMENT TO SUBSCRIBE............................................................... 2
2.1 Agreement to subscribe and issue Shares......................................... 2
2.2 Confidentiality................................................................. 2
3. SUBSCRIPTION FOR THE SHARES.......................................................... 2
3.1 Obligations for UUNET Australia................................................. 2
3.2 Obligations of the Company...................................................... 2
3.3 Application for Quotation....................................................... 3
3.4 Securities Act Acknowledgment; Registration Rights.............................. 3
4. MEMBERS REGISTER..................................................................... 4
5. WARRANTIES........................................................................... 5
5.1 Warranties by the Company....................................................... 5
5.2 Warranty by UUNET Australia..................................................... 5
6. ANNOUNCEMENTS........................................................................ 5
7. NOTICES.............................................................................. 6
7.1 Service of notices.............................................................. 6
7.2 Deemed receipt.................................................................. 6
8. WAIVER............................................................................... 6
9. GOVERNING LAW AND JURISDICTION....................................................... 7
10. GENERAL PROVISIONS................................................................... 7
10.1 Further action.................................................................. 7
10.2 Counterparts.................................................................... 8
11. NON-MERGER........................................................................... 8
SCHEDULE 1 - UUNET AUSTRALIA ANNOUNCEMENT................................................. 9
SCHEDULE 2 - OZEMAIL ANNOUNCEMENT......................................................... 10
SCHEDULE 3 - APPLICATION FORM............................................................. 11
</TABLE>
2
<PAGE>
SUBSCRIPTION AGREEMENT dated 12 December, 1998 (Sydney time)
BETWEEN OZEMAIL LIMITED ACN 066 387 157 of Ground Floor, Building B, 39
Herbert Street, St Leonards, New South Wales ('COMPANY')
AND UUNET HOLDINGS AUSTRALIA PTY LIMITED ACN 085 531 684 of 44 Martin
Place, Sydney, New South Wales ('UUNET AUSTRALIA')
1. DEFINITIONS AND INTERPRETATIONS
1.1 DEFINITIONS
In this agreement, the following words and phrases have the following
meanings, unless the contrary intention appears:
'ANNOUNCEMENTS' means the announcements set out substantially in the form
of SCHEDULE 1 and SCHEDULE 2.
'APPLICATION FORM' means the application form set out in SCHEDULE 3.
'SHARES' means 21,863,174 ordinary shares in the capital of the Company
(representing in aggregate no more than 14.9% of the ordinary share capital
of the Company, after the issue of the Shares).
'SUBSCRIPTION DATE' means 12 December 1998 (Sydney time).
'SUBSCRIPTION PRICE' means US$43,726,348, representing US$2.00 per Share.
1.2 INTERPRETATION
In this agreement, unless the contrary intention appears:
(a) headings are for ease of reference only and do not affect the meaning
of this agree ment;
(b) the singular includes the plural and vice versa, and words importing a
gender include other genders;
(c) a reference to a clause, paragraph or schedule is a reference to a
clause or paragraph of or schedule to this agreement, and a reference
to this agreement includes any schedules;
(d) a reference to a document, agreement or deed, including this
agreement, includes a reference to that document or agreement or deed
as novated, altered ro replaced from time to time; and
(e) a reference to a specific time for the performance of an obligation is
a reference to that time in New South Wales, Australia.
2. AGREEMENT TO SUBSCRIBE
2.1 AGREEMENT TO SUBSCRIBE AND ISSUE SHARES
On the terms and conditions of this agreement, UUNET Australia agrees to
subscribe for the Shares, and the Company agrees to issue and allot the
Shares to UUNET Australia, at the Subscription Price on the Subscription
Date.
2.2 CONFIDENTIALITY
The parties hereby terminate the confidentiality agreement dated 22 October
1998 between Goldman Sachs Australia L.L.C. (on behalf of the Company) and
UUNET Technologies, Inc., provided that UUNET Australia will not disclose
in its takeover documents any confidential
<PAGE>
2
information provided by Goldman Sachs or the Company without the prior
written approval of the Company (not to be unreasonably withheld) except as
required by law.
3. SUBSCRIPTION FOR THE SHARES
3.1 OBLIGATIONS OF UUNET AUSTRALIA
On the Subscription Date, UUNET Australia must:
(a) deliver to the Company a duly completed Application Form; and
(b) pay the Subscription Price by delivery of a cheque made payable to the
Company to Skadden Arps Slate Meagher & Flom L.L.P acting as nominee for
the Company, at UUNET Technologies, Inc's offices at Fairfax, Virginia,
USA,
simultaneously with, and in consideration of, the performance of the
Company's obligations under CLAUSE 3.2.
3.2 OBLIGATIONS OF THE COMPANY
On the Subscription Date, the Company must:
(a) make a representative of Skadden Arps Slate Meagher & Flom L.L.P
available at UUNET Technologies, Inc's offices at Fairfax, Virginia,
USA between 9.30am and 11.30am on the Subscription Dated (between
4.30pm and 8pm on December 11, 1998, New York time);
(b) issue and allot the Shares to UUNET Australia;
<PAGE>
3
(c) on or before 11.30am on the Subscription Date, hand deliver a share
certificate for the Shares (or its uncertificated equivalent) to a
representative of Minter Ellison, 44 Martin Place, Sydney, New South
Wales, Australia, acting as nominee for UUNET Australia; and
(d) enter UUNET Australia's name in the register of members of the Company
in respect of the Shares,
simultaneously with, and in consideration of, the performance of UUNET
Australia's obligations under CLAUSE 3.1.
3.3 APPLICATION FOR QUOTATION
The Company must apply to Australian Stock Exchange Limited for quotation
of the Shares within two business days of the Subscription Date, and use
its best endeavours to ensure that the Shares are quoted by Australian
Stock Exchange Limited as soon as possible after the Subscription Date.
3.4 SECURITIES ACT ACKNOWLEDGMENT; REGISTRATION RIGHTS
(a) Securities Act Acknowledgment. UUNET Australia represents and
warrants to the Company that it is acquiring the Shares for investment
purposes and not with a view to distribution. UUNET Australia
understands that the Shares have not been and will not be registered
under the United States Securities Act of 1933 (as amended)
('SECURITIES ACT'), and agrees that it will only offer and sell the
Shares:
(i) pursuant to a registration statement in accordance with the
Securities Act;
(ii) pursuant to an exemption from the registration requirements of
the Securities Act; or
(iii) in a transaction not subject to the Securities Act.
Notwithstanding any other provisions of this CLAUSE 3.4, the Company
agrees that UUNET Australia may sell or dispose of such Shares, and
the Company will promptly register such transfer, upon receipt of a
certificate form UUNET Australia that such sale or disposition will
be:
(1) effected in a transaction outside the United States; or
(2) effected pursuant to an exemption from the registration
requirements of the Securities Act (including, without
limitation, a transaction effected on the Australian Stock
Exchange in compliance with Rule 904 under the Securities Act).
<PAGE>
4
The Company agrees that it will not require an opinion of counsel to
effect any such transfer.
UUNET Australia further agrees that it will not deposit the Shares
into any unre stricted depositary receipt facility in respect of the
ordinary shares of the Company established or maintained by a
depositary bank unless and until such time as the shares are no longer
subject to the restrictions on transfer applicable to 'restricted
securities' within the meaning of Rule 144(a)(3) under the Securities
Act.
(b) Notwithstanding the foregoing, the parties acknowledge that in the
event of an offer for the ordinary shares of the Company by a party
other than UUNET Australia or its direct or indirect parent
corporations, UUNET Australia will be entitled to sell the Shares, or
any other shares in the Company acquired pursuant to the offer
referred to in the Announcements, or any amended offer to such bidder.
(c) Registration Rights. In the event that UUNET Australia makes a
takeover bid that is subsequently terminated or otherwise does not
become entitled to proceed under the Australian Corporations Law to
compulsory acquisition of all of the Company's shares, the Company
agrees, upon the request of UUNET Australia, to promptly file one
registration statement under the Securities Act and applicable
Australian laws, if any, relating to the sale of the Shares and any
other shares in the Company acquired pursuant to the offer referred to
in the Announcements, or any amended offer, to use its best efforts to
cause such registration statement to become effective, unless, in the
written opinion of counsel to the Company, in form and substance
reasonably satisfactory to UUNET Australia, such registration is not
required for the sale and distribution of the shares covered thereby
in the manner proposed by UUNET Australia, provided, however, the
Company shall be entitled to reasonable 'black-out periods' during the
pendency of the registration statement. The Company agrees to use its
best efforts to maintain the effectiveness of such registration
statement, and to amend, supplement and update, if necessary, until
completion of the distribution or until such time as, in the written
opinion of counsel to the Company, in form and substance reasonably
satisfactory to UUNET Australia, such registration is not required for
the sale and distribution of the shares covered thereby in the manner
proposed by UUNET Australia. The Company agrees to co-operate in good
faith and take such other actions as are customarily required of an
issuer in a US registra tion rights agreement. The registration
effected under this CLAUSE 3.4(C) shall be effected at the Company's
expense except for any underwriting commissions applicable to the sale
of the shares, fees and disbursements of UUNET Australia';s counsel
and any experts engaged by UUNET Australia. The Company and UUNET
Australia agree to hold harmless and indemnify each other and their
respective controlling persons, and make contribution, to the same
extent as is customary in a US registration rights agreement between
an issuer and a minority stockholder, including with respect to
advancement of expenses. The rights of UUNET Australia in this
paragraph may be assigned to any transferee who acquires the Shares or
any other shares in the Company acquired pursuant to the offer
referred to in the An nouncements, or any amended offer.
<PAGE>
5
4. MEMBERS REGISTER
The Company must provide a hard copy and, if the register is kept on a
computer, a copy on computer disk or computer tape, of the information on
the register of members of the Company as at the date advised by UUNET
Australia, within two business days of written request by UUNET Australia.
5. WARRANTIES
5.1 WARRANTIES BY THE COMPANY
The Company warrants and represents to UUNET Australia that:
(a) the Shares represent in aggregate no more than 14.9% of the share
capital of the Company (after the issue of the Shares);
(b) the Company is under no obligation to issue or allot, and has not
granted any person the right to call for the issue or allotment of,
any shares or other securities in the capital of the Company, other
than under any employee share option plan of the Company;
(c) except for the issue of the Shares under this agreement, the Company
will not issue and allot any shares in the Company for a period of
three months after the date of this agreement, other than pursuant to
existing rights under any employee share option plan of the Company or
on exercise of existing options;
(d) the Company has the power and authority to enter into and perform its
obligations under this agreement;
(e) the issue of the Shares has been approved by the shareholders of the
Company, and the issue of the Shares by the Company will not breach
the Listing Rules of Austra lian Stock Exchange Limited or the
Company's constitution, subject to the accuracy of the warranty set
out in CLAUSE 5.2; and
(f) no meeting has been convened, resolution proposed, petition presented
or order made for the winding up of the Company, and no receiver,
receiver and manager, provisional liquidator, liquidator or other
officer of a court has been appointed in relation to any of its
assets, and no mortgagee has taken or attempted or indicated in any
manner any intention to take possession of any of its assets.
5.2 WARRANTY BY UUNET AUSTRALIA
UUNET Australia warrants that neither it nor any associate voted in respect
of the resolu tion passed at the shareholders meeting of the Company on 14
September 1998 to approve the issue of up to 50 million shares.
<PAGE>
6
6. ANNOUNCEMENTS
After signing of this agreement by the parties, the parties will make the
Announcements on the next business day after the Subscription Date.
7. NOTICES
7.1 SERVICE OF NOTICES
A party giving notice or notifying under this agreement must do so in
writing:
(a) directed to the recipient's address specified in this clause, as
varied by any notice; and
(b) hand delivered or sent by facsimile to that address.
The parties' addresses and facsimile numbers are:
UUNET AUSTRALIA: UUNET Holdings Australia Pty Limited
Attention: Leigh Brown/David Watson
Address: c/- Minter Ellison
44 Martin Place
Sydney NSW 2000
Facsimile No.: +61 2 9210 4770
COMPANY: OzEmail Limited
Attention: Malcolm Turnbull
Address: c/- Goldman Sachs Australia L.L.C.
Level 48
Governor Phillip Tower
1 Farrer Place
Sydney NSW 2000
Facsimile No.: +61 2 9320 1009
7.2 DEEMED RECEIPT
A notice given in accordance with CLAUSE 7.1 is taken to be received:
(a) if hand delivered, on delivery; and
(b) if sent by facsimile, when the sender's facsimile system generates a
message confirming successful transmission of the total number of pages
of the notice unless, within eight hours after that transmission, the
recipient informs the sender that it has not received the entire
notice.
<PAGE>
7
8. WAIVER
The failure of a party at any time to require performance of any obligation
under this agreement is not a waiver of that party's right:
(a) to insist on performance of, or claim damages for breach of, that
obligation unless that party acknowledges in writing that the failure
is a waiver; and
(b) at any other time to require performance of that or any other
litigation under this agreement.
9. GOVERNING LAW AND JURISDICTION
9.1 This agreement is governed by, and is to be construed in accordance with,
the law applica ble in New South Wales, Australia.
9.2 Each party submits to the non-exclusive jurisdiction of the courts of New
South Wales, Australia.
10. GENERAL PROVISIONS
10.1 FURTHER ACTION
Each party must:
(a) use its best efforts to do all things necessary or desirable to give
full effect to this agreement; and
(b) refrain from doing anything that might hinder performance of this
agreement.
<PAGE>
8
10.2 COUNTERPARTS
This agreement may be executed in any number of counterparts.
11. NON-MERGER
None of the term or conditions of this agreement, or any act, matter or
thing done under or by virtue of this agreement or any other agreement,
instrument or document, or judgment or order of any court or judicial
proceedings, will operate as a merger of any of the rights and remedies of
the parties under this agreement, and those rights and remedies will at all
times continue in force.
EXECUTED as an agreement
EXECUTED by UUNET HOLDINGS )
AUSTRALIA PTY LIMITED )
)
/s/John Sidgmore /s/Charles Henry Coville
............................. .........................................
Signature of director Signature of director/company secretary
(Please delete as applicable)
John Sidgmore Charles Henry Coville
.............................. .........................................
Name of director (print) Name of director/company secretary(print)
EXECUTED by OZEMAIL LIMITED )
)
)
/s/Sean Martin Howard /s/David Moray Spence
.............................. .........................................
Signature of director Signature of director/company secretary
(Please delete as applicable)
Sean Martin Howard David Moray Spence
.............................. .........................................
Name of director (print) Name of director/company secretary (print)
<PAGE>
SCHEDULE 1 - UUNET AUSTRALIA ANNOUNCEMENT
<PAGE>
Contacts:
For Media:
Jim Monroe, MCI WorldCom +1 202 887 2241
pager: 800 724 3624 pin # 1561552
For Investors:
Gary Brandt, MCI WorldCom +1 601 360 8544
MCI WORLDCOM ANNOUNCES INTENTION TO ACQUIRE AUSTRALIA'S OZEMAIL LIMITED
TELECOM FIRM HAS PURCHASED 14.9 PERCENT OF AUSTRALIAN ISP
Jackson, MS, December 13, 1998 and Sydney, Australia, December 14, 1998 - MCI
WorldCom, Inc. (Nasdaq: WCOM) today acquired 21,863,174 newly issued ordinary
shares in OzEmail Limited ("OzEmail") and announced that it will make a cash
offer for all of the issued ordinary shares (including ADSs) of OzEmail (Nasdaq:
OZEMY, ASX: OZM).
UUNET Holdings Australia Pty Limited, a wholly owned subsidiary of MCI WorldCom,
will make an all cash offer to acquire all of the issued ordinary shares of
OzEmail at a price of US$2.20 per share, currently equivalent to approximately
A$3.54 per share(1), including ADSs at a price of US$22.00 per ADS. OzEmail has
146,732,714 ordinary shares issued and outstanding after the placement to MCI
WorldCom, representing a total value for OzEmail's ordinary issued and
outstanding shares of approximately US$322.8 million, currently equivalent to
approximately A$520.0 million(1), based on MCI WorldCom's offer price.
MCI WorldCom acquired the relevant interest in 21,863,174 ordinary shares by way
of a share subscription agreement with OzEmail at US$2.00 per share, currently
equivalent to approximately A$3.22 per share(1). The share subscription
agreement gave MCI WorldCom a relevant interest in approximately 14.9 percent of
OzEmail's expanded issued and outstanding ordinary shares.
Subject to completion of the transaction, OzEmail would become the Australian
Internet operating arm of MCI WorldCom's UUNET subsidiary, a global leader in
Internet communications solutions.
"The Asia-Pacific region is of key strategic importance to us and the synergies
between OzEmail and MCI WorldCom are clear," said MCI WorldCom Vice Chairman
John Sidgmore. "The local fiber we are deploying in Australia complements
OzEmail's Internet presence and the vast international resources of MCI
WorldCom, particularly our worldwide Internet backbone, will bring improved
global connectivity to OzEmail's customers."
OzEmail is one of the most successful Internet Service Providers (ISPs) in
Australia. Based in Sydney, the firm offers a wide range of Internet services
throughout both Australia and New Zealand. OzEmail's network includes
approximately 80 Points of Presence (POPs) covering virtually the entire
Australian population, as well as 15 POPs in New Zealand, which provides equally
comprehensive coverage in that market. OzEmail's services include dial-up and
leased line Internet access, wholesale services to other ISPs, web hosting
services through its subsidiary WebCentral and Internet-based voice offerings.
The offer provides OzEmail shareholders with a premium of approximately 50
percent over the weighted average trading price of OzEmail shares over the last
three months on the Nasdaq National Market(2).
The offer will remain open, unless extended, for at least one month from the
date of the offer, which is expected to be in early January. Pending
commencement of the offer, a copy of any offering documents filed with the
Australian Securities and Investments Commission ("ASIC") will also be filed by
MCI WorldCom with the United States Securities and Exchange Commission ("SEC")
as a exhibit to its current report on Form 8-K, as soon as practicable after
their registration with the ASIC.
The offer will be conditional upon, among other things:
MCI WorldCom being entitled to proceed, under the Australian Corporations
Law, to compulsory acquisition of all of OzEmail's shares at the expiration
of the offer;
<PAGE>
all Australian and other necessary governmental and regulatory approvals being
received, including approval by the Foreign Investment Review Board in
Australia; and no prescribed occurrences (as defined in the Australian
Corporations Law) (including, for example, the grant of options, liquidation or
asset disposition) occurring in relation to OzEmail or any of its subsidiaries
during the offer period.
Under the offer, OzEmail shareholders will be able to elect to receive payment
in either US ore Australian dollars. Australian dollar payment will be
converted from US dollars using the exchange rate when funds are paid by MCI
WorldCom.
Merrill Lynch & Co will act as Dealer Manager for the offer in the United States
and as financial adviser to MCI WorldCom. For further information in relation
to the offer, please contact Bruce McLennan or Fleur Jouault at Merrill Lynch in
Australia on +612 9226 5306/5342.
MCI WorldCom is a global communications company with revenue of more than $30
billion and established operations in over 65 countries encompassing the
Americas, Europe and the Asia-Pacific regions. MCI WorldCom is a premier
provider of facilities-based and fully integrated local, long distance,
international and Internet services. MCI WorldCom's global networks, including
its state-of-the-art pan-European network and transoceanic cable systems,
provide end-to-end high-capacity connectivity to more than 38,000 buildings
worldwide. For more information on MCI WorldCom, visit the World Wide Web at
http://www.mciworldcom.com or http://www.wcom.com.
(1) Exchange rate of US$1:A$0.6208 as of December 11, 1998.
(2) Per Bloomberg Financial Markets from Friday December 11, 1998.
<PAGE>
10
SCHEDULE 2 - OZEMAIL ANNOUNCEMENT
<PAGE>
PRESS RELEASE
OZEMAIL ANNOUNCES ISSUE OF 14.9% STAKE TO MCI WORLD COM
OzEmail Limited announced that it has issued 21,863,174 ordinary shares
(equivalent to 2,186,317 ADSs), constituting approximately 14.9% of the
outstanding shares following the issuance, to UUNET Holdings Australia Pty
Limited, a wholly owned subsidiary of MCI WorldCom Inc., at a purchase price
equal to US$2.00 per share (equivalent to US$20.00 per ADS). OzEmail said that
its Board of Directors has approved the issue of the shares.
MCI WorldCom has advised the Company that MCI WorldCom intends to make a
takeover bid for all outstanding shares of the Company at a price of US$22.00
per ADS (US$2.20 per share) net to the seller in cash. At the OzEmail board
meeting, Malcolm Turnbull, Sean Howard, and Trevor Kennedy, directors of the
Company (who together beneficially owned approximately 54% of the outstanding
OzEmail shares prior to the MCI WorldCom issuance) indicated that, subject to
reviewing the offer documents to be prepared by MCI WorldCom and absent a more
favourable offer, they intended to accept the offer. The Board indicated that
it intends to make a recommenda tion to OzEmail shareholders after it has had
an opportunity to review MCI WorldCom's offer document and Part A Statement.
<PAGE>
11
SCHEDULE 3 - APPLICATION FORM
The Directors
OzEmail Limited
Ground Floor, Building B
39 Herbert Street
St Leonards NSW 2065
12 December 1998
Dear Directors
APPLICATION FOR ALLOTMENT OF SHARES
UUNET Holdings Australia Pty Limited ('UUNET AUSTRALIA') of 44 Martin Place,
Sydney, New South Wales, applies for 21,863,174 fully paid ordinary shares in
OzEmail Limited.
UUNET Australia authorises you to record its name in the register of
shareholders of OzEmail Limited in respect of the shares the subject of this
application.
UUNET Australia has arranged for the delivery of a cheque payable to OzEmail
Limited in the amount of US$43,726,348 to Skadden Arps Slate Meagher & Flom
L.L.P acting as nominee for the Company, at UUNET Technologies, Inc's offices at
Fairfax, Virginia, USA, representing the allotment money payable for the shares
the subject of this application.
UUNET Australia agrees to be bound by the constitution of OzEmail Limited.
Yours faithfully
/s/John Sidgmore
.......................
Director
<PAGE>
EXHIBIT 3
---------
Goldman Sachs Australia L.L.C. | Level 48 | Governor Phillip Tower | 1 Farrer
Place | Sydney NSW 2000
ARBN 064 914 469 | Tel: (02) 9320-1000 | Fax: (02) 9320-1009
Goldman
Sachs
STRICTLY PRIVATE AND CONFIDENTIAL
- ---------------------------------
7th August, 1997
Mr Sean Howard
Chief Executive Officer
OzEmail Limited
Level 1
39 Herbert Street
St Leonards NSW 2065
Dear Mr Howard:
We are pleased to confirm the arrangements under which Goldman Sachs Australia
L.L.C. ("GSA") is exclusively engaged by OzEmail Limited ("the Company") as
financial adviser in connection with the possible sale of the Company's Internet
Access Provider businesses (the "ISP Business"), the possible sale of the
Company, and/or the possible merger of the Company with a strategic partner.
During the term of our engagement, we shall provide you with financial advice
and assistance in connection with this potential transaction, which may include
performing valuation analyses, searching for a partner or purchaser acceptable
to you, co-ordinating visits of potential partners or purchasers and assisting
you in negotiating the financial aspects of the transaction.
In connection with this engagement, the Company shall pay us a fee in United
States dollars of US$175,000 upon the execution of this agreement, which, to the
extent paid, shall be applied against any transaction fee which may become
payable pursuant to this engagement.
The transaction fee for our engagement will depend upon the outcome of this
assignment.
(i) if the sale of the ISP Business (which in this letter shall mean issues,
sales or other disposals of securities or a sale or other disposal of all
or a substantial proportion of the business or assets of or employed by the
ISP Business) is accomplished in one or a series of transactions, we shall
charge a transaction fee of 2 per cent. of the aggregate consideration paid
in such transactions on amounts up to US$40 million and 3 per cent. on
amounts in excess of US$40 million;
A limited liability company incorporated in Delaware, United States of America
Goldman Sachs Australia L.L.C.
<PAGE>
Goldman Sachs Australia L.L.C.
ARBN 064 914 469
OzEmail Limited
7th August, 1997
Page Two
(ii) if the sale of the Company (which in this letter shall mean issues, sales
or other disposals of securities of the Company or its subsidiaries
whether pursuant to a takeover offer, scheme of arrangement or otherwise
or a sale or other disposal by the Company or its subsidiaries of all or
substantial portion of their businesses or assets) is accomplished in one
or a series of transactions, we shall charge a transaction fee of 2 per
cent. of the aggregate consideration paid in such transactions; and
(iii) if the Company is merged with, or acquires, another entity, we shall
charge a transaction fee of 2 per cent. of the aggregate consideration
and/or value attributed to the Company in such a merger or acquisition.
We shall not be entitled to a transaction fee if the company undertakes an
internal reoganisation.
In the event of a transaction of the type contemplated by (i) or (iii) above,
GSA shall be entitled to receive its fee in ordinary shares of the Company or
the entity created by any merger to a value equivalent to the amount receivable
by GSA in cash.
Except as otherwise provided, all payments under this Agreement shall be made in
United States dollars and without withholding or deduction of any tax,
assessment or other governmental charge (collectively, "Tax") unless required by
law; and if the Company shall be required to deduct or withhold any Tax, or if
any Tax is required to be paid by Goldman Sachs (excluding income tax) solely on
account of services performed hereunder, the Company shall pay to Goldman Sachs
such additional amounts as shall be required so that the net amount received by
Goldman Sachs from the Company after such a deduction, withholding or payment
shall equal the amount otherwise due to Goldman Sachs under this agreement. If
the aggregate consideration by reference to which fees are to be paid is
denominated in another currency, it shall be converted to United States dollars
at the closing mid market exchange rate in New York on the business day prior to
that on which payment of fees is due.
The aggregate consideration for purposes of calculating a transaction fee shall
be:
(i) in the case of the issue, sale or other disposal of securities, the total
consideration paid for such securities (including amounts paid or to be
offered to holders of options); and
(ii) in the case of a sale or other disposal of businesses or assets, the total
consideration paid for such businesses or assets.
Amounts paid into escrow and contingent payments in connection with any
transaction will be included as part of the aggregate consideration. Fees on
amounts paid into escrow will be payable upon the establishment of such escrow.
If the consideration in connection with any transaction may be increased by
payments related to future events, the portion of our fee relating to such
contingent payments will be calculated and payable if and when such contingent
payments are made. Aggregate consideration shall also include the aggregate
amount of any gross dividends or other distributions (including transfers of
assets at less than market value) declared or paid with respect to the Company's
shares (or where subsidiaries are being sold with respect to their shares) after
the date hereof, other than normal recurring cash dividends in amounts not
materially greater than currently paid and
<PAGE>
Goldman Sachs Australia L.L.C.
ARBN 064 914 469
OzEmail Limited
7th August, 1997
Page Three
also excluding the anticipated dividend of up to US$7 million resulting from the
already announced transaction with Metro.
A transaction fee in connection with an issue, sale or disposal of shares or
securities in the Company or the ISP Business will become payable when control
of 50 per cent. or more of such company's outstanding ordinary shares is
acquired by a purchaser or group of purchasers acting in concert. In that
event, such transaction fee will be calculated under the above definition of
aggregate consideration as though 100 per cent. of such company's securities for
which an offer had been, or is to be, made had been acquired for consideration
equivalent to that paid in, or to be offered pursuant to, the transaction in
which control was acquired. Nevertheless, our services pursuant to this letter
will continue after control is obtained to assist you with the completion of the
transaction.
If any portion of the aggregate consideration is paid in the form of securities,
the value of such securities, for purposes of calculating the transaction fee,
will be determined by the average of the closing prices, on the principal
investment exchange on which they are listed or dealt in, on the five trading
days ending five days prior to the fee becoming due. If such securities do not
have an existing public trading market, the value of the securities shall be the
fair market value on the day prior to the fee becoming due.
The Company also agrees to reimburse us periodically, upon request, for our
reasonable out-of-pocket expenses, including the fees and disbursements of our
lawyers plus any sales, use of similar taxes (including additions to such taxes,
if any) arising out of or in connection with any matter referred to in this
letter. The foregoing provision for reimbursement of expenses shall survive any
termination or completion of the engagement provided by this letter.
In order most effectively to co-ordinate our efforts together to effect a
transaction satisfactory to the Company and the shareholders, the Company, its
management and the shareholders will promptly inform us of any inquiry they may
receive concerning the possible sale or merger of the ISP Business and/or the
Company. Also, during the period of our engagement, neither the Company, its
management, nor the shareholders will initiate any discussions looking toward
the sale or merger of the ISP Business or the Company without first consulting
with GSA.
Please note that any written or oral opinion, report or advice provided by GSA
or any of its affiliates in connection with our engagement is exclusively for
the information of the Board of Directors and senior management of the Company,
and may not be disclosed to any third party or circulated or referred to
publicly without our prior written consent. GSA shall be named as financial
adviser to the Company in any announcements, circulars or communications
regarding the sale of the Company in the manner and place in which it is normal
or a requirement for financial advisers to the Company to be so named.
<PAGE>
Goldman Sachs Australia L.L.C.
ARBN 064 914 469
OzEmail Limited
7th August, 1997
Page Four
GSA may, in performance of its services hereunder, delegate such of its
functions as it may select to Goldman, Sachs & Co. ("Goldman Sachs") or any of
its other affiliates; provided, however, that no such delegation by GSA shall in
any respect affect the terms hereof, and GSA shall be responsible for the
actions or omissions of Goldman Sachs or any of GSA's other affiliates to which
it may delegate its functions as if GSA were executing such functions itself.
The fees and amounts representing the reimbursement of expenses which are
payable hereunder shall be payable, in whole or in part, to Goldman Sachs or any
of the other affiliates of GSA in the event GSA so directs you prior to the
payment of the fees and amounts in question; provided however that the Company
shall not be liable to incur any additional payment as a result solely of this
direction to pay fees or amounts to an affiliate of GSA. In the absence of any
other direction, all fees and amounts payable under this letter or under Annex A
shall be payable to GSA at the above address or to such bank account as GSA
shall previously have requested.
In connection with engagements such as this, it is our policy to receive
indemnification. The Company agrees to the provisions with respect to our
indemnity and other matters set forth in Annex A which is incorporated by
reference into this letter.
As you know, GSA, Goldman Sachs and some of their affiliates are full service
securities firms and as such may from time to time effect transactions, for
their own account or the account of customers, and hold positions in securities
of the Company and other companies, and their affiliates, which may be the
subject of the engagement contemplated by this letter.
Our services may be terminated by you or us at any time with or without cause
effective upon receipt of written notice to that effect. We shall be entitled
to the transaction fee(s) set forth above in the event that at any time prior to
the expiration of two years after such termination a sale or merger of the ISP
Business or the Company or other transaction of the kind contemplated by this
engagement is completed and there was discussion with the acquiring or merging
party, any affiliate thereof, or a person as their adviser or agent regarding
such a transaction during the period of our engagement.
GSA shall be entitled to transfer all of its rights and obligations under this
letter agreement to an affiliate to which substantially all the assets and
business of GSA has been or are to be transferred and from such transfer
references to GSA shall be read as references to such affiliate.
This letter agreement shall be governed by and construed in accordance with the
laws of the State of New South Wales. The Company and the shareholders agree
that, in connection with any legal suit or proceeding arising with respect to
this letter agreement, it hereby submits to the exclusive jurisdiction of the
Courts of New South Wales.
<PAGE>
Goldman Sachs Australia L.L.C.
ARBN 064 914 469
OzEmail Limited
7th August, 1997
Page Five
Please confirm that the foregoing is in accordance with your understanding by
signing and returning to us the enclosed copy of this letter, which shall become
a binding agreement upon our receipt. We are delighted to accept this
engagement and look forward to working with you on this assignment.
Very truly yours, Confirmed:
GOLDMAN SACHS AUSTRALIA L.L.C. OZEMAIL LIMITED
By: /s/Timothy D. Dattels By: /s/Sean Howard
----------------------- ------------------------
Name: Timothy D. Dattels Date: 21/8/97
----------------------- ------------------------
Title: Managing Director
----------------------- ------------------------
<PAGE>
ANNEX A
DEED OF INDEMNITY
7th August, 1997
This is a deed of indemnity given to Goldman Sachs Australia L.L.C. (ARBN 064
914 469) of Level 48, Governor Phillip Tower, 1 Farrer Place, Sydney, New South
Wales, for itself and as agent for each other Financial Adviser (as defined
below), by OzEmail Limited of Level 1, 39 Herbert Street, St Leonards, NSW,
2065, Australia ("the Company")
In consideration of Goldman Sachs Australia L.L.C. agreeing to undertake the
engagement (the "Engagement") the subject of the letter dated 7th August, 1997
(the "Letter of Engagement"), a copy of which is annexed, the Company agrees
that:
1. The Company will indemnify and hold harmless each Goldman Sachs entity (as
defined below) and each other Financial Adviser jointly and each of them
severally from and against all Liabilities (as defined below) suffered or
incurred by any Financial Adviser in relation to the Engagement except to
the extent provided in clauses 3 and 7.
2. In addition, the Company acknowledges that none of the Financial Advisers
will be liable to the Company in any way for any Liability suffered or
incurred by the Company in relation to the Engagement (whether arising out
of or in connection with any breach of contract or duty, or any negligence,
of a Financial Adviser, or otherwise) except to the extent provided in
clause 3.
3. The indemnity in clause 1, and the limitation of liability in clause 2,
will not apply to the extent that the relevant liability is proven by final
and conclusive judgement of a court of competent jurisdiction to have
resulted primarily from the wilful misconduct, fraud or negligence of the
Financial Adviser who is claiming the benefit of clauses 1 or 2, as
applicable (or on whose behalf such benefit is claimed).
4. In this deed:
(a) "Financial Adviser" means any of the following:
(i) a Goldman Sachs entity;
(ii) any director, partner, officer, employee, agent, controlling
persons (if any) or representative of any Goldman Sachs entity;
and
(iii) any person seconded to or engaged by any Goldman Sachs entity
for the purposes of the Engagement.
(b) "Goldman Sachs entity" means any of Goldman Sachs Australia L.L.C.;
Goldman, Sachs & Co.; Goldman Sachs International; The Goldman Sachs
Group L.P.; and any affiliated entity and any successor of any of the
foregoing.
(c) "Liability" means any claim, action, damages, loss, liability, cost or
expense, including without limitation:
(i) any claim, proceeding, investigation or enquiry (including without
limitation by a government or government authority); and
(ii) legal fees on a fully indemnity basis.
5. The Company will, upon demand, promptly pay all amounts the subject of, or
otherwise payable by virtue of, the indemnity contained in clause 1 of this
deed, payment being made directly to the person to whom it is due, unless a
Financial Adviser has paid the amount earlier, in which case the Company
must reimburse such Financial Adviser promptly on request.
6. The Company acknowledges that all advice given and assistance or other
services provided in connection with the Engagement is given or provided by
Goldman Sachs Australia L.L.C. or another Goldman Sachs entity itself and
not by any other Financial Adviser.
7. Without limiting clause 6, this deed does not oblige and shall not be
construed as imposing any obligation upon the Company to provide an
indemnity which is prohibited or is void pursuant to section 821 of the
Corporation Law, but in all other respects this letter shall be construed
fully in accordance with its terms.
8. If any part of this letter is void, unenforceable or illegal, that part
shall be severed and the remainder of this letter shall have full force and
effect.
9. The provisions of this letter are intended to be for the benefit personally
of each Financial Adviser and each such person may personally enforce the
indemnity and the limitation of liability arrangements for his or her or
its benefit.
<PAGE>
10. The indemnity and the limitation of liability arrangements contained in
this deed is a continuing obligation, may have multiple applications, is in
addition to any other rights of any Financial Adviser, and will survive any
termination or completion of the Engagement and of any arrangements or
other services arising out of or in connection with the Engagement or the
relationship established by the Letter of Engagement.
11. The indemnity and the limitation of liability arrangements contained in
this deed will be governed by and construed in accordance with the laws of
the State of New South Wales and each party submits to the non-exclusive
jurisdiction of the courts of that State and all courts competent to hear
appeals from those courts.
Executed as a deed.
SIGNED SEALED AND DELIVERED )
for OzEmail Limited )
by its duly authorised lawyer )
in the presence of:
/s/Ian McGregor /s/Mary-Jane Salier
_____________________________ _______________________________
Witness Lawyer
Name: Ian McGregor Name: Mary-Jane Salier
<PAGE>
Exhibit 4
THIS IS AN IMPORTANT DOCUMENT
IF YOU ARE IN DOUBT AS TO HOW TO DEAL WITH THIS BOOKLET, PLEASE CONSULT
YOUR PROFESSIONAL ADVISER
PART B STATEMENT
INFORMATION FOR SHAREHOLDERS
OZEMAIL LIMITED
ACN 066 387 157
THIS STATEMENT HAS BEEN PREPARED IN ACCORDANCE WITH THE AUSTRALIAN
CORPORATIONS LAW. OZEMAIL LIMITED IS ALSO SUBJECT TO UNITED STATES DISCLOSURE
REQUIREMENTS. A SCHEDULE 14D-9 PREPARED IN ACCORDANCE WITH THE U.S. SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED, ACCOMPANIES THIS STATEMENT.
PART B STATEMENT INCLUDING YOUR DIRECTORS' RECOMMENDATION IN RELATION TO THE
OFFER BY UUNET HOLDINGS
AUSTRALIA PTY LIMITED, A WHOLLY OWNED SUBSIDIARY OF
MCI WORLDCOM, INC. OZEMAIL LIMITED'S
DIRECTORS UNANIMOUSLY RECOMMEND ACCEPTANCE
OF THE OFFER IN THE ABSENCE OF A HIGHER OFFER.
Financial Advisers
GOLDMAN SACHS AUSTRALIA L.L.C.
<PAGE>
CONTENTS
<TABLE>
<S> <C>
Letter from the Company.............................................. 3
Your Directors' Recommendation....................................... 4
Statutory Information................................................ 6
Schedule 14D-9....................................................... Appendix A
Form 6-K for the three months ended 30 September 1998................ Appendix B
</TABLE>
CONTACTS FOR FURTHER INFORMATION
IN AUSTRALIA:
OZEMAIL GROUP LIMITED
Michael Hughes
Company Secretary
Telephone: (61-2) 9433-2410
Facsimile: (61-2) 9906-8623
GOLDMAN SACHS AUSTRALIA L.L.C.
Craig Simpson
Telephone: (61-2) 9320 1000
Facsimile: (61-2) 9320 1009
IN THE UNITED STATES:
TODD FRIEDMAN AT MORGEN WALKE
Telephone: 1-415-296-7383
This Statement is given pursuant to Part 6.3 and Part B of Section 750 of the
Corporations Law by OzEmail Limited ACN 066 387 157 in response to the Part A
Statement received from UUNET Holdings Australia Pty Limited dated 22 December
1998.
2
<PAGE>
8 January 1999
[LOGO]
OZEMAIL
To OzEmail Shareholders:
This letter accompanies OzEmail Limited's Part B Statement in response to
the Offer (the "Offer") by UUNET Holdings Australia Pty Limited ("UUNET
Australia"), a wholly-owned subsidiary of MCI WORLDCOM, Inc. ("MCI WorldCom")
to purchase all of the issued and outstanding Ordinary Shares of OzEmail (the
"Ordinary Shares"), including American Depositary Shares (the "ADSs," and
together with the Ordinary Shares, the "Securities"), each ADS evidencing ten
Ordinary Shares. The offer price is US$2.20 per Ordinary Share (or US$22.00
per ADS), net to the seller in cash.
For some time, the Directors have been exploring various strategic
alternatives for the Company to maximise shareholder value. These alternatives
have included raising additional capital to acquire or construct
communications infrastructure and entering into strategic alliances with
global telecommunications providers.
On December 12, 1998, OzEmail issued Ordinary Shares to UUNET Australia
representing 14.9% of the outstanding Ordinary Shares. UUNET Australia
announced the Offer on December 14, 1998. Each of Messrs Howard, Kennedy and
Turnbull, who together control approximately 45.7% of the outstanding Ordinary
Shares, has stated his intention to accept the Offer.
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE COMPANY'S
SHAREHOLDERS ACCEPT THE OFFER AND TENDER THEIR ORDINARY SHARES AND ADSS IN THE
OFFER, SUBJECT TO NO MORE FAVOURABLE OFFER BEING MADE.
In arriving at its recommendation, the Board of Directors gave careful
consideration to a number of factors described in the attached Part B
Statement lodged on January 5, 1999 with the Australian Securities and
Investments Commission and the Schedule 14D-9, attached thereto, filed on
January 7, 1999 with the U.S. Securities and Exchange Commission.
In addition to the attached Part B Statement and Schedule 14D-9 relating to
the Offer, also enclosed is the Offer to Purchase, together with related
materials, including an Acceptance and Transmittal Form to be used to tender
Ordinary Shares and a Letter of Transmittal to be used to tender ADSs. These
documents set forth the terms and conditions of the Offer and provide
instructions as to how to tender your Ordinary Shares and ADSs.
Because OzEmail is listed on the Australian Stock Exchange and the ADSs are
quoted on the Nasdaq National Market, the enclosed documents differ from
customary format and style because they have been prepared to comply with the
regulatory requirements of both Australia and the United States. We urge you
to read the enclosed material carefully.
If you are uncertain as to how to respond to the Offer or about its taxation
implications you should consult your financial or tax adviser. IN PARTICULAR,
SHAREHOLDERS SHOULD CAREFULLY READ THE PROCEDURES CONTAINED IN THE OFFER TO
PURCHASE REGARDING THE APPROPRIATE FORMS TO BE COMPLETED IN RESPECT OF UNITED
STATES WITHHOLDING TAX, INCLUDING THE LANGUAGE IN BOLD IN THE "INTRODUCTION
AND OFFER," SECTION OF THAT DOCUMENT.
If you have any questions in relation to the above, please do not hesitate
to contact any of the people listed on the opposite page.
Sincerely,
/s/ Malcolm B. Turnbull
/s/ Sean M. Howard MALCOLM B. TURNBULL
SEAN M. HOWARD CHAIRMAN OF THE BOARD
CHIEF EXECUTIVE OFFICER AND
DIRECTOR
3
<PAGE>
THE DIRECTORS OF OZEMAIL UNANIMOUSLY RECOMMEND
THAT SHAREHOLDERS ACCEPT UUNET AUSTRALIA'S OFFER IN THE ABSENCE OF A HIGHER
OFFER
DIRECTORS' RECOMMENDATIONS IN RELATION TO OFFER
. Having considered the terms of the Offer, each of the Directors of OzEmail,
namely Mr S Ezzes, Mr S Howard, Mr T Kennedy, Mr D Spence and Mr M Turnbull
desires to make, and considers that he is justified in making, a
recommendation in relation to the Offer.
. The Directors unanimously recommend that you accept UUNET Australia's Offer
in the absence of a higher offer. The Directors of OzEmail intend to accept
the Offer for their own shareholdings in the absence of a higher offer.
Further details of each of the reasons are provided below.
WHY YOU SHOULD ACCEPT UUNET AUSTRALIA'S OFFER IN THE ABSENCE OF A HIGHER OFFER
THE OFFER REPRESENTS AN ATTRACTIVE PREMIUM
The Offer Price is an approximate 50% premium to the weighted average
price of the ADSs quoted on the Nasdaq National Market over the three
months prior to UUNET Australia's announcement of the Offer on 14 December
1998. Because of the historic volatility of the price of the ADSs, the
Board believes it was necessary to look at a weighted average rather than
any single day's trading. In that three month period the ADSs have traded
as high as US$25.25 and as low as US$6.88. In addition, as a result of the
relatively small size of the Company's public float, the liquidity in the
Company's shares has been limited.
MAXIMISING SHAREHOLDER VALUE
The industry and markets within which the Company operates are becoming
increasingly competitive and are in a state of rapid change and
technological development.
To ensure the long term growth and prosperity of the Company in this
environment, the Directors have considered various alternatives for
investment in new infrastructure (through acquisition, construction or
joint venture) and strategic alliances with other telecommunications
providers. The Directors also considered various means of raising new
capital to finance those ventures.
Against this range of possibilities, the Directors consider that the
UUNET Australia Offer represents the best available alternative for
shareholders to maximise the value of their OzEmail shareholding. In
reaching this view the Directors took into account a number of factors
including:
(i) the financial condition, results of operations, cash flows, business
and prospects of the Company, including the prospects of the Company if it
remained independent;
(ii) the strategic alternatives available to the Company and analysis of
the viability of and risks associated with such alternatives;
(iii) the Company's recent history of seeking to finance such strategic
alternatives;
4
<PAGE>
(iv) the likelihood of proposals from other parties of an acquisition or
strategic business combination that would be more favourable to the Company
and its shareholders than the Offer;
(v) the strong condition of the stock markets in general, making this an
advantageous time for an acquisition transaction;
(vi) the alternative possibilities of potentially other interested parties
in the Internet services and communications industries, regarding a possible
strategic alliance, partnership, business combination, acquisition or similar
transaction with the Company; and
(vii) the Company's relatively small size for a publicly-traded company,
particularly in the communications industry, consequently placing the Company
at a competitive disadvantage with respect to companies having substantially
greater financial and other resources.
DISADVANTAGES OF CONTINUING AS A MINORITY SHAREHOLDER:
UUNET Australia will be in a position to acquire at least 60% of the
Company's capital by reason of announced acceptances of its Offer if it waives
its 90% acceptance condition. In these circumstances shareholders who do not
accept may continue as minority shareholders in OzEmail.
There are risks and disadvantages of being such a minority shareholder,
including:
(i) the loss of a control premium for their OzEmail shares (the control
premium is, broadly, the additional amount a bidder is prepared to pay for
shares to obtain control of a company); and
(ii) possible lack of liquidity and depth in trading of OzEmail shares. It
may be more difficult for shareholders to sell their shares at an attractive
price.
ABILITY TO WITHDRAW ACCEPTANCES
During the course of the Offer, there are no restrictions on the ability of
the Directors or shareholders to consider other offers, or restrictions on the
ability of shareholders to withdraw Securities tendered if another more
favourable offer is made. There is, however, no assurance that other offers
will be made.
The foregoing discussion of information and factors considered and given
weight by the Company's Board of Directors is not intended to be exhaustive.
In view of the variety of factors considered in connection with its evaluation
of the Offer, the Company's Board of Directors did not find it practicable to,
and did not quantify or otherwise assign relative weights to the specific
factors considered in reaching its determinations and recommendations. In
addition, individual members of the Company's Board of Directors may have
given different weights to different factors.
5
<PAGE>
STATUTORY INFORMATION
1. DIRECTORS' ENTITLEMENT IN OZEMAIL
The number, description and amount of marketable securities of OzEmail to
which each Director of OzEmail is entitled (within the meaning of the
Corporations Law) are set out below:
<TABLE>
<CAPTION>
BENEFICIALLY HELD NON-BENEFICIALLY HELD
-------------------- ------------------------
SHARES OPTIONS SHARES OPTIONS
---------- --------- ---------- -----------
<S> <C> <C> <C> <C>
S. Ezzes....................... 100,000 100,000 -- --
S. Howard...................... 33,500,000 -- -- --
T. Kennedy..................... 16,750,000 -- -- --
D. Spence...................... 2,833,000 2,042,600 -- --
M. Turnbull.................... 16,750,000 -- -- --
</TABLE>
2. WHETHER DIRECTORS INTEND TO ACCEPT OFFER
Each of the Directors of OzEmail by whom, or on whose behalf, shares in
OzEmail are held, intends to accept the Offer in respect of those shares in
the absence of a higher offer.
3. DIRECTORS' ENTITLEMENT IN UUNET AUSTRALIA
No Director of OzEmail is entitled (within the meaning of the Corporations
Law) to any marketable securities in UUNET Australia.
4. TRANSACTIONS IN UUNET AUSTRALIA BY OZEMAIL OR ASSOCIATES DURING PREVIOUS
FOUR MONTHS
Neither OzEmail nor any associate of OzEmail has acquired or disposed of
shares in UUNET Australia in the period of four months ending on the day
immediately before the day on which the Part A Statement was served on
OzEmail.
5. TRANSACTIONS IN OZEMAIL BY ASSOCIATES DURING PREVIOUS FOUR MONTHS
Except as set out below, there have been no acquisitions or disposals of
shares in OzEmail by any associate of OzEmail in the period of four months
ending on the day immediately before the day on which the Part A Statement was
served on OzEmail:
<TABLE>
<CAPTION>
NO. OF PRICE
ORDINARY SHARES/ PER
AMERICAN DEPOSITARY SHARE OR
ENTITY DATE SHARES ("ADS") TRANSACTION ADS
------ -------- ------------------- ----------- --------
<S> <C> <C> <C> <C>
D.M. Spence................ 30/9/98 12,500 ADSs Sale US$12.54
D.M. Spence................ 23/11/98 7,500 ADSs Sale US$15.00
D.M. Spence................ 24/11/98 5,000 ADSs Sale US$15.00
</TABLE>
7. AUTHORISATION OF PART B STATEMENT
None of the Directors of OzEmail voted against the resolution authorising
this Statement.
8. PROPOSED BENEFITS TO OFFICERS OF OZEMAIL
8.1 No prescribed benefit (not being an excluded benefit) will or may be
given to a person in connection with the retirement of a person from a
prescribed office in relation to OzEmail.
8.2 No prescribed benefit will or may be given to a prescribed person in
relation to OzEmail in connection with the transfer of the whole or any
part of the undertaking or property of OzEmail.
6
<PAGE>
9. OTHER AGREEMENTS BY DIRECTORS OF OZEMAIL
Except as set out below, there is no other agreement made between any
Director of OzEmail and any other person in connection with or conditional
upon the outcome of the Offer.
Pursuant to the terms of a letter agreement dated 7 August , 1997 (the
"Engagement Letter"), the Company retained Goldman Sachs Australia L.L.C.
("Goldman Sachs") to assist the Company as its financial adviser in
considering the desirability and feasibility of effecting various strategies
for maximising the Company's value to its shareholders, including, among other
things, a merger or sale of the Company. The Company has agreed to pay Goldman
Sachs a "transaction fee" of 2% of the aggregate value of a transaction (which
for purposes of the Engagement Letter means issues, sales or other disposals
of securities of the Company) accomplished in one or more transactions, as
well as reimbursement for expenses incurred. The transaction fee becomes
payable when control of 50% or more of the Company's ordinary shares is
acquired. Pursuant to the Engagement Letter, the Company has agreed to
indemnify Goldman Sachs and its directors, officers, agents, employees and
controlling persons for certain costs, expenses and liability, to which it
might be subjected arising out of its engagement as financial adviser. Malcolm
Turnbull, the Chairman of the Company's Board of Directors, is also the
Chairman and Managing Director of Goldman Sachs and is a partner of the
Goldman Sachs Group L.P.
10. INTERESTS OF DIRECTORS OF OZEMAIL IN CONTRACTS WITH UUNET AUSTRALIA
OzEmail and certain subsidiaries of OzEmail have entered into contracts in
the ordinary course of business with related entities of UUNET Australia.
Directors of OzEmail may be deemed to have an interest in those contracts.
Apart from those set out below, none of the Directors of OzEmail has an
interest in any contract entered into by UUNET Australia.
To support the dial-up Internet access services in Australia of UUNET
Technologies, Inc. ("UUNET Technologies"), a related entity of UUNET
Australia, since March 1998 OzEmail has provided to UUNET Technologies the
following services: (i) purchase and supply of telecommunication services
required for connection of customers to terminal servers at various points of
presence throughout Australia; (ii) purchase and supply of telecommunication
services required for the interconnection of terminal servers at these points
of presence back to a central point in Sydney, and (iii) housing of the
necessary equipment for such communications services. The parties currently
are negotiating a Master Agreement to govern the relationship. UUNET
Technologies has become a significant OzEmail customer. As of December 1998,
payments to OzEmail for such services totalled approximately US$600,000.
UUNET Technologies supplies a 6Mbps Internet Access service to Access One
Pty Limited, a wholly-owned subsidiary of the Company, at Palo Alto Internet
Exchange, California. The service is used as part of the Company's trans-
Pacific satellite link for connection of international Internet services to
the Company's network in Australia. The fee for this service is US$7,000 per
month.
MCI WorldCom provides a 45 Mbps link facility to the Company between the
Palo Alto Internet Exchange and the PanAmSat Earth Station in Napa Valley
which is used as part of the Company's trans-Pacific satellite link, for
connection of international Internet services to the Company's network in
Australia. The fee for this service is US$7,000 per month.
7
<PAGE>
In addition, OzEmail Interline Pty Limited ("OzEmail Interline"), the
Company's Internet telephony subsidiary, from time to time, has had co-
location agreements with MCI WorldCom in the United Kingdom and the United
States and UUNET Technologies from time to time, has provided OzEmail
Interline with connectivity in those two countries.
In addition, from time to time the management of the Company has discussed
with MCI WorldCom the possibility for collaboration with respect to the
construction and use of fiber in major Australian central business districts.
11. CHANGES IN OZEMAIL'S FINANCIAL POSITION
So far as is known to the Directors of OzEmail, the financial position of
OzEmail has not materially changed since the date of the last balance sheet
sent to shareholders being the balance sheet as at 31 December 1997, except as
set out below. The material changes set out below include summaries of
information in Appendix B. Holders of Securities should read Appendix B in its
entirety.
(i) On 29 May 1998, the Company's Ordinary Shares were listed on the
Australian Stock Exchange Limited ("ASX").
(ii) On 6 November 1998 OzEmail lodged with the ASX its report for the
period ended 30 September 1998. This report was presented in Australian
dollars and prepared in accordance with U.S. generally accepted accounting
principles ("GAAP"). A copy of that report is Appendix B to this Part B
Statement. Material changes in financial position arising from that report
are:
-- for the 9 months ended 30 September 1998, total revenue grew by 104% to
A$78,644,000 from A$38,557,000 in the 9 months ended 30 September 1997. The
net loss for the 9 months to 30 September 1998 was A$11,210,000 compared to
a net loss of A$9,003,000 for the same period in 1997;
-- in September 1998, the Company recognised an impairment charge of
A$1,000,000 in relation to an investment in preferred stock; and
-- in August 1998, the Company entered into a deed of settlement with
Solution 6 Holdings Limited in respect to a working capital adjustment for
the acquisition of Access One Pty Limited. The net impact of this
settlement resulted in an increase in goodwill arising on consolidation of
approximately A$1,340,000.
It should be noted that for U.S. filing purposes the Company prepares its
accounts in accordance with U.S. GAAP, including its report on Form 6-K
prepared for the quarter ended 30 September 1998.
Filings specifically prepared for the ASX are prepared under Australian
GAAP. With respect to the accounting treatment for the repurchase of Metro
Holding AG's ("Metro") 40% interest in OzEmail Interline, there are
significant differences between OzEmail's consolidated balance sheet under
U.S. GAAP and Australian GAAP.
OzEmail regained control of OzEmail Interline in April 1998 when it
increased its equity interest to 88% by acquiring Metro's 40% interest.
OzEmail has therefore consolidated OzEmail Interline from 15 April 1998, for
the purposes of Australian GAAP. OzEmail issued 5,400,000 Ordinary Shares
(equivalent to 540,000 ADSs) with a market value of US$2.2125 per share at
close of business on 15 April 1998 in consideration for the 40% of shares
acquired in OzEmail Interline giving rise to total consideration of
A$18,381,000. Metro also agreed to
8
<PAGE>
forgive a debt of A$2,043,000 owed by OzEmail Interline. This has been
reflected as part of the net cost of the additional 40% interest in OzEmail
Interline in OzEmail's balance sheet. On consolidation, these transactions
gave rise to goodwill of approximately A$18,976,000.
Balance sheets prepared under Australian GAAP present information giving
effect to the purchase by OzEmail of Metro's 40% interest in OzEmail Interline
as if it occurred at 15 April 1998. Metro originally acquired this 40%
interest in June 1997 from OzEmail (32%) and Ideata Pty Limited (8%).
However, for the purposes of U.S. GAAP, as the equity interest in OzEmail
Interline held by Metro was repurchased within one year of sale, in accordance
with the Securities and Exchange Commission Staff Accounting Bulletin Topic 5-
H OzEmail has restated its previously reported quarterly results to reverse
the gain recorded on the initial sale of the equity interest in OzEmail
Interline. OzEmail has also reversed previously recorded license revenues from
Metro recognised in the second quarter of 1997. As a result of the change in
ownership under Securities and Exchange Commission Staff Accounting Bulletin
Topic 5-H a restatement has also been made to the previously released
quarterly results. The impact of this restatement was that the monies received
from Metro were treated as deposits pending the issue of shares by OzEmail on
15 April 1998 and no profit was recorded in June 1997 in respect of license
fees received or profit on the original sale of the equity interest in OzEmail
Interline. This restatement has had the effect of OzEmail reporting for U.S.
GAAP purposes a net loss of A$16,768,0000 for the year ended 31 December 1997.
(iii) On 14 September 1998, OzEmail announced an additional investment in
the Southern Cross Cable Consortium to acquire fibre capacity between the
United States, New Zealand and Australia. The open commitments relating to the
Southern Cross Cable investment are US$41,580,000. Of this amount, US$3.78
million will be due by 28 February 1999, with the balance due when the cable
is ready for use, which is expected to be during the year 2000.
(iv) On 12 December 1998, OzEmail entered into a subscription agreement
whereby OzEmail issued 21,863,174 Ordinary Shares to UUNET Australia at a
purchase price equal to US$2.00 per share for a total subscription price of
US$43,726,384 ("Subscription Agreement"). This represents an aggregate of
14.9% of Ordinary Shares outstanding after such issuance. Pursuant to the
Subscription Agreement, the Company agreed further that, for a period of three
months from the date of the Subscription Agreement, not to issue and allot any
additional Ordinary Shares, except pursuant to existing rights under any
employee share option plan of the Company or an exercise of existing options.
The Company also agreed that in the event the Offer is terminated or that
UUNET Australia does not become entitled to proceed under the Australian
Corporations Law to compulsory acquisition of all of the Ordinary Shares, the
Company, upon request of UUNET Australia, will file a registration statement
under the U.S. Securities Act of 1933, relating to the sale of the Ordinary
Shares issued to it under the Subscription Agreement and any other Ordinary
Shares acquired by UUNET Australia pursuant to the Offer.
(v) The Directors of OzEmail are considering various alternatives for
enabling employees who hold unvested options to realise the value of such
options in connection with the Offer. One of the alternatives under
consideration is to provide a procedure for holders of such options to receive
a cash payment equal to the difference between the exercise price of the
options held by the option holders and the price at which any successful
takeover bid for OzEmail proceeds, in exchange for extinguishing the rights
attaching to such options. A takeover would mean a takeover scheme or takeover
announcement, scheme of arrangement or other circumstance by virtue of which
any person becomes the beneficial owner of more than 90% of the issued shares
in the capital of OzEmail or such less percentage, greater than
9
<PAGE>
50%, that the Board of Directors determines. If this alternative is adopted
OzEmail would incur an expense of approximately A$9.4 million if a takeover
were successful.
(vi) OzEmail has acquired 60% of the capital of SE Network Access Pty
Limited, a leading Internet service provider in South Australia with
approximately 16,000 customers for an acquisition price of approximately $1.5
million. OzEmail has the option to acquire the remaining 40% at any time
within the next 30 months. The exercise price of this option will vary
depending on the performance of the business.
(vii) The Company anticipates that its results for the year ended 31
December 1998 will be consistent with its expectations, except that the
Company has incurred one-time expenses in the quarter ended 31 December 1998
in relation to the deferred capital raising.
(viii) The Company is budgeting approximately A$3.0 million for Year 2000
compliance costs in 1999.
12. OTHER MATERIAL INFORMATION
There is no other information material to the making of a decision by an
offeree whether or not to accept the Offer being information which is known to
any of the Directors of OzEmail and which has not previously been disclosed to
the holders of Securities, except as set out in this Part B Statement, its
appendices, the Part A Statement, its appendices and the Offer, and as set
below.
This Statement has been prepared in accordance with the Australian
Corporations Law. OzEmail Limited is also subject to United States disclosure
requirements. A Schedule 14D-9 prepared in accordance with the U.S. Securities
Exchange Act of 1934, as amended, accompanies this Statement as Appendix A.
For a full description of UUNET Australia's and MCI WorldCom's intentions
with respect to OzEmail, see Section 11 of the Offer to Purchase.
13. INTERPRETATION
In this Statement, unless the context otherwise requires, words and phrases
to which a meaning is given by the Corporations Law have that meaning and,
where a special meaning is given for the purposes of Chapter 6 or a provision
of Chapter 6 of the Corporations Law, have that special meaning.
DATED 5 January 1999.
SIGNED for and on behalf of OZEMAIL LIMITED by Sean M. Howard and Malcolm B.
Turnbull, being two Directors of OzEmail who are authorised to so sign
pursuant to a resolution passed at a meeting of the Directors of OzEmail.
/s/ Sean M. Howard /s/ Malcolm B. Turnbull
- ------------------------------------- -------------------------------------
Director Director
10
<PAGE>
APPENDIX B
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13A-16 OR 15D-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDING SEPTEMBER 30, 1998
OZEMAIL LIMITED
ACN 066 387 157
OZEMAIL CENTRE,
39 HERBERT STREET,
ST. LEONARDS NEW SOUTH WALES
2065 AUSTRALIA
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(Indicate by check mark whether the registrant files or will file annual
reports under cover of Form 20-F or Form 40-F.)
FORM 20-F X FORM 40-F
(Indicate by check mark whether the registrant by furnishing the information
contained in this form is also thereby furnishing the information to the
commission pursuant to rule 12g3-2(b) under the Securities Exchange Act of
1934.)
YES NO X
<PAGE>
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1
Condensed Consolidated Interim Financial Statements
Condensed Consolidated Balance Sheet as of December 31, 1997 and
September 30, 1998.
Condensed Consolidated Statement of Operations for the Three Months
Ended September 30, 1997 and 1998 and for the Nine Months Ended
September 1997 and 1998.
Condensed Consolidated Statement of Cash Flows for the Nine Months
Ended September 30, 1997 and 1998.
Notes to Condensed Consolidated Interim Financial Statements
ITEM 2
Management's Discussion and Analysis of Financial Condition and Results
of Operations
SIGNATURES
AB-2
<PAGE>
OZEMAIL LIMITED
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... A$51,614 A$14,732
Restricted term deposits.......................... -- 2,797
Accounts receivable--trade, net of allowances of
A$889 and A$3,524, respectively.................. 8,427 15,653
Other receivables................................. 2,363 21
Current investments............................... -- 305
Income tax receivable............................. -- 1,679
Other current assets.............................. 2,520 1,884
--------- ---------
Total current assets............................ 64,924 37,071
Plant and equipment, net.......................... 27,179 31,255
Non-current investments........................... 1,559 535
Goodwill and other intangibles.................... 19,839 23,484
Non-current restricted term deposits.............. -- 4,230
Net deferred tax assets........................... 285 1,717
Other non-current assets.......................... -- 3,559
--------- ---------
Total assets.................................... A$113,786 A$101,851
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. A$19,936 A$22,010
Deferred consideration............................ 4,407 --
Current portion of financing--lease liability..... 3,836 4,393
Short term loan--due to Metro..................... 2,043 --
Accrued expenses and other liabilities............ 7,513 6,674
Deposits under agreements with Metro.............. 18,686 --
Income taxes payable.............................. 3,776 --
--------- ---------
Total current liabilities....................... 60,197 33,077
Non-current portion of financing--lease liability... 4,423 2,198
--------- ---------
Total liabilities............................... 64,620 35,275
--------- ---------
Minority equity interest............................ -- 808
Commitments and contingencies (Note 11)............. -- --
Shareholders' equity:
Ordinary Shares, 1,250,000,000 shares authorized;
111,000,010 and 124,819,500 shares issued and
outstanding, respectively........................ 444 499
Additional paid-in capital........................ 64,636 95,257
Accumulated deficit............................... (15,916) (27,126)
Dividends......................................... -- (2,858)
Other comprehensive income (loss), net............ 2 (4)
--------- ---------
Total shareholders' equity...................... 49,166 65,768
--------- ---------
Total liabilities and shareholders' equity.......... A$113,786 A$101,851
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
interim financial statements.
AB-3
<PAGE>
OZEMAIL LIMITED
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1997 1998 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues...................... A$ 14,728 A$ 29,210 A$ 38,557 A$ 78,644
Costs and expenses:
Cost of revenues--network
operations and support......... 3,967 7,350 10,976 19,890
Cost of revenues--communications
and other...................... 4,440 11,363 12,490 30,615
Sales and marketing............. 3,845 5,959 9,617 16,432
Product development............. 1,852 1,875 6,945 5,128
General and administrative...... 1,429 4,898 6,373 14,875
Amortization of goodwill and
other intangibles.............. -- 1,282 -- 3,772
--------- --------- --------- ---------
Total costs and expenses...... 15,533 32,727 46,401 90,712
--------- --------- --------- ---------
Loss from operations.............. (805) (3,517) (7,844) (12,068)
Other income (expense):
Foreign exchange gain (loss),
net ........................... (116) 62 (112) 297
Interest income................. 859 239 2,354 1,025
Other income (expense), net..... 59 (508) 612 (283)
Interest expense................ (96) (135) (219) (464)
--------- --------- --------- ---------
Loss before provision for income
taxes and minority equity
interest......................... (99) (3,859) (5,209) (11,493)
Income tax (expense) benefit...... (299) 169 (3,794) 270
Minority equity interest.......... -- 13 -- 13
--------- --------- --------- ---------
Net loss.......................... A$ (398) A$ (3,677) A$((9,003) A$(11,210)
========= ========= ========= =========
Basic loss per ordinary share..... A$ (0.004) A$ (0.030) A$ (0.087) A$ (0.093)
========= ========= ========= =========
Diluted loss per ordinary share... A$ (0.004) A$ (0.030) A$ (0.087) A$ (0.093)
========= ========= ========= =========
Weighted average ordinary shares
and share equivalents
--Basic......................... 103,663 124,509 103,555 120,497
========= ========= ========= =========
--Diluted....................... 103,663 124,509 103,555 120,497
========= ========= ========= =========
Basic loss per ADS................ A$ (0.042) A$ (0.295) A$ (0.870) A$ (0.930)
========= ========= ========= =========
Diluted loss per ADS.............. A$ (0.042) A$ (0.295) A$ (0.870) A$ (0.930)
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
interim financial statements.
AB-4
<PAGE>
OZEMAIL LIMITED
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1997 1998
-------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................ A$(9,003) A$(11,210)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 5,244 14,484
Allowance for bad and doubtful accounts................. 652 2,476
Assets written off...................................... 578 1,000
Write back of provisions and expenses incurred.......... (556) (374)
Loss/(gain) on disposal of plant and equipment.......... 44 (9)
Minority interest in PowerUp............................ -- (13)
Profit on sale of shares................................ -- (205)
Compensation expense on employee options................ -- 31
Gain on sale of investment in Softbank Interactive
Marketing.............................................. (775) --
Changes in assets and liabilities net of effects from
purchase of Camtech and PowerUp:
Accounts receivable..................................... (2,714) (9,247)
Restricted term deposits................................ -- (1,500)
Other current assets.................................... 38 (238)
Accounts payable........................................ 1,083 604
Accrued expenses and other current liabilities ......... 623 (1,571)
Increase/(decrease) in income taxes payable/receivable,
net...................................................... 3,690 (5,814)
Increase in deferred income taxes......................... 29 (1,048)
-------- ---------
Net cash used in operating activities..................... (1,067) (12,634)
-------- ---------
Cash flows from investing activities:
Sale of plant and equipment............................. 37 34
Sale of non current investment.......................... -- 24
Purchase of plant and equipment......................... (9,729) (13,329)
Deposits under agreements with Metro.................... 18,686 --
Purchase of trade names................................. -- (86)
Deposit payment for Southern Cross Cable................ -- (3,558)
Payment to acquire an additional 20% interest in
Voyager................................................ -- (861)
Cash acquired on the acquisition of PowerUp, net of cash
paid................................................... -- 96
Proceeds on redemption of options in Solution 6, net of
payment for options exercised.......................... -- 1,143
Cash received on settlement of Solution 6 working
capital adjustment..................................... -- 1,210
Payments for restricted term deposits related to
infrastructure purchases............................... -- (4,230)
Distribution to minority shareholders................... (896) --
-------- ---------
Net cash provided by/(used in) investing activities....... 8,098 (19,557)
-------- ---------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
interim financial statements.
AB-5
<PAGE>
OZEMAIL LIMITED
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1997 1998
-------- ---------
<S> <C> <C>
Cash flows from financing activities:
Net proceeds from sale and leaseback transactions....... A$ 5,000 A$ --
Payments under finance lease obligations................ (1,622) (3,237)
Payment of dividends.................................... -- (2,858)
Payments for restricted term deposits under finance
lease obligations...................................... -- (1,297)
Proceeds from common stock issued upon exercise of
options................................................ -- 2,719
Proceeds from issuance of ordinary shares............... 99 --
Proceeds from bank overdraft............................ 221 --
-------- ---------
Net cash provided by/(used in) financing activities....... 3,698 (4,673)
-------- ---------
Effect of exchange rate changes........................... (1) (18)
-------- ---------
Increase/(decrease) in cash............................... 10,728 (36,882)
Cash and cash equivalents at the beginning of the period.. 44,615 51,614
-------- ---------
Cash at the end of the period............................. A$55,343 A$ 14,732
======== =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
interim financial statements.
AB-6
<PAGE>
OZEMAIL LIMITED
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(DOLLARS AND SHARES IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
RETAINED OTHER TOTAL
ADDITIONAL EARNINGS COMPRE- SHARE-
PAID-IN (ACCUMULATED HENSIVE HOLDERS'
SHARES DOLLARS CAPITAL DEFICIT) DIVIDENDS INCOME EQUITY
------- ------- ---------- ------------ --------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1997................... 111,000 A$444 A$64,636 A$(15,916) A$ -- A$ 2 A$49,166
Issuance of Ordinary
Shares as part of
Purchase of OzEmail
Interline.............. 5,400 22 19,863 -- -- -- 19,885
Issuance of Ordinary
Shares as part of
Purchase of Camtech SA
Pty Limited............ 1,103 4 2,773 -- -- -- 2,777
Common stock issued upon
exercise of options.... 4,138 17 2,702 -- -- -- 2,719
Payment of dividends.... -- -- -- -- (2,858) -- (2,858)
Other comprehensive
income................. -- -- -- -- -- (6) (6)
Issuance of Ordinary
Shares as part of
Purchase of Power Up
Pty Limited............ 379 1 887 -- -- -- 888
Issuance of Ordinary
Shares as part of
Purchase of Access One
Pty Limited............ 2,800 11 4,396 -- -- -- 4,407
Net (loss).............. -- -- -- (11,210) -- -- (11,210)
------- ----- -------- --------- -------- ---- --------
Balance at September 30,
1998................... 124,820 A$499 A$95,257 A$(27,126) A$(2,858) A$(4) A$65,768
======= ===== ======== ========= ======== ==== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
interim financial statements.
AB-7
<PAGE>
OZEMAIL LIMITED
NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIALSTATEMENTS (UNAUDITED)
NOTE 1--THE COMPANY
The Company
OzEmail Limited (the "Company" or "OzEmail") and its subsidiaries provide
Internet access and other value added services in Australia and New Zealand.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The accompanying unaudited financial statements of the Company have been
prepared in accordance with generally accepted accounting principles in the
United States for interim financial information and in accordance with Article
10 of Regulation S-X. The condensed balance sheet as of December 31, 1997 and
September 30, 1998, the condensed statement of operations for the three and
nine months ended September 30, 1997 and 1998, and the condensed statement of
cash flows for the nine months ended September 30, 1997 and 1998 have been
prepared by the Company, and have not been audited. In the opinion of
management, these interim financial statements reflect all adjustments,
consisting of normal recurring adjustments necessary to present fairly the
financial position, results of operations, and cash flows of the Company at
September 30, 1998, and for all periods presented. Although the Company
believes that the disclosures in these financial statements are adequate to
make the information presented not misleading, certain information normally
included in financial statements and related footnotes prepared in accordance
with generally accepted accounting principles has been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange
Commission. The accompanying financial statements should be reviewed in
conjunction with the audited financial statements and notes thereto included
in the Company's Annual Report on Form 10-K for the year ended December 31,
1997.
The results for the three and nine month period ended September 30, 1998,
are not necessarily indicative of the results that may be expected for the
fiscal year ended December 31, 1998, or any future period.
The Company conducts most of its business in Australian dollars. Amounts
included in the financial statements and in notes herein are in Australian
dollars and referenced as "A$." References to "US$" are to United States
dollars and references to "NZ$" are to New Zealand dollars.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Principles of consolidation
The Consolidated Financial Statements include the accounts of OzEmail and
its controlled subsidiaries: Voyager; Access One; OzEmail Interline; OzEmail
Fax Investments; OzEmail West; OzEmail Technologies; Web Wide Media; Cyber
Publications and PowerUp. All intercompany accounts and transactions have been
eliminated.
AB-8
<PAGE>
OZEMAIL LIMITED
NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL
STATEMENTS (UNAUDITED)--(CONTINUED)
Losses in excess of minority interest in consolidated subsidiaries are fully
provided for by the Company.
Business Combinations
Business combinations which have been accounted for under the purchase
method of accounting include the results of operations of the acquired
business from the date of acquisition. Net assets of the companies acquired
are recorded at their estimated fair value at the date of acquisition.
Revenue recognition
The Company's net revenues consist primarily of hourly connect time and
monthly user charges for access to the Internet and are recognized over the
period such services are rendered, if collection of the resulting receivable
is deemed probable and provided no significant obligations remain outstanding.
Net revenues also include charges for one-time Internet registration; sales of
the Company's value added services; set-up and establishment fees; refiler
fees; and advertising revenues received from the provision of online content.
Revenues from registration, set-up and establishment fees are recognized at
the time registration, set-up and establishment services are completed and
related software, hardware and other services are delivered or provided.
Revenues for product sales and related Internet services are recognized as
products and services are delivered or rendered.
The Company has also derived revenues from: license fees for licensing of
the Internet telephony service offering network affiliates and in respect to
the timed charges for the provision of the OzEmail Phone Internet telephony
service in Australia.
In conjunction with providing hourly and monthly Internet access, the
Company provides free telephone technical support to its customers. Costs of
these services are expensed in the period incurred to match the related
revenues recognized from access to the Internet.
Cost of revenues
The Company segregates its cost of revenues into two categories: "network
operations and support" and "communications and other."
Cost of revenues--network operations and support includes: technical and
customer support staff; network and equipment maintenance and support;
depreciation expense on network equipment; amortization of capitalized
telecommunication installation costs and applicable overhead costs.
Cost of revenues--communications and other includes: monthly
telecommunications expenses; a fee payable as a percentage of revenue to the
New South Wales government for revenues sourced from government customers;
merchant commissions on credit card sales; cost of domain name registrations;
and cost of other products sold by the Company.
Earnings per share
Following is a reconciliation of the numerators and denominators of the
Basic and Diluted EPS computations for the periods presented below
(information has also been provided for Basic and Diluted earnings per ADS)
(dollars and shares in thousands, except earnings per share data):
AB-9
<PAGE>
OZEMAIL LIMITED
NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL
STATEMENTS (UNAUDITED)--(CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- --------------------
1997 1998 1997 1998
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Numerator
Net loss.......................... A$ (398) A$ (3,677) A$ (9,003) A$(11,210)
========= ========= ========= =========
Denominator for basic earnings per
ordinary share
Weighted ordinary shares.......... 103,663 124,509 103,555 120,497
Weighted contingently issuable
ordinary shares.................. -- -- -- --
--------- --------- --------- ---------
103,663 124,509 103,555 120,497
========= ========= ========= =========
Effect of dilutive securities..... -- -- -- --
--------- --------- --------- ---------
Denominator for diluted earnings
per ordinary share............... 103,663 124,509 103,555 120,497
========= ========= ========= =========
Loss per ordinary share
Basic........................... A$ (0.004) A$ (0.030) A$ (0.087) A$ (0.093)
========= ========= ========= =========
Diluted......................... A$ (0.004) A$ (0.030) A$ (0.087) A$ (0.093)
========= ========= ========= =========
Loss per ADS (1 ADS is equivalent
to 10 ordinary shares):
Basic........................... A$ (0.042) A$ (0.295) A$ (0.870) A$ (0.930)
========= ========= ========= =========
Diluted......................... A$ (0.042) A$ (0.295) A$ (0.870) A$ (0.930)
========= ========= ========= =========
Loss per ADS (1 ADS is equivalent
to 10 ordinary shares):
Basic........................... US$(0.030) US$(0.176) US$(0.593) US$(0.554)
========= ========= ========= =========
Diluted......................... US$(0.030) US$(0.176) US$(0.593) US$(0.554)
========= ========= ========= =========
</TABLE>
Net loss used in the computation of basic and diluted earnings per share is
not affected by the assumed issuance of stock under the Company's stock plans
and is therefore the same under both calculations.
Options to purchase approximately 8,554,000 and 5,948,000 Ordinary Shares
were outstanding for the three months ended September 30, 1997 and 1998,
respectively, but were excluded from the respective computation of diluted
earnings per share because the Company was in a net loss position during this
period and to include these options would be anti-dilutive.
Goodwill and other intangibles
Goodwill consists of the excess of cost over estimated fair value of net
assets acquired and certain other intangibles relating to purchase
transactions. Goodwill and intangibles are primarily amortized over 5 years.
In the third quarter of 1998, amortization costs associated with goodwill and
intangibles was A$1,282,000. The Company periodically evaluates the carrying
value of goodwill and other intangibles for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. If such circumstances arise, the Company would use an estimate of
the undiscounted value of expected future operating cash flows to determine
whether goodwill and intangibles are recoverable. If the review indicates that
goodwill or intangibles will not be recoverable, the associated asset will be
reduced to its estimated recoverable value in the respective period.
AB-10
<PAGE>
OZEMAIL LIMITED
NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL
STATEMENTS (UNAUDITED)--(CONTINUED)
Dividends
Any dividend payments made by the Company would, under the Australian
Corporations Law, be limited to the Company's aggregate of amounts available
for distribution, which aggregated A$3,840,000 at December 31, 1997 as
determined under the Australian Corporations Law. The Directors of the Company
declared a fully franked dividend of A$0.025 per share (A$0.25 per ADS) with
an Australian ex-dividend date of March 26, 1998 and an Australian dividend
payable date of March 27, 1998. The dividend was payable in Australian dollars
to those holders of Ordinary Shares. The Bank of New York, as depository for
the Company's ADS facility is responsible for distributing the dividend to
holders of ADSs in the US dollar equivalent of the Australian dollar payment.
The Bank of New York, as depositary set the ex-dividend date for holders of
ADSs as March 21, 1998 American Eastern Standard time, with a dividend payable
date of April 6, 1998 American Eastern Standard time.
Recent accounting pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" (SFAS 130), and SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information" (SFAS 131). The
Company will be required to adopt both statements for the year ending December
31, 1998. Under SFAS No. 130, companies are required to report in the
financial statements, in addition to net income, comprehensive income
including, as applicable, foreign currency items, minimum pension liability
adjustments and unrealized gains and losses on certain investments in debt and
equity securities. The Company has adopted SFAS 130 for the purposes of these
financial statements in this Form 6-K. The adoption of this standard did not
have a significant impact on the Company's financial statements and related
disclosures as net income is not currently materially different from
comprehensive income of the Company. SFAS No. 131 requires that companies
report separately, in the financial statements, certain financial and
descriptive information about operating segments, if applicable. The Company
is currently assessing its disclosure requirements under SFAS No. 131 for the
year ending December 31, 1998.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use". This Statement of Position (SOP)
provides guidance on accounting for the costs of computer software developed
or obtained for internal use and requires that computer software costs that
are incurred in the preliminary project stage, as defined by the standard,
should be expensed as incurred. Once the capitalization criteria of the SOP
have been met, external direct costs of materials and services consumed in
developing or obtaining internal-use computer software; payroll and payroll-
related costs for employees who are directly associated with and who devote
time to the internal-use computer software project (to the extent of the time
spent directly on the project) and certain other costs incurred when
developing computer software for internal use should be capitalized. The
Company has adopted this standard in the first quarter of 1998 the impact of
which was not material.
HEDGING
On June 15, 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and
AB-11
<PAGE>
OZEMAIL LIMITED
NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL
STATEMENTS (UNAUDITED)--(CONTINUED)
Hedging Activities" ("SFAS 133"). SFAS 133 is effective for all fiscal
quarters of all fiscal years beginning after January 1, 2000 for the Company.
SFAS 133 requires that all derivative instruments be recorded on the balance
sheet at their fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. From time to time the Company
has entered, and in the future, may enter into foreign currency contracts. It
is the Company's stated policy not to enter into swaps, derivatives or other
speculative securities for speculative purposes. The policy further requires
Board approval for expenditures in excess of US$500,000 for hedging
activities, and the approval of the Chief Financial Officer and either the
President or Chief Executive Officer for expenditures that are less than
US$500,000 but more than US$50,000. As of December 31, 1997 and September 30,
1998 there were no outstanding derivative instruments. As the future level of
derivative instruments that the Company will enter into is unknown, the
Company has not yet determined the impact that the adoption of SFAS 133 will
have on its results of operations and financial position.
NOTE 3--RESTRICTED TERM DEPOSITS
As at September 30, 1998, the Company had A$2,797,000 and A$4,230,000 of
cash held in current and non-current restricted term deposits, respectively,
as a condition of various telecommunication related agreements. The term
deposits classified as a non-current asset are denominated in US dollars
totaling US$2,520,000 and will not be available for use by the Company for at
least twelve months.
NOTE 4--PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Plant and equipment consisted of the following:
Telecommunications plant and equipment............ A$11,619 A$18,903
Telecommunications plant and equipment under
finance lease.................................... 6,522 7,104
Computer equipment................................ 13,112 17,474
Computer equipment under finance lease............ 3,739 4,827
Furniture and fittings............................ 1,746 2,682
Leasehold improvements............................ 1,917 2,359
-------- --------
38,655 53,349
Accumulated depreciation and amortization........... (11,476) (22,094)
-------- --------
Net plant and equipment............................. A$27,179 A$31,255
======== ========
</TABLE>
NOTE 5--ACQUISITIONS
On May 8, 1998, the Company signed a binding heads of agreement to acquire
55% of the share capital of PowerUp Pty Limited ("PowerUp"), an Internet
Service Provider ("ISP"), based in Queensland, after PowerUp acquired the
assets of Topten Pty Limited ("Topten", formerly known as WebCentral Pty
Limited), a web hosting business based in Queensland which was controlled by
the directors of PowerUp. The Company signed a variation agreement on August
31, 1998 to finalize the transaction and, on this date, issued 37,879 American
Depository shares, ("ADS"), and paid an amount of A$666,666 in return for 55%
of the share capital of PowerUp.
AB-12
<PAGE>
OZEMAIL LIMITED
NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL
STATEMENTS (UNAUDITED)--(CONTINUED)
NOTE 6--INTERNATIONAL TRANSMISSION CAPACITY
On September 8, 1998 the Company, by a wholly owned subsidiary, entered into
a deed with Southern Cross Cables Limited ("SX") to obtain capacity through an
indefeasible right of use ("IRU") of a fiber optic submarine cable network
which is being built to link Australia, New Zealand and the United States (the
"Cable") for consideration totaling US$44,100,000. As part of the deed, the
Company has acquired IRUs for 3.5 T-3 blocks. The capacity of each T-3 is
45Mbps.
Pursuant to the agreement, the Company was required to pay a discounted part
prepayment of US$2,217,000 that has been included in other non-current assets
in the accompanying September 30, 1998 Condensed Consolidated Balance Sheet.
The Company was also required to provide a bank guarantee of US$2,520,000 and
this amount is held in a non-current restricted term deposit as of September
30, 1998 (Note 3). As of September 30, 1998, the open commitments relating to
this agreement were US$41,580,000. Of this amount, US$3,780,000 will be due by
February 29, 1999 as either an irrevocable standby letter of credit or a
further part payment. The balance will be due upon the Cable's ready for
service date ("RFS") anticipated to be by the beginning of the year 2000. The
term of the agreement expires on the 15th anniversary of the RFS date,
however, it may be extended for a maximum of an additional five years at the
option of the Company.
NOTE 7--INCOME TAXES
Income before provision for income taxes in the third quarter of 1998
includes A$1,578,000 of losses relating to OzEmail Interline and A$275,000 of
losses relating to the New Zealand operations of Voyager.
Both OzEmail Interline and Voyager have incurred losses since their
formation. As of September 30, 1998, the Company had A$10,540,000 and
A$3,508,000 of net operating loss carryforwards associated with the OzEmail
Interline and Voyager operations, respectively. These loss carryforwards are
available to reduce future taxable income of either entity without any time
limitation. However, the loss carryforwards will expire in the event of a
change of ownership in these entities of greater than 51%. Management believes
that the weight of available evidence indicates that it is more likely than
not that these operations will not be able to utilize the net operating loss
carryforwards, and thus a full valuation allowance of A$3,794,000 and
A$1,263,000 has been recorded at September 30, 1998 with respect to OzEmail
Interline and Voyager losses, respectively. If future evidence indicates that
the Company will be likely to be able to utilize these operations' net
operating loss carryforwards in future years, the valuation allowance will be
reduced with a corresponding credit to the Company's tax expense. The
Australian corporate tax rate is a flat rate of 36%.
NOTE 8--EQUITY
On September 15, 1998, at a general meeting of shareholders, the
shareholders of the Company approved the issuance of up to an additional
50,000,000 new shares in connection with potential equity capital raising. If
the Company does not issue such new shares within three months of the general
meeting, it may be required to obtain a new shareholder approval for the
issuance of shares in excess of 15% of the outstanding share capital of the
Company. As of September 30, 1998 there were 124,819,500 Ordinary Shares
issued and outstanding,
AB-13
<PAGE>
OZEMAIL LIMITED
NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL
STATEMENTS (UNAUDITED)--(CONTINUED)
including 2,800,000 Ordinary Shares issued to Solution 6 Holdings Limited
("Solution 6") and 378,790 Ordinary Shares issued to the directors of PowerUp.
Limitations on foreign shareholdings requires the Company to obtain Foreign
Investment Review Board (the "FIRB") approval for the issuance of new equity.
The Company has sought approval from the FIRB for the issuance of up to
75,000,000 new shares. Any changed circumstances may require the Company to
seek further review from the FIRB.
On September 15, 1998, at a general meeting of shareholders, the
shareholders of the Company approved various amendments to the 1996 Employee
Stock Option Plan (the "Plan"). These amendments were to remove directors from
eligibility under the Plan, to change the maximum number of ordinary shares
which may be issued over the term of the Plan to 13,000,000 from 6,500,000 and
to specify that any options issued under the Plan will be issued on terms that
comply with the applicable ASX Listing Rules.
In June 1998, the Directors approved a grant of 500,000 options to an
employee to acquire 500,000 Ordinary Shares (equivalent to 50,000 ADSs) under
the Plan at an exercise price approximately 12% below the fair market value of
the Company's common stock at date of grant. Of these options, 50% vest in the
option holder on March 31, 1999 and 50% vest on March 31, 2000. The charge to
compensation expense during the third quarter of 1998 was $31,000.
In January 1998, a total of 1,080,000 options to acquire 1,080,000 Ordinary
Shares under the Plan were granted to employees at an exercise price equal to
the fair market value of the Company's common stock at the date of grant. Of
these options, 50% vest in the option holders on December 31, 1998, and 50%
vest on December 31, 1999.
NOTE 9--OTHER INCOME AND EXPENSES
An impairment charge of A$1,000,000 was recognised in relation to an
investment in preferred stock. The Directors are continuing to evaluate the
remaining carrying amount of A$535,000 for impairment. In September 1998,
Solution 6 redeemed 4,060,000 options held by OzEmail in Solution 6 at an
amount of A$0.30 per option, resulting in a cash receipt of A$1,218,000 and a
realised profit of A$219,000. OzEmail became the holder of shares in Data
Advantage Limited as part of the demutualisation of the Credit Reference
Association of Australia ("CRAA"). These shares were subsequently sold
resulting in a gain of A$205,000 being recorded in September 1998.
NOTE 10--CAPITAL COMMITMENTS
As at September 30, 1998 the Company had open commitments of A$3,966,000
relating to the purchase of various items of communications equipment,
computer hardware and software.
As of September 30, 1998, the open commitments relating to the Southern
Cross Cable agreement were US$41,580,000. Of this amount, US$3,780,000 will be
due by February 29, 1999 as either an irrevocable standby letter of credit or
a further part payment. The balance will be due upon the Cable's ready for
service date, ("RFS"), anticipated to be by the beginning of the year 2000.
The term of the agreement expires on the 15th anniversary of the RFS date,
however, it may be extended for a maximum of an additional five years at the
option of the Company. See Note 6 to the Interim Consolidated Financial
Statements.
AB-14
<PAGE>
OZEMAIL LIMITED
NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL
STATEMENTS (UNAUDITED)--(CONTINUED)
NOTE 11--CONTINGENCIES
Litigation
Prior to September 1998 OzEmail owned an 80% equity interest in Voyager,
with the remaining 20% equity interest held by the Minority Shareholders of
Voyager. OzEmail and the Minority Shareholders were parties to a Shareholders'
Agreement setting out certain rights and restrictions on the employment and
stock ownership of the Minority Shareholders. On January 2, 1997 the Minority
Shareholders provided formal notice to OzEmail that they wished to exercise
their option under the Shareholders Agreement to sell their shares in Voyager
to OzEmail at fair value. The parties could not reach a consensus on the price
at which such sale of shares would take place and the Minority Shareholders
commenced proceedings in September, 1997, in the High Court of New Zealand for
recovery of the share sale price. On September 11, 1998, the High Court ruled
in favor of the Minority Shareholders and ruled that the Company must purchase
the shares from the Minority Shareholders for NZ$1,010,000 (A$861,000) which
includes interest from the date of the commencement of the proceedings. The
Company purchased these shares on September 28, 1998. The Directors have
determined that of this amount, A$589,000 is to represent the acquisition of
the Minority Shareholders 20% interest in the share capital at fair value. The
balance of A$272,000 was offset against amounts previously provided by the
Company in relation to the settlement of the case.
On August 27, 1998 OzEmail and Solution 6 Holdings Limited ("Solution 6")
entered into a deed to settle a working capital adjustment in connection with
the Company's acquisition of Access One in November 1997. As part of the deed,
Solution 6 paid an amount of A$1,210,000 to OzEmail in final settlement of the
working capital adjustment.
From time to time, the Company has received, and may in the future receive,
notice of claims by other parties against the Company. As of the date of this
Form 6-K, the Company is not a party to any other legal proceedings, and is
not aware of any other pending or threatened proceedings the outcome of which,
in the opinion of management, would have a material adverse impact on the
Company's business, results of operations or financial condition.
NOTE 12--SUBSEQUENT EVENT
On November 2, 1998 the Directors approved a grant of 4,184,000 options to
various employees to acquire 4,184,000 Ordinary Shares (equivalent to 418,400
ADSs) under the 1996 Plan. The exercise price of the options was US$1.07 per
Ordinary Share which was above the market value of the Company's Ordinary
Shares at the date of grant. Of these options, 50% vest in the option holder
on October 31, 1999 and 50% vest on October 31, 2000. The options expire on
November 1, 2003.
AB-15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain statements contained in this report may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995, as amended which are subject to the "safe harbor" created by such
legislation. These statements include statements regarding the intent, belief
or current expectations of the Company or its management, which are affected
by a number of things including (i) user demand for Internet access and
services, including IP telephony, (ii) competition and the ability of the
Company to retain its Internet service customers and obtain new customers for
existing and proposed communications services in the face of strong and
increasing competition, (iii) pricing changes in the services offered by the
Company and its competitors, (iv) access to telecommunications transmission
capacity supplied by telecommunications carriers and any cost increases
associated with the supply of such capacity, (v) new service introductions by
the Company and its competitors, (vi) delays or expense in obtaining necessary
equipment for its existing and any proposed businesses, (vii) changes in and
obsolescence of technology, (viii) capital expenditures and other costs
relating to the maintenance and expansion of existing and any new operations,
(ix) demand for increased and different products and services in the
telecommunications industry generally, (x) economic conditions in the Internet
access and service industries and, more generally, the telecommunications
industry, (xi) general economic conditions, particularly in Australia, and
(xii) other factors discussed herein. Readers are cautioned not to place undue
reliance on those forward looking statements, which speak only as the date
hereof.
By their very nature, forward-looking statements involve inherent risks and
uncertainties, both general and specific. OzEmail cautions readers that a
number of important factors, including those described above, could cause
actual results or events to differ materially from the intentions, beliefs or
expectations expressed in such forward-looking statements or that the
intentions, beliefs or expectations expressed will not be achieved. OzEmail
cautions readers that the foregoing list of factors is not exhaustive.
OzEmail undertakes no obligation to release publicly the results of any
revisions to these forward-looking statements which may be made to reflect
events or circumstances after the date hereof, including without limitation,
changes in the Company's business, competitive position or acquisition
strategy or planned capital expenditures, or to reflect the occurrence of
unanticipated events.
OVERVIEW
The Company is the leading provider of comprehensive Internet services in
Australia (in terms of active customer accounts) providing services to
residential, educational, government and business customers, ranging from low-
cost dial-up to high performance continuous access services integrating the
Company's ISDN capabilities and its consulting expertise. The Company's is
also considering a number of options under each business plan which represent
a significant proposed change in its business, the Company believes that its
financial condition and results of operations for prior years may not be
necessarily indicative of the Company's future financial condition or results
of operations. The Company expects that it may initially incur operating
losses with respect to certain proposed communications infrastructure
projects, and that such projects will require substantial capital
expenditures. No assurances can be given that the Company will be able to
implement and manage successfully all or any portion of its new business
plans.
AB-16
<PAGE>
Since its inception in 1994, the Company's net revenue base has consisted
primarily of hourly connect-time and monthly user charges for Internet access.
Since 1995, the Company has identified the need to broaden its revenue base to
cater to the specific needs of the residential, business, educational and
government customer sectors, given the increasing level of price competition
in the Australian Internet service industry. As a consequence, revenues from
services such as ISDN and permanent modem connectivity to business,
educational and governmental customers and web hosting and advertising revenue
from the provision of value-added content to residential, business,
educational and governmental customers have represented, and are expected to
represent, an increasing percentage of total revenues.
In the 1998 year to date, the Company has taken a number of steps in order
to enhance its position in the Australian, Internet service market and in the
Internet telephony sector. The Company is currently pursuing several
communications infrastructure projects designed to reduce costs and expand its
service offerings to existing and new customers, particularly high margin
business customers. Such steps have included:
.a flat rate pricing plan marketed as OzMegaSaver for $44.95 per month;
. the introduction of prepaid phone cards by OzEmail to allow users to
place telephone calls over the internet from existing tone dial
telephones;
. the offering of a new service called MyMail which is a web-based e-mail
service available from anywhere on the Internet;
. the release of SouthernX which is an Australian and New Zealand e-mail
address directory;
. the release of Chaos Music Market, an on-line music catalogue with over
230,000 titles available on line enabling secure preview and purchase of
music;
. the release of itravel, a Web-based travel service that enables Internet
users to research, plan, book and pay for all their travel arrangements
online;
. the Company was chosen by Apple Computer Australia in September 1998 as
the only pre-installed Internet service provider for the Australian
release of iMac;
. the release of Chat City, a Web-based interactive service that allows
Internet users to chat real-time across the Internet; and
. the release of Answers explore which is a web based navigation and
directory service.
The Company has also sought to increase its position in the Australian
market through strategic acquisitions of Internet service operations with a
strong regional presence or a strong presence in markets in which the Company
seeks to improve its positioning. In November 1997, the Company acquired
Access One from Solution 6. The Company paid A$5,000,000 and agreed to issue
10,000,000 Ordinary Shares with an estimated fair value of A$15,740,000 to
Solution 6. On March 31, 1998, the Company acquired the Internet access
business assets and liabilities from Camtech an ISP in South Australia. The
consideration for the acquisition will be equal to two-thirds of Camtech's
revenues over the twelve months from March 31, 1998. The immediate payment to
Camtech was 1,103,240 Ordinary Shares valued at approximately A$2,777,000 at
US$16.53 per ADS. On May 8, 1998, the Company signed a binding heads of
agreement to acquire 55% of the share capital of PowerUp an ISP, based in
Queensland, after PowerUp acquired the assets of Topten, a web hosting
business based in Queensland which was controlled by the directors of PowerUp.
The Company signed a variation agreement on August 31, 1998 to finalize the
transaction and, on this date, issued 37,879 ADS's, and paid an amount of
A$666,666 in return for 55% of the share capital of PowerUp.
AB-17
<PAGE>
The Company's revenues are recognized over the period that the related
services are rendered. Most residential customers are automatically charged
via credit cards on a monthly basis. Business customers have the option to
receive monthly statements. In response to its exposure to credit card fraud
or malpractice, the Company states revenues net of estimated credit card
chargebacks. Australian banks have up to 180 days to issue a chargeback to
mail order or telephone order merchants. As a result, the Company largely
bears the risk of credit card fraud. The Company also maintains an allowance
for bad accounts receivable. Actual bad debt expenses do not include credit
card chargebacks.
Net revenues also include amounts for one-time Internet registration
charges, sales of the Company's value-added services, set-up and establishment
fees, and advertising revenues received through the provision of online
content. Revenues from registration, set-up and establishment fees are
recognized at the time such services are completed and related software,
hardware and other services are delivered and provided. Revenues associated
with other activities are recognized as services are rendered and products are
delivered. The Company also derives revenues from fees for the licensing of
OzEmail Interline's IP telephony services to network affiliates, refiler fees,
management and support fees from network affiliates and in respect of the time
charges and other fees for the provision of VoIP offerings by OzEmail in
Australia.
As a result of increased competition in the Australian Internet access and
services industry, the Company launched new frequent user plans in December
1996 for residential and business customers who regularly access the Internet.
These plans have resulted in reductions in the average selling price of the
Company's Internet access services. However, OzEmail was able to retain its
Australian peak connect-time charges at A$5.00 and an increase in average
monthly usage per customer through the nine months to September 1998. The
current industry environment continues to be very dynamic and competitive. As
a result of increasing competition in the Internet access and services
industry in Australia and New Zealand, including the entry of America Online
in Australia in October 1998, the Company expects to encounter significant
pricing pressure, which in turn could result in further reductions in the
average selling price of the Company's services and has resulted in the
development of a flat pricing initiative for Internet access. Commencing with
users of 56 kbps modems, in May 1998, the Company launched "OzMegaSaver", a
fixed monthly fee unlimited access pricing plan offered to Australian credit
card customers. The introduction of this plan and other reductions in pricing
structures may result in further reductions in the average selling price for
the Company's services. Further, the costs associated with such plans may
increase in the short-term. The impact of such price reductions, or any future
price reductions, on the Company's revenues or operating results cannot be
definitively ascertained due to the variety of factors affecting the Company's
revenues. However, if recent or future average selling price reductions do not
generate sufficient increases in the number of customers or in hourly Internet
usage and the Company is not able to compensate for such lost revenues with
revenues received from its growing educational, government and business
customer base, the Company's operating results could be adversely affected.
The Company expects average revenues received from educational, government and
business customers will be greater than average revenues received from dial-up
customers, as the range of services offered to educational, government and
business customers increases and as such customers become more dependent on
the Internet for the transfer of information.
Net access revenue will also be significantly affected by demand for
Internet access services. User demand for Internet access services generally
is a function of content provided and technology available to distribute and
disseminate information. Although the Company continues to develop and obtain
licenses for content and is continuously evaluating
AB-18
<PAGE>
technological developments, if user demand for Internet services fails to
grow, or grows more slowly than anticipated, the Company's results of
operations would be adversely affected.
The Company has historically experienced a decrease in demand during
Australia and New Zealand's summer months in December, January and February of
each year. There can be no assurance that the Company's results in any future
year will not be negatively affected by such trends.
Network operations and support costs as a percentage of revenues are
primarily related to the expansion of the Company's customer base. The most
significant element of network operations costs is the personnel costs
associated with the Company's technical services and customer support staff.
The Company intends to continue to expand its technical support and customer
service operations to support the Company's growing active customer base and
maintain the Company's market position as a premium provider of Internet
connectivity solutions. Accordingly, such costs can be expected to increase in
absolute terms and remain relatively stable as a percentage of net revenues.
Communications costs, particularly with respect to transmitting data from
overseas, principally the United States, to Australia, comprise a major
component of the Company's operating costs and the Company has been active in
initiating ways of reducing such costs. Such costs have historically comprised
an increasing percentage of revenues as a result of more information being
disseminated through the Internet. The Company has taken steps to offset the
increase in charges through the increased use of proxy servers, the use of
satellite links, the anticipated new use of alternative international links
(such as the Southern Cross Cable), rationalization of Access One's bandwidth
and systems, and new contractual arrangements with Telstra and Optus, the
primary telecommunications service providers in Australia. The Company
commenced satellite transmission in the first half of 1998 to download data
transmitted from the United States. The Company expects to be using the
satellite at full capacity in the fourth quarter. The Company is also
purchasing IRUs from Southern Cross to acquire bandwidth capacity between the
United States, Australia and New Zealand. The Company expects to be able to
use this cable for service during the second quarter of 2000. Communication
charges increased in the first quarter of 1998 as a result of the inclusion of
costs (primarily international) related to Access One bandwidth that was in
excess of usage requirements. This excess bandwidth was reduced in February
1998. The Company expects that it will be able to further decrease
communication costs as a percentage of revenue as the backbones of Access One
and OzEmail are rationalized. Also, in June 1998 the Company entered into an
agreement with Telstra for the migrating of traffic from Access One's and
OzEmail's existing networks to a single new ATM network for both companies, at
substantial cost savings. In addition, in May 1998, Telstra and OzEmail
entered into an interconnect agreement pursuant to which data between the two
companies' Internet networks will be transmitted, generating communications
cost savings to the Company. The Company has entered into interconnect
agreements with other ISP's and expects to enter into additional such
agreements in the future.
Sales and marketing expenses include: salaries, wages and related costs
associated with sales and marketing personnel; promotional expenses; expenses
related to the provision of the Company's online services; and allocable
overheads. To the extent competition increases, the Company expects that sales
and marketing expenses may increase.
Prior to 1998 product development expenses had been increasing significantly
both in absolute terms and as a percentage of revenues. This increase was
primarily attributable to product development costs associated with the
Company's IP telephony service offering. Although the Company is in the
process of developing other related products and services,
AB-19
<PAGE>
such product development costs have begun to decrease in absolute terms and as
a percentage of revenues since the commencement of the roll-out of IP
telephony products by network affiliates of OzEmail Interline.
General and administrative costs increased as a percentage of revenues in
1998 as compared to 1997. The increase is primarily attributable to the hiring
of additional staff to manage and implement new services such as OzEmail
Interline, and increases in bad and doubtful debt provisions. The Company has
also expanded its corporate reporting, billing and credit control personnel
levels since its inception in line with revenue and active customer account
growth. The Company believes that potential additional acquisitions of ISPs
and anticipated growth in revenue from OzEmail Interline will allow it to
spread its corporate overhead over a larger revenue base. The anticipated
increases in absolute terms are expected to arise from increased personnel
resulting from acquisitions and increases in revenues and active customer
accounts.
In conjunction with the acquisition of Access One, the Company accrued a
liability in the amount of A$965,000, to cover the anticipated costs of the
rationalization of Access One's network and the reduction of certain Access
One personnel performing duplicative tasks. The acquisition of Access One has
had a negative impact on the Company's profitability in the nine months to
September 30, 1998 because the Company incurred costs associated with the
rationalization and integration of Access One's network with OzEmail's
network, in addition to the amounts accrued. However, the Company has begun
and intends to continue creating efficiencies that it believes can be
generated through the elimination of duplicated infrastructure between OzEmail
and Access One and the rationalization of excess bandwidth capacity used for
transmission of data from the United States.
RESULTS OF OPERATIONS
The following table sets forth consolidated operating results of the Company
as a percentage of net revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- --------------
1997 1998 1997 1998
------ ------- ------ ------
<S> <C> <C> <C> <C>
Net revenues.................................. 100% 100% 100% 100%
Costs and expenses:
Cost of revenues--network operations and
support.................................... 26.9 25.2 28.5 25.3
Cost of revenues--communications and other.. 30.1 38.9 32.4 38.9
Sales and marketing......................... 26.1 20.4 24.9 20.9
Product development......................... 12.6 6.4 18.0 6.5
General and administrative.................. 9.7 16.8 16.5 18.9
Amortization of goodwill and other
intangibles................................ 0.0 4.4 0.0 4.8
------ ------- ------ ------
Total costs and expenses.................. 105.4 112.1 120.3 115.3
------ ------- ------ ------
Loss from operations.......................... (5.4) (12.1) (20.3) (15.3)
Foreign exchange gain (loss), net............. (0.8) 0.2 (0.3) 0.4
Interest income (expense), net................ 5.2 0.4 5.5 0.7
Other income (expense), net................... 0.4 (1.7) 1.6 (0.4)
------ ------- ------ ------
Loss before provision for income taxes........ (0.6) (13.2) (13.5) (14.6)
------ ------- ------ ------
Net loss...................................... (2.7)% (12.6)% (23.3)% (14.3)%
====== ======= ====== ======
</TABLE>
AB-20
<PAGE>
Three Months Ended September 30, 1998 Compared to Three Months Ended
September 30, 1997
Net Revenues: Total net revenues grew by 98.3% to A$29,210,000 in the third
quarter of 1998 from A$14,728,000 in the third quarter of 1997. The increase
in net revenues was attributable to the inclusion of Access One sales revenue
following its acquisition in November 1997; the inclusion of Camtech sales
revenue following the acquisition by the Company of the Camtech ISP business
in March 1998 and the inclusion of PowerUp sales revenue following its
acquisition in August 1998. The increase in net revenues was also attributable
to: growth in the number of active business and residential customers using
the Company's services and increases in billable hours; and increased revenue
from the usage of ISDN connections and permanent modems. As of September 30,
1998, the Company's active customer base consisted of approximately 247,700
active customer accounts as compared to approximately 127,200 active customer
accounts as at September 30, 1997.
Cost of Revenues--Network Operations and Support. Cost of revenues--network
operations and support includes costs related to technical and customer
support staff; network and equipment maintenance and support; depreciation,
amortisation and operating lease rental expense on network equipment;
amortization of capitalized telecommunication installation costs; and
applicable overhead costs. Cost of revenues--network operations and support
increased 85.3% to A$7,350,000 in the third quarter of 1998 from A$3,967,000
in the third quarter of 1997, but decreased as a percentage of net revenues to
25.2% from 26.9%. The increase in cost of revenues in absolute terms was
primarily attributable to: network operations and support costs following the
Company's acquisition of Access One in November 1997; an increase in
infrastructure costs and associated maintenance, depreciation and amortisation
charges; and increased staffing costs as a result of expansion of the
Company's customer support staff in order to enhance the level of customer
service and meet the subscription growth of the Company. The decrease in cost
of revenues--network operations and support as a percentage of net revenues
was primarily attributable to economies of scale achieved by subsidiaries that
have been acquired or have commenced accruing revenue since September 30,
1997, particularly through Access One, which has lower technical support and
customer support staffing levels than OzEmail because of its mix of customers.
Cost of Revenues--Communications and Other. Cost of revenues--communications
and other includes: monthly telecommunications expenses; a fee payable as a
percentage of revenue to the New South Wales government for revenues sourced
from government customers; merchant commissions on credit card sales; cost of
domain name registrations, refiler fees; and cost of other products sold by
the Company. Cost of revenues--communications and other increased 155.9% to
A$11,363,000 in the third quarter of 1998 from A$4,440,000 in the third
quarter of 1997, and increased as a percentage of net revenues to 38.9% from
30.1%, respectively. The increase in cost of revenues--communications and
other in absolute terms was primarily attributable to: the acquisition of
Access One, increased usage of the Internet by active customer accounts;
increased megabyte usage due to the adoption of higher-speed modems by the
Company's active customer accounts, increases in permanent modem connections;
increases in customer numbers and expansion of the host system. The
introduction of a flat rate pricing structure and increases in the number of
and usage by users, has resulted in a twofold increase in average megabytes
per dial-up subscriber compared to the quarter ended September 30, 1997. Since
the first quarter of 1998, the Company has taken various steps to reduce
communications costs; which include the use of satellite transmission, the
rationalisation of excess bandwidth capacity and entering into interconnect
agreements. These infrastructure initiatives have resulted in cost of
revenues--communications and other to decrease as a percentage of revenues
since the first quarter of 1998 despite the increases in megabyte usage over
this time.
AB-21
<PAGE>
Sales and Marketing. Sales and marketing expenses include: sales and
marketing personnel; promotional expenses; expenses related to the provision
of the Company's online content services; and allocable overheads. Specific
marketing costs include advertising, co-operative disk bundling with computer
hardware and modem manufacturers and retailers, computer fairs and
registration starter disks. Sales and marketing expenses increased 55.0% to
A$5,959,000 in the third quarter of 1998 from A$3,845,000 in the third quarter
of 1997, but decreased as a percentage of net revenues to 20.4% from 26.1%,
respectively. The increase in sales and marketing expenses in absolute terms
was primarily attributable to an increase in the cost of salaries and wages
related to the hiring of additional sales staff. The decrease in sales and
marketing expenses in percentage terms was attributable to achieving economies
of scale in sales and marketing activities on the acquisition of subsidiaries,
particularly Access One.
Product Development. Product development expenses include: development of
the OzEmail Interline Internet telephony related products/software; research
and development costs; salaries of engineering staff; and allocable overheads.
Product development expenses increased slightly to A$1,875,000 in the third
quarter of 1998 from A$1,852,000 in the third quarter of 1997, and decreased
as a percentage of net revenues to 6.4% from 12.6%. The decrease in product
development costs was primarily attributable to significant amounts spent on
the development of OzEmail Interline technologies during 1997.
General and Administrative. General and administrative expenses include:
expenses related to administrative staff; depreciation of non-network
equipment; travel expenses of management; allocable overheads; and allowance
for bad and doubtful accounts and bank charges. General and administrative
expenses increased 242.8% to A$4,898,000 in the third quarter of 1998 from
A$1,429,000 in the third quarter of 1997, and increased as a percentage of net
revenues to 16.8% from 9.7%. The increase in general and administrative
expenses was primarily attributable to: hiring of additional staff; an
increase in the provision for doubtful debts, consulting costs on the proposed
capital raising and inclusion of Access One, Camtech and PowerUp general and
administrative expenses following their acquisitions in November 1997, March
1998 and August 1998 respectively.
Amortization of Goodwill and Other Intangibles. Amortization of goodwill and
other intangibles relates to the excess of cost over estimated fair value of
net assets acquired and certain other intangibles relating to purchase
transactions. Goodwill and intangibles are amortized over five years.
Amortization of goodwill and other intangibles of A$1,282,000 recorded in the
third quarter of 1998 primarily related to the acquisition of Access One and
Camtech.
Foreign exchange gain, net. Foreign exchange gains increased to A$62,000 in
the third quarter of 1998 from a loss of A$116,000 in the third quarter of
1997. The increase is a result of the conversion to Australian dollars of
monies held in US dollar bank accounts.
Interest Income (Expense), Net. Interest income decreased to A$239,000 in
the third quarter of 1998 from A$859,000 in the third quarter of 1997. The
decrease was primarily attributable to a decrease in short-term Australian
interest rates and a reduction in cash balances in the third quarter of 1998
as compared to the third quarter of 1997. Interest expense, increased to
A$135,000 in the third quarter of 1998 from A$96,000, in the third quarter of
1997 primarily due to an increase in the outstanding capital leases in the
quarter ended September 30, 1998 compared to the quarter ended September 30,
1997.
Other Income (Expense), Net. Other expense of A$508,000 in 1998 related
primarily to an impairment charge of A$1,000,000 in relation to an investment
in preferred stock. This
AB-22
<PAGE>
was offset by a gain of A$205,000 on the sale of shares and a gain of
A$219,000 on the redemption of options in Solution 6.
Income Taxes. The Company recorded tax benefit of A$169,000 in the third
quarter of 1998 compared to a tax expense of A$299,000 in the third quarter of
1997. The reduction is due to booking OzWest tax losses and tax adjustments
resulting from the lodging of the tax returns for the year ended 31 December
1997.
Minority Interest. A minority interest on consolidation of A$13,000 was
recorded in the third quarter of 1998 due to the acquisition of a 55%
controlling interest in the share capital of PowerUp who recorded a loss from
the date of acquisition to September 30, 1998.
Net Loss. The net loss for the third quarter of 1998 increased to
A$3,677,000 from A$398,000 in the third quarter of 1997, representing an
increase of A$3,279,000. The increase in the net loss is primarily
attributable to goodwill amortisation on the acquisition of Access One and
Camtech of A$1,282,000 and increased general and administrative costs due to
additional staff, increases in the provision for doubtful debts and inclusion
of Access One, Camtech and PowerUp general and administrative expenses
following their acquisitions in November 1997, March 1998 and August 1998
respectively.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September
30, 1997
Net Revenues: Total net revenues grew by 104.0% to A$78,644,000 in the nine
months to September 1998 from A$38,557,000 in the nine months to September
1997. The increase in revenues was attributable primarily to the inclusion of
Access One sales revenue following its acquisition in November 1997, the
inclusion of Camtech sales revenue; which was acquired on March 31, 1998 and
the inclusion of PowerUp sales revenue, which was acquired on 31 August 1998.
The increase in net revenues was also attributable to growth in the number of
active enterprise and residential customers using the Company's services and
increases in billable hours; and increased revenue from the usage of ISDN
connections and permanent modems. As of September 30, 1998, the Company's
active customer base consisted of approximately 247,700 active customer
accounts as compared to approximately 127,200 active customer accounts as at
September 30, 1997.
Cost of Revenues--Network Operations and Support. Cost of revenues--network
operations and support increased 81.2% to A$19,890,000 in the nine months to
September 30, 1998 from A$10,976,000 in the nine months to September 30, 1997,
but decreased as a percentage of net revenues to 25.3% from 28.5%,
respectively. The increase in cost of revenues in absolute terms was primarily
attributable to: inclusion of Access One network operations and support costs
following the Company's acquisition of Access One in November 1997; an
increase in infrastructure costs and associated maintenance, depreciation and
amortisation charges and increased staffing costs as a result of expansion of
the Company's customer support staff in order to enhance the level of customer
service and meet the subscription growth of the Company. The decrease in cost
of revenues--network operations and support as a percentage of net revenues
was primarily attributable to economies of scale achieved by subsidiaries that
have been acquired or have commenced accruing revenue since June 30, 1997,
particularly through Access One, which has lower technical support and
customer support staffing levels than OzEmail because of its customer mix.
Cost of Revenues--Communications and Other. Cost of revenues--communications
and other increased 145.1% to A$30,615,000 in the nine months to September 30,
1998 from A$12,490,000 in the nine months to September 30, 1997, and increased
as a percentage of net
AB-23
<PAGE>
revenues to 38.9% from 32.4%, respectively. The increase in cost of revenues
was primarily attributable to: the acquisition of Access One, increased usage
of the Internet by active customer accounts; increased megabyte usage due to
the adoption of higher-speed modems by the Company's active customer accounts,
increases in permanent modem connections; increases in customer numbers and
inclusion of Access One communications costs that include dedicated leased
bandwidth capacity to the United States that was in excess of usage
requirements. The introduction of a flat rate pricing structure and increases
in the number of and usage by users has resulted in a twofold increase in
average megabytes per dial-up subscriber compared to the nine months to
September 30, 1997. Since the first quarter of 1998, the Company has taken
various steps to reduce communications costs; which include the use of
satellite transmission, the rationalisation of excess bandwidth capacity and
entering into interconnect agreements. These infrastructure initiatives have
resulted in cost of revenues--communications and other as a percentage of
revenues to remain constant with the six months to June 30, 1998 despite the
increases in megabyte usage over this time.
Sales and Marketing. Sales and marketing expenses increased 70.9% to
A$16,432,000 in the nine months to September 30, 1998 from A$9,617,000 in the
nine months to September 30, 1997, but decreased as a percentage of net
revenues to 20.9% from 24.9%, respectively. The increase in sales and
marketing expenses in absolute terms was primarily attributable to an increase
in the cost of salaries and wages related to the hiring of additional sales
staff and additional amounts spent in the second quarter of 1998 in
anticipation of the arrival of a major competitor which occurred in the third
quarter of 1998. The decrease in sales and marketing expenses in percentage
terms was attributable to achieving economies of scale in sales and marketing
activities on the acquisition of subsidiaries, particularly Access One.
Product Development. Product development expenses decreased to A$5,128,000
in the nine months to September 30, 1998 from A$6,945,000 in the nine months
to September 30, 1997, and decreased as a percentage of net revenues to 6.5%
from 18.0%, respectively. The decrease in product development costs was
primarily attributable to significant amounts spent on the development of
OzEmail Interline technologies during 1997.
General and Administrative. General and administrative expenses increased
133.5% to A$14,875,000 in the nine months to September 30, 1998 from
A$6,373,000 in the nine months to September 30, 1997, and increased as a
percentage of net revenues to 18.9% from 16.5%, respectively. The increase in
general and administrative expenses was primarily attributable to: hiring of
additional staff; increases in the provision for doubtful debts; listing costs
associated with completing a compliance listing on the Australian Stock
Exchange in May 1998; ("ASX"); legal and consulting costs on the proposed
capital raising and inclusion of Access One, Camtech and PowerUp general and
administrative expenses following their acquisitions in November 1997, March
1998 and August 1998 respectively.
Amortisation of Goodwill and Other Intangibles. Amortization of goodwill and
other intangibles of A$3,772,000 recorded in the nine months to September 30,
1998 primarily related to the acquisition of Access One and the Internet
business of Camtech.
Foreign exchange gain, net. Foreign exchange gains increased to A$297,000 in
the nine months to September 30, 1998 from a loss of A$112,000 in the nine
months to September 30, 1998. The increase is a result of the conversion to
Australian dollars of monies held in US dollar bank accounts.
Interest Income (Expense), Net. Interest income decreased to A$1,025,000 in
the nine months to September 30, 1998 from A$2,354,000 in the nine months to
September 30, 1997. The decrease was primarily attributable to a decrease in
short-term Australian interest rates and a reduction in cash balances in the
nine months to September 30, 1998 as compared to
AB-24
<PAGE>
the nine months to September 30, 1997. Interest expense, increased to
A$464,000 in the nine months to September 30, 1998 from A$219,000, in the nine
months to September 30, 1997 primarily due to an increase in the outstanding
capital leases over the period.
Other Income (Expense), Net. Other expense increased to A$283,000 in the
nine months to September 30, 1998 from other income of A$612,000 in the nine
months to September 30, 1997. Other income in the nine months to September 30,
1997 included a profit of A$775,000 from the sale of the Company's Web Wide
Media business. Other expense in the nine months to September 30, 1998
included an impairment charge of A$1,000,000 in relation to an investment in
preferred stock. This was offset by a gain of A$205,000 on the sale of shares,
a gain of A$219,000 on the redemption of options by Solution Six and the
recognition of a deferred profit from the sale and lease-back of assets in the
nine months to September 30, 1998 of A$190,000.
Income Taxes. The Company recorded a tax benefit of A$270,000 in the nine
months to September 30, 1998 compared to tax expense of A$3,794,000 in the
nine months to September 30, 1997. The reduction in income tax expense is
primarily due to the sale of the licence to Metro in the second quarter of
1997 being taxable under Australian Taxation law.
Minority Interest. A minority interest on consolidation of A$13,000 was
recorded in September 1998 due to the acquisition of a 55% controlling
interest in the share capital of PowerUp.
Net loss. Net loss increased to A$11,210,000 in the nine months to September
30, 1998 from A$9,003,000 in the nine months to September 30, 1997. Excluding
the effect of income taxes, net loss increased 120.6%. This is primarily
attributable to goodwill amortisation on the acquisition of Access One and
Camtech of A$1,282,000 and increased general and administrative costs due to
additional staff, increases in the provision for doubtful debts and inclusion
of Access One, Camtech and PowerUp general and administrative expenses
following their acquisitions in November 1997, March 1998 and August 1998
respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations to date through cash
flow from operations, shareholder loans, capital leases and the issuance of
equity securities. During the nine-month period ended September 30, 1998, the
Company's Internet access business partially funded the continued development
of OzEmail Interline and the on-going rationalization of Access One's
operations with that of OzEmail.
Net cash flows used in operating activities in the nine months to September
30, 1998 totaled A$12,634,000 compared to net cash flows used in operating
activities of A$1,067,000 in the nine months to September 30, 1997. The
increase in net cash flows used in operating activities in the nine months to
September 30, 1998 as compared to the nine months to September 30, 1997 is
primarily attributable to: tax payments of A$6,012,000 relating to the tax
year ended December 31, 1997; A$10,000,000 utilized to reduce an accrual for
communications costs and increased costs associated with the continual
development of OzEmail Interline. This was offset by an increase in the
addback of non-cash charges such as depreciation and amortisation and
increases in the amount set aside to the provision for doubtful debts.
Net cash flows used in investing activities in the nine months to September
30, 1998 totaled A$19,557,000 as compared to net cash flows used in investing
activities of A$10,588,000, (excluding A$18,686,000 of cash received in 1997
related to the Metro transactions), in the nine months to September 30, 1997.
The increase in net cash flows used
AB-25
<PAGE>
in investing activities in the nine months to September 30, 1998 is due to a
deposit of A$3,558,000 in connection with the purchase of IRU capacity in the
Southern Cross Cable, A$4,230,000 of investments in restricted term deposits
related to infrastructure purchases, a payment of A$861,000 for the remaining
20% of share capital in Voyager and increases in the acquisition of capital
equipment of A$3,600,000 to upgrade existing hardware and expand the range of
services offered by the Company. This has been offset to some extent by
A$1,210,000 received on the settlement of the working capital adjustment with
Solution 6 and A$1,143,000 received on the redemption of options by Solution
6, net of options exercised.
Net cash flows used in financing activities totaled A$4,673,000 in the nine
months to September 30, 1998, as compared to net cash flows provided by
financing activities of A$3,698,000 in the nine months to September 30, 1997.
The increase in net cash flows used in financing activities in the nine months
to September 30, 1998 was primarily attributable to the payment of dividends;
and increases in payments made under capital lease obligations which require
an amount of A$1,297,000 equivalent to the outstanding lease liability at
September 30, 1998 to be placed in a restricted term deposit, offset in part
by proceeds received on the exercise of options by a Director and employees of
the Company. Proceeds from a sale and leaseback transaction totaling
A$5,000,000 were received in the nine months ended September 30, 1997. No such
transaction was entered into in the nine months ended September 30, 1998.
The Company believes that its cash and cash equivalents of A$14,732,000,
which excludes amounts held in restricted term deposits of A$7,027,000, as at
September 30, 1998 will be sufficient to meet its presently anticipated
working capital requirements. In connection with its contemplated business
plans to participate in communications infrastructure projects, the Company is
considering bank financing which may be used to make the February payment of
A$3,780,000 for its acquisition of an IRU in the Southern Cross Cable. The
Company announced in August of this year a proposed capital raising of up to
US$250,000,000 in the form of equity and debt. As a result of changed market
conditions since this announcement, the Company has decided to defer the
proposed capital raising, but is considering various options to finance and
pursue certain of the projects contained in it's business plans, including
capital raisings, if and when market conditions make such an option practical.
There can be no assurance that the Company will be able to obtain the funds
necessary to finance the open commitments of A$41,580,000 for its acquisition
of an IRU in the Southern Cross Cable, or other communications infrastructure
activities, on terms favourable to the Company, or at all. As a result, the
Company may be required to reduce the scope and/or change the nature of its
plans to pursue communications infrastructure related activities.
On September 15, 1998, at a general meeting of shareholders, the
shareholders of the Company approved the issuance of up to an additional
50,000,000 new shares in connection with potential equity capital raising. If
the Company does not issue such new shares within three months of the general
meeting, it may be required to obtain a new shareholder approval for the
issuance of shares in excess of 15% of the outstanding share capital of the
Company. As of September 30, 1998 there were 124,819,500 Ordinary Shares
issued and outstanding, including 2,800,000 Ordinary Shares issued to Solution
6 Holdings Limited ("Solution 6") and 378,790 Ordinary Shares issued to the
directors of PowerUp. Limitations on foreign shareholdings requires the
Company to obtain Foreign Investment Review Board (the "FIRB") approval for
the issuance of new equity. The Company has sought approval from the FIRB for
the issuance of up to 75,000,000 new shares. Any changed circumstances may
require the Company to seek further review from the FIRB.
On September 15, 1998, at a general meeting of shareholders, the
shareholders of the Company approved various amendments to the 1996 Employee
Stock Option Plan (the
AB-26
<PAGE>
"Plan"). These amendments were to remove directors from eligibility under the
Plan, to change the maximum number of ordinary shares which may be issued over
the term of the Plan to 13,000,000 from 6,500,000 and to specify that any
options issued under the Plan will be issued on terms that comply with the
applicable ASX Listing Rules.
This report does not constitute an offer of securities. Any offering of
securities will be made by means of a prospectus. In the future, the Company
may also seek to expand its operations by making acquisitions or entering into
joint ventures or licensing agreements in domestic or international markets,
which may require additional capital. Entrance into certain countries or
markets could require a significant commitment of resources, which could in
turn require the Company to obtain additional financing.
YEAR 2000 COMPLIANCE
Many existing computer systems use two digit data fields which recognize
dates using the assumption that the first two digits are "19" (i.e., the
number 97 is recognized as the year 1997). Date critical functions relating to
the Year 2000 and beyond may be adversely affected unless changes are made to
existing systems. As a result, business and governmental entities are at risk
for possible miscalculations or systems failures causing disruptions in their
business operations. This is commonly described as the year 2000 ("Y2K")
issue.
In July 1998 the Company initiated a Business Risk Analysis of OzEmail,
OzEmail Interline and Access One in accordance with the methodology of an
external consultant ("consultant") engaged by the Company. The purpose of the
Business Risk Analysis is to raise awareness of the Y2K problem throughout the
business; create an understanding of the nature and scope of the Y2K problem;
develop an understanding of the risks; estimate a Y2K budget; develop
contingency plans; and define the OzEmail Y2K project to address any Y2K
problems identified during the assessment. The Company has engaged the
consultant to assist in the preparation of the analysis which is currently
scheduled for completion in December 1998.
While the Y2K Business Risk Analysis has not yet been completed, the Company
has identified certain critical areas for evaluation, including but not
limited to, in-house developed applications, systems and programs; the
Company's POPs which provide customers with connectivity to the Internet and
the Company's internal networks. In addition, the Company has commenced
testing for Y2K related problems in certain critical areas of its operations
and expects such testing to continue through the first half of 1999.
The Company has also established a Y2K Task Force consisting of management
personnel from various areas of the Company's operations, in order to assess
resources required in order to make the Company Y2K ready and manage the Y2K
project. The Task Force meets on a regular basis and is commencing the process
of checking the compliance status of applications, software and hardware and
preparing a plan for Y2K analysis, testing and rectification, including
assessing the preparedness of third party suppliers for the year 2000.
The Company's ISP operations are, in part, dependent on the supply of
communication link, routers, modems and other equipment, electricity and
content, by a number of suppliers. The Company recently delivered a Y2K survey
to all its major suppliers as a first step in assessing the readiness of such
suppliers for the year 2000. The Company will also conduct limited internal
testing with respect to systems provided by third parties. Upon completion of
the survey of third party suppliers and risk assessments, the Company will
consider the necessity of contingency plans and the costs associated with the
failure of any supplier to be non Y2K compliant.
AB-27
<PAGE>
Camtech and the Company's subsidiary responsible for its Western Australia
ISP business have participated partially in the Business Risk Analysis, having
identified resources that are required for them to perform their critical
functions but have established internal task forces to take into account
separate products offered in Western Australia and the separate network and
billing system operated by Camtech. PowerUp, a 55% owned and controlled entity
of OzEmail, has a separate Y2K Task Force which reports regularly to OzEmail.
The Company's main customers are dial up residential users; dial up business
customers; ISDN users connection and web hosting services. The Company does
not have any significant exposure to any individual customer. However, the
Company is conducting an assessment of the various software used by clients,
such as browsers, for Y2K compliance. The Company hopes to assess the extent
of customer communication and support strategies which may need to be
implemented.
The final stage of the Year 2000 Business Risk Analysis comprises the
preparation of a plan for Y2K analysis and testing and rectification to
address any Y2K problems identified. During 1998 and 1999, OzEmail will review
its critical services and determine any feasible contingencies, if necessary,
to reduce any exposure to Y2K related issues.
The Business Risk Analysis is expected to result in a full budget for the
Company's Y2K project and compliance costs. As of September 30, 1998, direct
Y2K costs for the Company totaled approximately A$20,000, all of which are
related to the Business Risk Analysis. The Company is currently estimating
$450,000 in direct Y2K project management costs. This estimate does not
include replacement costs, if any, for equipment. Such costs cannot be known
until the Business Risk Analysis is completed. The Company expects to be Y2K
ready by the end of June 1999.
The failure to correct a material Y2K problem could result in, or a failure
of, certain normal business activities or operations. At this time the Company
cannot quantify the potential impact of these failures. The Business Risk
Analysis, the Y2K Task Force and the development of contingency plans are
being undertaken to address issues within the Company's control. There can be
no assurance that the systems or services operated by third parties that
interface with the Company's systems will achieve Y2K compliance in a timely
manner or that the failure of such systems to achieve compliance will not have
a material adverse effect on the Company. While the Company believes that its
software, hardware and applications will be Y2K ready, there can be no
assurance until the Year 2000 that all systems will function adequately.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" (SFAS 130), and SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information" (SFAS 131). The
Company will be required to adopt both statements for the year ended December
31, 1998. Under SFAS No. 130, companies are required to report in the
financial statements, in addition to net income, comprehensive income
including, as applicable, foreign currency items, minimum pension liability
adjustments and unrealized gains and losses on certain investments in debt and
equity securities. The Company has adopted SFAS 130 for the purposes of these
financial statements in this Form 6-K. The adoption of this standard did not
have a significant impact on the Company's financial statements and related
disclosures as net income and comprehensive income of the Company is not
currently materially different. SFAS No. 131 requires that
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companies report separately, in the financial statements, certain financial
and descriptive information about operating segments, if applicable. The
Company is currently assessing its disclosure requirements under SFAS No. 131
for the year ending December 31, 1998.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use". This Statement of Position (SOP)
provides guidance on accounting for the costs of computer software developed
or obtained for internal use and requires that computer software costs that
are incurred in the preliminary project stage, as defined by the standard,
should be expensed as incurred. Once the capitalization criteria of the SOP
have been met, external direct costs of materials and services consumed in
developing or obtaining internal-use computer software; payroll and payroll-
related costs for employees who are directly associated with and who devote
time to the internal-use computer software project (to the extent of the time
spent directly on the project) and certain other costs incurred when
developing computer software for internal use should be capitalized. The
Company has adopted this standard in the first quarter of 1998 the impact of
which was not material.
On June 15, 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for
all fiscal quarters of all fiscal years beginning after January 1, 2000 for
the Company. SFAS 133 requires that all derivative instruments be recorded on
the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part
of a hedge transaction and, if it is, the type of hedge transaction. From time
to time the Company has entered, and in the future, may enter into foreign
currency contracts. It is the Company's stated policy not to enter into swaps,
derivatives or other speculative securities for speculative purposes. The
policy further requires Board approval for expenditures in excess of
US$500,000 for hedging activities, and the approval of the Chief Financial
Officer and either the President or Chief Executive Officer for expenditures
that are less than US$500,000 but more than US$50,000. As of December 31, 1997
and September 30, 1998 there were no outstanding derivative instruments. As
the future level of derivative instruments that the Company will enter into is
unknown, the Company has not yet determined the impact that the adoption of
SFAS 133 will have on its results of operations and financial position.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
OzEmail Limited
/s/ Ian McGregor
By: _________________________________
IAN MCGREGOR
CHIEF FINANCIAL OFFICER
Date: November 6, 1998
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