<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 2, 1998
REGISTRATION NO. 333-47901
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 2
TO
FORM F-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
TELECOM CORPORATION OF NEW ZEALAND LIMITED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
NEW ZEALAND NONE
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
TELECOM NETWORKS HOUSE, 68 JERVOIS QUAY, WELLINGTON, NEW ZEALAND; (64) 4-801-
9000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
CT CORPORATION SYSTEM
1633 BROADWAY
NEW YORK, NEW YORK 10019
(212) 246-5070
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
COPIES TO:
MALCOLM R. CARTER W. EMERSON, ALAN F. DENENBERG, KELLY R. WELSH,
GILLESPIE, ESQ. P.C. ESQ. ESQ.
TELECOM NETWORKS KIRKLAND & ELLIS SHEARMAN & AMERITECH
HOUSE 200 EAST RANDOLPH STERLING CORPORATION
68 JERVOIS QUAY DRIVE UOB PLAZA 2, #16- 30 SOUTH WACKER
WELLINGTON, NEW CHICAGO, ILLINOIS 21 DRIVE
ZEALAND 60601 80 RAFFLES PLACE CHICAGO, ILLINOIS
(64) 4-801-9000 (312) 861-2000 SINGAPORE 048624 60606
(65) 230-3800 (312) 750-5200
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable on or after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED APRIL 2, 1998
TELECOM CORPORATION OF NEW ZEALAND LIMITED
87,400,000 Ordinary Shares LOGO
in the form of Instalment Receipts and Interim American Depositary Shares
--------
Ameritech New Zealand Investments, Inc. (the "Selling Shareholder") is
offering 87,400,000 ordinary shares ("Shares"), no par value, of Telecom
Corporation of New Zealand Limited ("Telecom" or the "Company") in a public
offering in the United States and an institutional offering in Canada in the
form of (i) Shares and (ii) American Depositary Shares ("ADSs"), each
representing the right to receive eight Shares, as part of a global offering of
397,346,064 Shares (the "Global Offering") as described herein. ADSs will be
evidenced by American Depositary Receipts ("ADRs"). The Global Offering also
includes (a) a concurrent public offering of 79,500,000 Shares in New Zealand,
(b) a concurrent public offering of 59,600,000 Shares in Australia and (c) a
concurrent institutional offering of 170,846,064 Shares, in the form of Shares
or ADSs, in the Rest of the World (as defined herein). Each portion of the
Global Offering is being conducted, and is conditional upon closing,
concurrently. See "The Global Offering" and "Underwriting." The Company will
not receive any of the proceeds from the sale of the Shares offered in the
Global Offering.
Shares and ADSs offered in the Global Offering are to be paid for in two
instalments. The First Instalment (as defined herein) is payable at closing and
the Final Instalment (as defined herein) is payable by March 31, 1999. Payment
for the Shares offered hereby is to be made in NZ dollars and payment for the
ADSs is to be made in U.S. dollars. Prior to payment of the Final Instalment,
beneficial interests in the Shares will be represented by Instalment Receipts
("Instalment Receipts" or "IRs"), with each IR representing a beneficial
interest in one Share, subject to a security interest securing payment of the
Final Instalment. Prior to payment of the Final Instalment, purchasers who
elect to receive ADSs will receive Interim ADSs, evidenced by Interim ADRs,
with each Interim ADS representing the right to receive eight IRs. Upon payment
of the Final Instalment, holders of IRs and Interim ADSs will have the right to
receive the related Shares and ADSs. See "Description of Instalment Receipts
and Trust Deed" and "Description of Interim American Depositary Receipts and
American Depositary Receipts."
The Shares are quoted on the New Zealand Stock Exchange ("NZSE") and the
Australian Stock Exchange ("ASX") under the symbol "TEL," and the ADSs are
listed on the New York Stock Exchange ("NYSE") under the symbol "NZT."
Application has been made for the IRs to be approved for official quotation on
the NZSE and the ASX, conditional upon the Shares being transferred by the
Selling Shareholder to the Trustee (as defined herein). Application has been
made to list the Interim ADSs on the NYSE. Application has been made for the
IRs and Interim ADSs to be eligible for quotation and trading through SEAQ
International. See "Prospectus Summary--The Global Offering." The last reported
sale price of the Shares on the NZSE on April 3, 1998 was NZ$ per Share and
of the ADSs on the NYSE on April 3, 1998 was US$ per ADS. See "Price
Range of Shares and ADSs."
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION
WITH AN
INVESTMENT IN THE SHARES OR ADSS, SEE "RISK FACTORS," BEGINNING ON PAGE 13.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THESECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSIONPASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND SELLING
PUBLIC COMMISSION SHAREHOLDER (1)
-------- ------------- ---------------
<S> <C> <C> <C>
Per Share:
First Instalment........................ NZ$
Final Instalment........................ NZ$
Total per Share......................... NZ$ NZ$ NZ$
Per ADS:
First Instalment (2).................... US$
Final Instalment (3).................... US$
Total per ADS (2)(3).................... US$ US$ US$
Total (2)(3)(4)(5)...................... US$ US$ US$
</TABLE>
- -----
(1) Before deduction of expenses in the Global Offering estimated at NZ$
(US$ ). Such expenses will generally be paid by the Company, which
will receive a payment from the Selling Shareholder in respect thereof. See
"Principal and Selling Shareholders."
(2) Based on an exchange rate of NZ$1.00 to US$ .
(3) Based on an exchange rate of NZ$1.00 to US$ . The amount ultimately
payable in U.S. dollars will depend on the NZ dollar to U.S. dollar
exchange rate on March 30, 1999.
(4) Assumes that all Shares sold in the U.S. Offering are in the form of ADSs.
(5) The Selling Shareholder has granted the several International Underwriters
(as defined herein) an option, exercisable within 30 days after the date
hereof, to purchase up to 39,624,606 additional Shares solely to cover
over-allotments, if any. Any exercise of such option will be shared pro
rata by each of the International Underwriters in proportion to the Shares
underwritten by each such International Underwriter. If such option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Selling Shareholder will be $ ,
$ and $ , respectively. See "Underwriting."
--------
JOINT GLOBAL COORDINATORS AND JOINT BOOKRUNNERS
CREDIT SUISSE FIRST BOSTON MERRILL LYNCH & CO.
--------
SBC WARBURG DILLON READ INC.
The Shares and the ADSs are offered by the several U.S. Underwriters (as
defined herein) when, as and if delivered to and accepted by the U.S.
Underwriters and subject to their right to reject orders in whole or in part.
It is expected that the Interim ADRs evidencing the Interim ADSs will be ready
for delivery in New York, New York, against payment in immediately available
funds, and that the IRs will be ready for delivery in New Zealand, on or about
April 9, 1998.
--------
Prospectus dated , 1998.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THE GLOBAL OFFERING MAY ENGAGE IN
TRANSACTIONS IN THE SHARES, ADSS, IRS AND INTERIM ADSS THAT STABILIZE,
MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES OFFERED HEREBY,
INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT COVERING
TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
AVAILABLE INFORMATION
Telecom is subject to the informational requirements of the Securities
Exchange Act of 1934 (United States), as amended (the "Exchange Act"), as
applicable to foreign private issuers, and in accordance therewith files
reports and other information with the Securities and Exchange Commission (the
"Commission"). Such information, and the reports and other information filed
with the Commission by Telecom can be inspected and copied at the Commission's
public reference facilities located at Room 1024, 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549 and at the following Regional Offices:
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-
2511 and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of
such materials may also be obtained from the Commission at prescribed rates by
mailing a request to the Public Reference Section of the Commission, at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Reports
and other information concerning Telecom can also be inspected at the offices
of the New York Stock Exchange, 20 Broad Street, New York, New York 10005.
Telecom has filed with the Commission a Registration Statement on Form F-3
(as amended and including the exhibits, the "Registration Statement") under
the Securities Act of 1933 (United States), as amended (the "U.S. Securities
Act"), covering the securities offered hereby. This Prospectus, which forms a
part of the Registration Statement, does not contain all of the information
set forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information, reference is hereby made to the Registration Statement. The
Registration Statement, including the exhibits and schedules thereto, may be
inspected without charge and copied, upon payment of prescribed fees, at the
public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549, and copies of such material and
any part thereof may be obtained by mail from the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates.
REPORTS TO SHAREHOLDERS
Telecom will provide to all registered holders of Instalment Receipts such
reports as are required to be distributed to shareholders in accordance with
the New Zealand Companies Act 1993 and the rules of the NZSE, including an
annual report containing audited consolidated financial statements prepared in
accordance with generally accepted accounting principles in New Zealand ("New
Zealand GAAP").
Telecom will furnish the Interim Depositary and the Depositary referred to
under "Description of Interim American Depositary Receipts and American
Depositary Receipts" with copies of all periodic reports required to be filed
by Telecom with the Commission under the Exchange Act, including the Company's
annual report on Form 20-F, which will include a review of the Company's
operations, annual audited consolidated financial statements prepared in
accordance with New Zealand GAAP and with an information content substantially
similar to financial statements that comply with generally accepted accounting
principles in the United States ("US GAAP") and Regulation S-X of the
Commission and an opinion thereon by independent chartered accountants to the
Company. The annual reports will include a reconciliation of certain items in
the financial statements to US GAAP. The Company has also agreed to furnish
the Interim Depositary and the Depositary with interim reports which will
include unaudited interim financial information prepared in accordance with
New Zealand GAAP. The Interim Depositary and Depositary have agreed to arrange
for the prompt mailing of such reports to all record holders of Interim ADSs
and ADSs, as the case may be. In addition, the Company has agreed
ii
<PAGE>
to furnish to the Interim Depositary and the Depositary copies of all notices
of shareholders' meetings and other reports and communications that are
distributed generally to shareholders of the Company and holders of Instalment
Receipts, and the Interim Depositary and the Depositary have agreed to arrange
for the prompt mailing of such notices, reports and communications to all
record holders of Interim ADSs and ADSs, as the case may be. As a foreign
private issuer, the Company is exempt from the rules under the Exchange Act
prescribing the furnishing and content of proxy statements.
INCORPORATION OF DOCUMENTS BY REFERENCE
Telecom's annual report on Form 20-F for the fiscal year ended March 31,
1997, filed with the Commission on September 18, 1997 (the "1997 Form 20-F"),
and the description of the Shares included in its Registration Statement on
Form 8-A, filed with the Commission on July 1, 1991, as amended, are hereby
incorporated by reference herein. In addition, all filings on Form 20-F filed
by Telecom pursuant to the Exchange Act, and, to the extent designated
therein, any reports on Form 6-K deposited by Telecom with the Commission
pursuant to the Exchange Act, after the initial filing of the Registration
Statement of which this Prospectus forms a part and prior to the termination
of the offering made hereby shall be deemed to be incorporated by reference in
this Prospectus and to be a part hereof from the date of filing of such
documents. Any statement or information contained in a document incorporated
or deemed to be incorporated by reference herein shall be deemed to be
modified or superseded for the purposes of this Prospectus to the extent that
a statement or information contained herein or in any other subsequently filed
document which also is deemed to be incorporated by reference herein modifies
or supersedes such statement or such information. The modifying or superseding
statement or information need not state that it has modified or superseded a
prior statement or prior information or include any other information set
forth in the document that it modifies or supersedes. The making of a
modifying or superseding statement or the inclusion of modifying or
superseding information shall not be deemed an admission that the modified or
superseded statement or information, when made, constituted a
misrepresentation, an untrue statement of a material fact or an omission of a
material fact required to be stated or necessary to make a statement or
information not misleading in light of the circumstances in which it was made.
The statements and information contained in this Prospectus shall be deemed to
supersede the 1997 Form 20-F in its entirety (except for the statements and
information contained in Items 6, 11, 12 and 13 thereof).
Telecom will provide without charge to each person, including any beneficial
owner, to whom this Prospectus is delivered, upon the written or oral request
of such person, a copy of any or all of the documents which have been or may
be incorporated by reference in this Prospectus, other than exhibits to such
documents unless specifically incorporated by reference into the information
that this Prospectus incorporates. Requests should be directed to the Company
at 68 Jervois Quay, P.O. Box 570, Wellington, New Zealand, Attention: Company
Secretary.
CERTAIN DEFINED TERMS, CURRENCY OF PRESENTATION,
EXCHANGE RATES AND CONVENTIONS
As used herein, the terms "Telecom" and the "Company," unless the context
otherwise requires, refer to Telecom Corporation of New Zealand Limited, a New
Zealand limited liability company, and its consolidated subsidiaries. In this
Prospectus, all references to "NZ dollars" and "NZ$" are to the currency of
New Zealand and all references to "U.S. dollars" and "US$" are to the currency
of the United States.
Telecom publishes its consolidated financial statements in NZ dollars and in
accordance with New Zealand GAAP. Except as otherwise indicated, translations
of NZ dollars into U.S. dollars in this Prospectus have been made at NZ$1.00
to US$0.5803, the noon buying rate in the City of New York for cable transfers
in foreign currencies announced by the Federal Reserve Bank of New York for
customs purposes (the "Noon Buying Rate") on December 31, 1997. On April 3,
1998, the Noon Buying Rate was NZ$1.00 to US$ . See "Exchange Rates" for
further information regarding the rates of exchange between NZ dollars and
U.S. dollars.
iii
<PAGE>
All amounts translated into U.S. dollars as described above are provided
solely for the convenience of the reader, and no representation is made that
the NZ dollar or U.S. dollar amounts referred to herein could have been, or
could be, converted into U.S. dollars or NZ dollars, as the case may be, at
any particular rate, the above rates or at all.
All financial information included in this Prospectus is stated on a
consolidated basis unless otherwise indicated. Any discrepancies in the tables
included herein between the amounts listed and the totals thereof are due to
rounding. The fiscal year of Telecom ends on March 31. The fiscal year ended
March 31, 1997 is referred to in this Prospectus as "fiscal 1997" and other
fiscal years are referred to in a similar manner.
ENFORCEABILITY OF CIVIL LIABILITIES
The Company is a New Zealand limited liability company. Most of its
directors and officers and certain experts named herein reside outside the
United States (principally in New Zealand). Substantially all the assets of
the Company and such persons are located outside the United States. It may not
be possible, therefore, for investors to effect service of process within the
United States against the Company or such persons or to enforce against them
judgments obtained in United States courts predicated upon the civil liability
provisions of the federal securities laws of the United States. In addition,
the Company has been advised by its New Zealand solicitors, Chapman Tripp
Sheffield Young, that there is doubt that the courts of New Zealand will
enforce against the Company or such persons judgments obtained in United
States courts predicated upon the civil liability provisions of the federal
securities laws of the United States, in particular because under New Zealand
law the United States courts may not be considered to have jurisdiction over
the Company or such persons. A New Zealand court is likely to entertain an
original action brought in New Zealand against the Company or such persons
predicated upon applicable United States securities laws, but may hold that
some United States securities laws are not applicable to the offer and/or
cannot be enforced by direct action in New Zealand.
iv
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information contained in this Prospectus,
including the audited consolidated financial statements of Telecom as of March
31, 1996 and 1997 and for each of the three years in the period ended March 31,
1997, and the notes thereto (the "Audited Consolidated Financial Statements"),
and the unaudited consolidated financial statements of Telecom as of December
31, 1996 and 1997 and for each of the nine-month periods ended December 31,
1996 and 1997, and the notes thereto (the "Unaudited Consolidated Financial
Statements," and, together with the Audited Consolidated Financial Statements,
the "Consolidated Financial Statements").
THE COMPANY
Telecom is a major supplier of telecommunications services in New Zealand.
Telecom provides a full range of telecommunications products and services
including local, national and international telephone services, cellular and
other mobile services, enhanced network services, equipment sales and
installation services, leased services and directories. In addition, Telecom is
a leading provider of Internet services in New Zealand.
As of December 31, 1997, Telecom had total assets of approximately NZ$4.7
billion (US$2.7 billion). Telecom generated approximately NZ$0.6 billion
(US$0.3 billion) and NZ$0.6 billion (US$0.3 billion) of net earnings from
approximately NZ$3.1 billion (US$1.8 billion) and NZ$2.5 billion (US$1.5
billion) of operating revenues for fiscal 1997 and the nine months ended
December 31, 1997, respectively. Telecom is the largest New Zealand company
listed on the NZSE in terms of market capitalization.
Approximately 70.8% of Telecom's operating revenues for the nine months ended
December 31, 1997 were derived from the Company's core business comprising the
provision of local (25.5%), national (17.9%) and international (15%) telephone
services and cellular and other mobile services (12.4%). The Company's other
telecommunications services, including enhanced network services, equipment
sales and installation services, leased services and directories, contributed
the remaining 29.2% of the Company's operating revenues for the nine months
ended December 31, 1997.
Telecom operates an advanced telecommunications network with over 99% of
Telecom's customers connected to digital telephone exchanges. Telecom's
international network provides services via optical fiber submarine cables and
satellite earth stations and is also over 99% digitalized. Telecom's cellular
service is available to approximately 96% of New Zealand's population. The
network consists of both digital (DAMPS) and analog (AMPS) services.
Unlike telecommunications companies in many other countries, Telecom operates
in a comparatively deregulated environment and is not prohibited from offering
a full range of telecommunications services. Except for certain limitations on
standard residential charges and general competition law constraints, Telecom
is free to increase or decrease the prices it charges for all of its services.
See "Risk Factors--Relationship with New Zealand Government" and "Description
of Shares--Kiwi Share."
Since 1989, there have been no statutory barriers to entry to any part of the
telecommunications industry in New Zealand. Consequently, the
telecommunications market in New Zealand is now very competitive. Telecom
expects competition to continue to intensify, with the prospect of existing
participants extending their activities as well as new competitors entering the
market. Competition exists in each of Telecom's markets, including local,
national and international telephone services, cellular and other mobile
services, equipment sales and installation services and leased services.
Certain of Telecom's competitors are large multi-national corporations, or
affiliates thereof, with substantial resources, including Telstra Corporation
Limited ("Telstra"), British Telecommunications plc ("BT"), MCI Communications
Corp. ("MCI"), Sprint Corp. ("Sprint") and BellSouth Corporation ("BellSouth").
See "Risk Factors--Competition" and "Business--Competition."
1
<PAGE>
Telecom's principal executive offices are located at 68 Jervois Quay, P.O.
Box 570, Wellington, New Zealand and its telephone number is (64) 4-801-9000.
BUSINESS STRATEGY
The Company's business strategy is to continue to grow its core business
while expanding and diversifying its revenue base primarily through stimulating
increased customer use of mobility, value added services and Internet services.
The Company is also containing growth in operating expenses. The primary
components of the Company's business strategy are described below.
GROW CORE BUSINESS
The Company's strategy to continue to grow revenues from local access
services is to promote growth in business usage and access lines and the use of
second access lines in the residential market. The long distance calling
markets in New Zealand are very competitive. Telecom's long distance strategy
is to keep its tariffs competitive while stimulating increased demand for call
services. Increased calling volumes are being pursued through innovative
marketing programs and pricing promotions. Telecom is also using its strong
brand awareness and customer loyalty programs to increase customer penetration
and long distance usage. Hubbing and routing of international call transit
traffic may also offer further revenue opportunities. In the fourth quarter of
fiscal 1998, Telecom reduced international toll call base rates for residential
customers by 16% to 66%, depending on the country being called, offset in part
by the removal of duration discounts. Telecom also reduced international
business toll call base rates by similar percentages. Cellular rates were also
reduced. Telecom had instituted toll reductions in international and national
rates earlier in fiscal 1998. Intense competition and price declines are
expected to continue.
PROMOTE MOBILITY AND PERSONALIZATION
The Company has implemented a strategy to increase the number of cellular
subscribers and cellular revenues through innovative marketing programs and
pricing promotions. In addition, it is offering and promoting the use of value-
added mobile services such as voice dialing, direct connect and cellular packet
data services and mobile services that integrate fixed-wire and wireless
communication. For example, the Company recently introduced extension dialing
and "business zone," which allows users to make calls from within their offices
or "business zone" for less than a standard mobile phone call. As the leading
provider of cellular and fixed-wire services in New Zealand, Telecom believes
it is well positioned to lead the development of integrated fixed-wire and
mobile services.
ENHANCED SERVICES
The Company has embarked on a strategy in recent years to diversify its
revenue base by developing and offering new and enhanced network services
including 0800 capability, managed network services, voice messaging,
integrated services digital network ("ISDN") lines, caller display and other
value added services. The Company believes that penetration of many of these
services in New Zealand is lower than in some other comparable markets and that
there is potential for further growth in the use of these services.
INCREASE INTERNET SERVICE REVENUES
The Company is a leading provider of Internet services in New Zealand.
Telecom's goal is to increase Internet service revenues by continuing to grow
the number of subscribers for its XTRA service and increasing usage by
promoting electronic commerce applications in New Zealand. In addition, Telecom
intends to continue to grow revenues by attracting advertising and Internet
traffic over its network. Growth in the Company's Internet service business is
also stimulating demand for second access lines and fast data services by
business and residential customers.
2
<PAGE>
CONTAIN COSTS
The Company's overall strategy is to maximize profitability by increasing
revenues, as described above, and by containing cost growth. The Company's
Performance 2000 program has enabled the Company to identify additional cost
reduction opportunities which have been or are currently being implemented,
including improved fault diagnosis and repair procedures, more centralized
vendor management, reduced property and accommodation costs, increased
automation at calling centers and streamlined network design and planning.
RELATIONSHIP WITH AMERITECH AND BELL ATLANTIC
An affiliate of the Selling Shareholder and Bell Atlantic Holdings Limited
("Bell Atlantic NZ"), wholly owned subsidiaries of Ameritech Corporation
("Ameritech") and Bell Atlantic Corporation ("Bell Atlantic"), respectively,
purchased the Company from the New Zealand government in September 1990 for
approximately NZ$4.3 billion (US$2.5 billion). In accordance with an agreement
with the New Zealand government, each of Ameritech and Bell Atlantic
subsequently reduced its beneficial share ownership in the Company to 24.95%.
Bell Atlantic, which holds its Shares through Bell Atlantic NZ, recently issued
notes (the "Exchangeable Notes") exchangeable, commencing in September 1999,
under certain circumstances, into 24.95% of Telecom's Shares. See "Risk
Factors--Potential Effects of Bell Atlantic Transaction" and "Principal and
Selling Shareholders."
RECENT DEVELOPMENTS
The central business district of Auckland, New Zealand's largest city, is
experiencing a severe and prolonged power disruption as a result of the failure
of power cables servicing such area, resulting in a significant decrease in
business activity for the duration of the disruption. While Telecom has not yet
determined the full extent of the impact that such power disruption and
resultant decrease in business activity could have on its results of
operations, it is possible that this event will have an adverse effect on
Telecom's results of operations.
3
<PAGE>
THE GLOBAL OFFERING
The Selling Shareholder is offering 397,346,064 Shares, representing 22.68%
of the issued and outstanding Shares, in the Global Offering. The Global
Offering may be increased up to a total of 436,970,670 Shares, representing
24.94% of the issued and outstanding Shares, if the over-allotment option
described below is exercised in full. See "The Global Offering" and
"Underwriting."
Global Offering........... An offering of 397,346,064 Shares in the
aggregate, including:
(i) 79,500,000 Shares through the several
New Zealand underwriters (the "New Zealand
Underwriters") to the public in New Zealand
(the "New Zealand Offering");
(ii) 59,600,000 Shares through the several
Australian underwriters (the "Australian
Underwriters") to the public in Australia
(the "Australian Offering");
(iii) 87,400,000 Shares, in the form of
Shares or ADSs, through the several U.S.
underwriters (the "U.S. Underwriters") to
the public in the United States and to
institutional investors in Canada (the "U.S.
Offering"); and
(iv) 170,846,064 Shares, in the form of
Shares or ADSs, through the several rest of
the world underwriters (the "Rest of the
World Underwriters" and, together with the
U.S. Underwriters, the "International
Underwriters") to institutional investors in
the rest of the world (the "Rest of the
World") other than the United States,
Canada, New Zealand and Australia (the "Rest
of the World Offering" and, together with
the U.S. Offering, the "International
Offering").
Over-Allotment Option.....
The Selling Shareholder has granted to the
International Underwriters an option,
exercisable for 30 days from the date of this
Prospectus, to purchase a maximum of 39,624,606
additional Shares (all or a portion of which
the International Underwriters may elect to
purchase in the form of ADSs) at the initial
public offering price per Share, less the
underwriting discount, solely to cover over-
allotments.
Offering Price............
The initial public offering price per Share in
the Global Offering (the "Share Purchase
Price") is NZ$ . The initial public
offering price per ADS in the International
Offering (the "ADS Purchase Price") would be
US$ (assuming an exchange rate of NZ$1.00
to US$ for the Final Instalment). Payment
for Shares is to be made in NZ dollars and
payment for ADSs is to be made in U.S. dollars.
Payment for Shares in the retail portion of the
Australian Offering is to be made in Australian
dollars. The first instalment payment per Share
is NZ$4.70 and the first instalment payment per
ADS is US$ (in each case, the "First
Instalment"). The final instalment payment per
Share, due on March 31, 1999 (the "Final
Instalment Payment Date"), is NZ$ and the
final instalment payment per ADS will be the
U.S. dollar equivalent of the final instalment
per Share, based on the NZ dollar to U.S.
dollar exchange rate on March 30, 1999 and
adjusted to reflect the ratio of eight Shares
per ADS (in each case, the "Final Instalment").
Accordingly, the total amount ultimately
payable in U.S.
4
<PAGE>
dollars with respect to each ADS may be higher
or lower than the U.S. dollar purchase price
per ADS referred to in this Prospectus.
Selling Shareholder.......
The Selling Shareholder is offering a total of
397,346,064 Shares in the Global Offering
(436,070,670 Shares if the International
Underwriters' over-allotment option is
exercised in full). As a result of the Global
Offering, the Selling Shareholder's ownership
interest in the Company will be reduced from
24.95% to 2.27%. If the International
Underwriters' over-allotment option is
exercised in full, the Selling Shareholder's
ownership interest in the Company will be
reduced to 110,000 Shares.
Instalment Payment
Arrangements.............. Payment for the Shares and the ADSs is to be
made in two instalments. Holders of IRs and
Interim ADSs will be deemed to have agreed to
pay the Final Instalment when due, failing
which a holder's position may be liquidated in
whole or in part pursuant to the Selling
Shareholder's security interest and such holder
will remain liable for any deficiency in the
proceeds of such sale and (if applicable)
default interest, enforcement costs and certain
other payments. The partial payment
characteristics of IRs and Interim ADSs may
make percentage price movements in them, other
things being equal, greater than percentage
price movements in fully paid Shares and ADSs.
At the time of payment of the Final Instalment,
the respective market prices of the Shares and
ADSs may be less than the total of the First
Instalment and Final Instalment with respect to
the Shares and ADSs, respectively. IR holders
have the right to prepay the Final Instalment
and receive their Shares early by giving notice
to the IR Registrar (as defined in the Trust
Deed) along with payment in full of the Final
Instalment plus an administration fee of
NZ$200. In order for the owners of Interim ADRs
to prepay the Final Instalment and receive
Shares early, the owners must first turn in
their Interim ADRs in exchange for IRs in
accordance with the Interim Deposit Agreement.
See "Description of Instalment Receipts and
Trust Deed" and "Description of Interim
American Depositary Receipts and American
Depositary Receipts--Interim ADRs."
Shares Outstanding........ A total of 1,751,948,050 Shares were issued and
outstanding as of December 31, 1997. See
"Capitalization."
ADSs...................... Each ADS represents eight Shares. The ADSs will
be evidenced by ADRs which, upon payment of the
Final Instalment per ADS, will be issued
pursuant to a deposit agreement among the
Company, The Bank of New York (the
"Depositary") and all owners and beneficial
owners from time to time of the ADSs (the
"Deposit Agreement"). See "Description of
Interim American Depositary Receipts and
American Depositary Receipts" and
"Underwriting."
Instalment Receipts....... Prior to the payment of the Final Instalment
per Share, purchasers of the Shares will
initially be issued IRs. Each IR will evidence
beneficial ownership in a particular Share,
subject to a security interest in favor of the
Selling Shareholder securing payment of the
Final Instalment for that Share and (if
applicable) default interest, enforcement costs
and
5
<PAGE>
certain other payments. Upon payment of the
First Instalment, the Shares will be
transferred to The New Zealand Guardian Trust
Company Limited (the "Trustee"), as trustee
under the Trust Deed between the Selling
Shareholder and the Trustee (the "Trust Deed").
The Trustee will be the registered holder of
the Shares and will hold them as nominee for
holders of IRs, until payment of the Final
Instalment, subject to a security interest in
favor of the Selling Shareholder to secure
payment of the Final Instalment and (if
applicable) default interest, enforcement costs
and certain other payments. Investors will
become registered holders of the Shares
relating to their IRs upon payment of the Final
Instalment with respect thereto. See
"Description of Instalment Receipts and Trust
Deed."
Interim ADSs.............. Prior to the payment of the Final Instalment
per ADS, purchasers of Shares in the form of
ADSs will initially be issued Interim ADSs,
evidenced by Interim ADRs. Interim ADRs are
issuable by the Interim Depositary pursuant to
an interim deposit agreement among the Company,
the Selling Shareholder, the Trustee, The Bank
of New York (the "Interim Depositary") and all
owners and beneficial owners from time to time
of the Interim ADSs (the "Interim Deposit
Agreement"). Each Interim ADS represents the
right to receive eight IRs. Following payment
of the Final Instalment per ADS, Interim ADRs
will be surrendered for ADRs under the Interim
Deposit Agreement, with each ADR representing
eight Shares. See "Description of Interim
American Depositary Receipts and American
Depositary Receipts--Interim ADRs."
Use of Proceeds........... The Selling Shareholder will receive all of the
net proceeds of the Global Offering. None of
the proceeds will be received by the Company.
Dividends.................
The present dividend policy of the Company's
Board of Directors (the "Board"), which came
into effect in fiscal 1996, is to pay a
quarterly dividend in September, December,
March and June in respect of each fiscal
quarter. The first dividend to be received by
holders of IRs and Interim ADSs will be the
dividend in respect of the quarter ended March
31, 1998, which is expected to be paid in June
1998. The amount of such dividend is expected
to be reduced by the amount of a NZ3.5 cents
per Share special dividend which was paid on
April 1, 1998. Telecom's current policy is to
distribute at least 70% of its net earnings in
respect of each fiscal year. However, future
dividends, if any, are not assured and will
depend on a number of factors, including those
discussed in "Risk Factors," and the taxation
position of Telecom. Holders of IRs and Interim
ADRs will be entitled to the benefit of any
dividends declared by Telecom. To the extent
that dividends paid by Telecom in the period
from the consummation of the Global Offering to
the Final Instalment Payment Date do not in the
aggregate exceed twice the dividends paid by
Telecom during the period from April 1, 1997 to
March 31, 1998 (calculated after making any
adjustment appropriate to reflect the issue,
buyback or cancellation of Shares during the
two periods in question), any dividends
declared
6
<PAGE>
will be paid to holders of IRs and Interim
ADRs. Any dividends (other than supplementary
dividends paid to non-New Zealand tax
residents) declared which in the aggregate
exceed such amount will be applied, on behalf
of the holders of IRs and Interim ADRs, to
reduce or extinguish the amount of the Final
Instalment. See "Dividends," "Description of
Instalment Receipts and Trust Deed--Dividends"
and "Taxation."
Tax Consequences.......... The following summary is based on tax laws of
the United States and New Zealand as in effect
on the date of this Prospectus and is subject
to various limitations and qualifications. See
"Taxation."
. United States Taxation. For United States
federal income tax purposes, the gross amount
of all dividends paid with respect to ADSs or
Shares out of E&P (as defined herein) to a
United States holder (as defined in "Taxation--
United States Taxation") generally will be
treated as foreign source ordinary income to
such holder. The amount of any such dividend
paid in NZ dollars generally will be the U.S.
dollar value of the NZ dollars at the exchange
rate in effect on the date of receipt of the
distribution by the United States holder or by
the Trustee and applied to the Final
Instalment. The withholding tax imposed by New
Zealand on such dividends is a creditable
foreign tax for United States federal income
tax purposes, subject to certain limitations.
In addition, gain or loss recognized by a
United States holder on the sale or other
disposition of ADSs or Shares will be subject
to United States federal income taxation as
capital gain or loss.
A United States holder's obligation to pay the
Final Instalment will be treated for U.S.
federal income tax purposes as a debt
obligation (a "Purchase Obligation"), which
will bear original issue discount ("OID") to
the extent that the amount of the Final
Instalment exceeds the difference between the
fair market value of a Share or ADS at the date
of the issuance of the IR or Interim ADR and
the amount of the First Instalment, all
calculated in NZ dollars. In addition, a United
States holder, whether a cash-basis or accrual-
basis taxpayer, will be entitled to deduct as
interest expense (subject to various
limitations discussed below) the OID with
respect to each Purchase Obligation such United
States holder has issued. See "Taxation--United
States Taxation."
The Purchase Obligation constitutes
"acquisition indebtedness" to United States
holders exempt from tax. Accordingly, tax-
exempt United States holders may be taxed on
dividends or gains as unrelated business
taxable income.
. New Zealand Taxation. United States holders
(as defined in "Taxation--New Zealand
Taxation") will be subject to a maximum New
Zealand withholding tax of 15% of the gross
amount of all cash dividends paid by the
Company. The Foreign Investor Tax Credit regime
can result in a supplementary dividend being
paid to non-New Zealand residents which can in
certain circumstances be sufficient to satisfy
the withholding tax liability in full. See
"Taxation--New Zealand Taxation."
7
<PAGE>
The above also applies to United States holders
of IRs and Interim ADRs in respect of the
underlying Shares. No New Zealand tax
consequences will arise to United States
holders from the deferred payment obligations
under the IRs.
Voting Rights............. Shareholders are entitled to one vote for each
Share held. Holders of IRs and Interim ADRs
will be entitled to instruct the Trustee and
the Interim Depositary, respectively, as to the
manner in which votes on the underlying Shares
are to be cast. The Trustee, as holder of the
underlying Shares, will vote in accordance with
those instructions on a poll, but will not cast
any vote on a resolution determined by a show
of hands or voice vote. See "Description of
Shares--Shareholder Meetings and Voting
Rights," "Description of Instalment Receipts
and Trust Deed--Voting and Telecom Shareholder
Meetings" and "Description of Interim American
Depositary Receipts and American Depositary
Receipts--Voting of the Underlying Shares;
--Interim ADRs."
Ownership Restrictions--
Limitations on
Shareholdings............ Certain provisions of Telecom's constitution
(the "Constitution") and New Zealand law impose
restrictions on the ownership of Shares. Such
restrictions may have the effect of inhibiting
or discouraging an attempt to acquire a
substantial or controlling interest in Telecom.
See "Description of Shares--Limitations on
Shareholdings."
Listing................... The Shares are quoted on the NZSE and the ASX,
and the ADSs are listed on the NYSE.
Application has been made for the IRs to be
approved for official quotation on the NZSE and
the ASX, conditional upon the Shares being
transferred by the Selling Shareholder to the
Trustee. Application has been made to the NZSE
for permission to list the IRs and all the
requirements of the NZSE relating thereto that
can be complied with on or before the date of
this Prospectus have been duly complied with.
However, the NZSE accepts no responsibility for
any statement in this Prospectus. Application
has been made to list the Interim ADSs on the
NYSE. Application has been made for the IRs and
Interim ADSs to be eligible for quotation and
trading through SEAQ International.
NYSE Symbols.............. ADSs NZT
Interim ADSs NZTPP
NZSE Symbols.............. Shares TEL
IRs TELAA
ASX Symbols............... Shares TEL
IRs TNZCA
Settlement of First
Instalment................ Payment of the First Instalment and delivery of
the IRs and the Interim ADRs are expected to
take place on or about April 9, 1998.
Application has been made for clearance of the
Interim ADRs through the facilities of The
Depository Trust Company ("DTC").
8
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA
The summary consolidated financial information and other data of Telecom
presented below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements.
The summary consolidated statements of financial performance and financial
position and other data for, and as of the end of, each year in the five-year
period ended March 31, 1997, have been derived from Telecom's consolidated
financial statements for these periods, which have been audited by Coopers &
Lybrand, independent accountants, subject to certain reclassifications of data
from prior years to conform to current period classifications. The Consolidated
Financial Statements have been prepared and presented in accordance with New
Zealand GAAP, which differs in certain material respects from U.S. GAAP. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." See also note 28 to the Audited Consolidated Financial Statements.
Summary financial data as of, and for the nine months ended, December 31,
1996 and 1997 set forth below have been derived from the Unaudited Consolidated
Financial Statements. Such summary financial data are unaudited but, in the
opinion of Telecom's management, include all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation thereof. In addition, the
operating statistics set forth below are unaudited. Results of operations for
the nine months ended December 31, 1997 are not necessarily indicative of the
results that may be expected for the full year. Certain reclassifications of
data presented for the nine-month period ended December 31, 1996 have been made
to conform to current classifications.
9
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------------------------
1993 1994 1995 1996 1997 1997
---------- ---------- ---------- ---------- ---------- ----------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS, PER ADS AMOUNTS AND
OPERATING STATISTICS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF FINANCIAL
PERFORMANCE DATA(A):
Amounts in accordance
with New Zealand GAAP:
Total operating
revenues............... NZ$2,474.3 NZ$2,484.2 NZ$2,683.5 NZ$2,908.6 NZ$3,083.5 US$1,789.4
Total operating
expenses(b)............ 2,170.0 1,599.3 1,646.9 1,694.1 2,003.6 1,162.7
---------- ---------- ---------- ---------- ---------- ----------
Surplus from continuing
operations............. 304.3 884.9 1,036.6 1,214.5 1,079.9 626.7
Net interest expense.... 140.7 120.0 103.6 92.1 99.4 57.7
---------- ---------- ---------- ---------- ---------- ----------
Surplus from continuing
operations before tax.. 163.6 764.9 933.0 1,122.4 980.5 569.0
Income tax.............. 55.7 237.3 308.3 376.0 311.3 180.7
---------- ---------- ---------- ---------- ---------- ----------
Net surplus from
continuing operations.. 107.9 527.6 624.7 746.4 669.2 388.3
Loss from discontinued
operations(a).......... -- -- 4.4 29.6 87.6 50.8
Net earnings(c)......... 107.7 528.1 620.2 716.8 581.4 337.4
Earnings per Share from
continuing
operations(d).......... 0.046 0.227 0.331 0.395 0.355 0.206
Earnings per ADS from
continuing
operations(d).......... 0.37 1.82 2.65 3.16 2.84 1.65
Dividends per Share(e).. 0.155 0.230 0.300 0.350 0.390 0.226
Amounts in accordance
with U.S. GAAP(f):
Net surplus from
continuing
operations(c).......... NZ$109.3 NZ$532.2 NZ$618.0 NZ$744.6 NZ$762.6 US$442.5
Net earnings(c)......... 109.3 532.2 613.6 715.0 675.0 391.7
Basic earnings per Share
from continuing
operations(d).......... 0.046 0.230 0.327 0.394 0.404 0.234
Basic earnings per ADS
from continuing
operations(d).......... 0.37 1.84 2.62 3.15 3.23 1.87
Diluted earnings per
Share from continuing
operations(d).......... 0.046 0.230 0.327 0.394 0.404 0.234
Diluted earnings per ADS
from continuing
operations(d).......... 0.37 1.84 2.62 3.15 3.23 1.87
STATEMENT OF FINANCIAL
POSITION DATA(A):
Amounts in accordance
with New Zealand GAAP:
Fixed assets............ NZ$3,810.9 NZ$3,692.2 NZ$3,597.7 NZ$3,632.4 NZ$3,763.1 US$2,183.7
Total assets............ 4,750.0 4,558.0 4,492.5 4,491.6 4,618.3 2,680.0
Debt due within one year
(including overdrafts). 462.1 325.2 392.9 271.7 524.4 304.3
Long term debt.......... 874.3 1,238.1 1,070.0 1,287.5 1,285.2 745.8
Total liabilities....... 2,299.6 2,525.6 2,402.5 2,343.2 2,975.7 1,726.8
Total capital funds(g).. 2,450.4 2,032.4 2,090.0 2,148.4 1,642.6 953.2
Amount in accordance
with U.S. GAAP(f):
Total shareholders'
funds(g)............... NZ$2,656.9 NZ$2,346.7 NZ$2,433.9 NZ$2,358.1 NZ$1,963.0 US$1,139.1
OPERATING STATISTICS:
Total access lines (at
period end)............ 1,534,000 1,593,000 1,658,000 1,719,000 1,782,000 1,782,000
National call minutes
(millions)............. 1,423.5 1,502.2 1,640.7 1,884.9 2,143.4 2,143.4
International outward
call minutes
(millions)............. 145.0 165.6 199.6 238.6 265.6 265.6
International inward
call minutes
(millions)............. 160.0 176.9 200.5 240.6 279.2 279.2
Cellular connections (at
period end)............ 100,200 143,800 229,200 339,500 422,800 422,800
Operating revenues per
employee............... NZ$191,066 NZ$230,072 NZ$305,551 NZ$345,563 NZ$357,798 US$207,630
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31,
--------------------------------
1996 1997 1997
---------- ---------- ----------
(IN MILLIONS, EXCEPT PER SHARE
AMOUNTS, PER ADS AMOUNTS AND
OPERATING STATISTICS)
<S> <C> <C> <C>
STATEMENT OF FINANCIAL PERFORMANCE DATA(A):
Amounts in accordance with New Zealand GAAP:
Total operating revenues...................... NZ$2,288.1 NZ$2,523.3 US$1,464.3
Total operating expenses...................... 1,377.1 1,518.8 881.4
---------- ---------- ----------
Surplus from continuing operations............ 911.0 1,004.5 582.9
Net interest expense.......................... 75.8 98.8 57.3
---------- ---------- ----------
Surplus from continuing operations before tax. 835.2 905.7 525.6
Income tax.................................... 267.3 293.7 170.5
---------- ---------- ----------
Net surplus from continuing operations........ 567.9 612.0 355.1
---------- ---------- ----------
Loss from discontinued operations(a).......... 39.8 -- --
Distribution on capital securities after tax.. -- 14.1 8.2
Net earnings(c)............................... 528.1 598.0 347.0
Earnings per Share from continuing
operations(d)................................ 0.301 0.333 0.193
Earnings per ADS from continuing
operations(d)................................ 2.408 2.664 1.546
Dividends per Share(e)........................ 0.285 0.315 0.183
Amounts in accordance with U.S. GAAP(f):
Net surplus from continuing operations(c)..... NZ$ 563.3 NZ$ 545.8 US$ 316.7
Net earnings(c)............................... 523.5 545.8 316.7
Basic earnings per Share from continuing
operations(d)................................ 0.298 0.304 0.176
Basic earnings per ADS from continuing
operations(d)................................ 2.384 2.432 1.408
Diluted earnings per Share from continuing
operations(d)................................ 0.298 0.305 0.177
Diluted earnings per ADS from continuing
operations(d)................................ 2.384 2.440 1.416
STATEMENT OF FINANCIAL POSITION DATA(A):
Amounts in accordance with New Zealand GAAP:
Fixed assets.................................. NZ$3,713.7 NZ$3,791.7 US$2,200.3
Total assets.................................. 4,627.7 4,738.0 2,749.5
Debt due within one year (including
overdrafts).................................. 401.5 896.9 520.5
Long term debt................................ 1,301.7 1,303.3 756.3
Total liabilities............................. 2,489.1 3,314.8 1,923.6
Total capital funds(g)........................ 2,138.6 1,423.2 825.9
Amount in accordance with U.S. GAAP(f):
Total shareholders' funds(g).................. NZ$2,345.2 NZ$1,304.1 US$ 756.7
OPERATING STATISTICS:
Total access lines (at period end)............ 1,761,000 1,823,000 1,823,000
National call minutes (millions).............. 1,600.5 1,661.8 1,661.8
International outward call minutes (millions). 197.2 226.9 226.9
International inward call minutes (millions).. 208.8 242.5 242.5
Cellular connections (at period end).......... 410,300 469,400 469,400
Operating revenues per employee (annualized).. NZ$351,738 NZ$391,870 US$227,402
</TABLE>
- --------
(a) During fiscal 1997, the operations of Pacific Star group were classified as
discontinued and a formal plan of disposal or wind-down of its business was
commenced. The comparative figures for prior years have been reclassified
accordingly.
(b) The costs associated with a strategic restructuring of Telecom announced in
the fourth quarter of fiscal 1993, of NZ$450 million, together with
redundancy costs incurred in the first three quarters of fiscal 1993,
amounting to NZ$43.2 million, were charged against earnings in fiscal 1993
as an aggregate abnormal restructuring charge amounting to NZ$493.2
million.
The costs associated with a further strategic restructuring of Telecom
together with a provision for the cost of making all business-critical
computer platforms and applications Year 2000 compliant were charged
against earnings in fiscal 1997 as an aggregate abnormal charge amounting
to NZ$151.5 million.
11
<PAGE>
(c) After deduction of minority interests and including Telecom's share of
associate companies' profits and losses.
(d) Per Share amounts have been calculated based on the weighted average number
of Shares outstanding during the periods indicated. Per ADS amounts have
been calculated based on a ratio of eight Shares per ADS. Diluted earnings
per Share and per ADS amounts reflect the dilutive effects of options and
capital securities.
(e) Dividends per Share are presented on the basis of the period to which they
relate.
(f) The principal differences between the amounts shown in accordance with New
Zealand GAAP and those shown in accordance with U.S. GAAP arise from the
treatment of the capitalization of interest costs, the recognition of costs
incurred in terminating interest rate swaps, accruals for compensated
absences, the write-off of research and development expenditures, the
method of providing for deferred income taxes, the recognition of deferred
compensation expense relating to the executive share ownership plan, the
recognition of accruals for restructuring and Year 2000 modification costs
and the timing of reflection of dividends in retained earnings. In
estimating the amounts shown in accordance with U.S. GAAP, it has not been
possible to quantify the impact on earnings and total shareholders' funds
arising as a result of ascribing fair values to the fixed assets acquired
by Telecom from the New Zealand Post Office (the "Post Office") as of April
1, 1987 as required under New Zealand GAAP rather than using historical
book values as required under U.S. GAAP because the Post Office did not
maintain a separate fixed asset register or separate historical cost
records of all fixed asset additions in respect of the telecommunications
business. See also note 28 to the Audited Consolidated Financial
Statements.
(g) Capital funds includes both shareholders' funds and other items included in
equity under New Zealand GAAP, such as capital securities. For U.S. GAAP,
such other items are not included in shareholders' equity.
At an extraordinary general meeting of Telecom held in fiscal 1994,
shareholders passed a special resolution to cancel one Share for every five
on issue and to pay shareholders the par value of NZ$1 per cancelled Share.
The cancellation of Shares was completed in March 1994 for a a total
payment of NZ$472.4 million.
In February 1997, Telecom commenced a Share repurchase program subject to
the requirements of Telecom's Constitution, the New Zealand Companies Act
1993 and the NZSE. The repurchase program was completed on December 19,
1997. As of March 31, 1997, 54,735,582 Shares had been repurchased at a
total cost of NZ$357.5 million and as of December 31, 1997 a total of
138,093,860 Shares had been repurchased at a total cost of NZ$1,001.3
million.
12
<PAGE>
RISK FACTORS
This Prospectus, including the information contained under the headings
"Risk Factors," "Dividends," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business," contains
forward-looking statements within the meaning of Section 27A of the U.S.
Securities Act. Such forward-looking statements are based on the beliefs of
the Company's management as well as on assumptions made by and information
currently available to the Company at the time such statements were made. When
used in this Prospectus, the words "anticipate," "believe," "estimate,"
"expect," "intends" and similar expressions, as they relate to the Company,
are intended to identify forward-looking statements, which include statements
relating to, among other things, the ability of the Company to continue to
successfully compete in the New Zealand telecommunications market. Actual
results could differ materially from those projected in the forward-looking
statements as a result of the risk factors set forth below, the matters set
forth or incorporated in the Prospectus generally and certain economic and
business factors, some of which may be beyond the control of the Company. The
Company cautions the reader, however, that this list of factors may not be
exhaustive. In analyzing an investment in the Shares or ADSs offered hereby,
prospective investors should carefully consider, along with the other matters
referred to herein, the risk factors described below.
COMPETITION
Since 1989, there have been no statutory barriers to entry to any part of
the telecommunications industry in New Zealand, and vigorous competition has
developed in the various telecommunications markets in New Zealand. Telecom
expects competition to continue to intensify, with the prospect of existing
participants extending their activities as well as additional competitors
entering the market. Competition exists in each of the markets in which
Telecom operates, including local, national and international telephone
services, cellular and other mobile services, equipment sales and installation
services and leased services. Certain of Telecom's competitors are large
multi-national corporations, or affiliates thereof, with substantial
resources, including Telstra, BT, MCI, Sprint and BellSouth. A major
competitor of Telecom is Clear Communications Limited ("Clear"), a joint
venture among BT, MCI and two New Zealand investors. See "Business--
Competition--Telephone Services." In the fourth quarter of fiscal 1998,
Telecom reduced international toll call base rates and cellular rates. Telecom
had instituted toll reductions in international and national rates earlier in
fiscal 1998. These reductions were, in part, a response to competitive
pressures. The Company is required to make publicly available certain pricing
information that may place it at a competitive disadvantage in the market. See
"Business--Regulatory Framework--The New Zealand Regulatory Environment--
Telecommunications (Disclosure) Regulations 1990." There can be no assurance
that the competitive environment will not have a material adverse effect on
Telecom's business, financial condition or results of operations. See
"Business--Competition."
LITIGATION
The Company is currently involved in a number of legal proceedings,
including lawsuits brought by and against Clear relating to a variety of
issues, including Telecom's right to provide pay television, Internet and
other services, Telecom's bundling practices, the terms on which Telecom
provides interconnection and Clear's failure to make payment of certain
charges under its interconnection agreement. The legal proceedings pending
against Telecom involve claims for substantial damages and other relief. There
can be no assurance that such litigation will not have a material adverse
effect on Telecom's business, financial condition or results of operations.
See "Business--Legal Proceedings."
DEPENDENCE ON FINANCING
As of December 31, 1997, Telecom's total debt was approximately NZ$2.2
billion (US$1.3 billion) and it also had capital securities outstanding of
approximately NZ$0.9 billion (US$0.5 billion) (pro forma for the February 1998
issuance of restricted capital securities). See "Capitalization." Telecom may
incur additional indebtedness and issue additional capital securities over the
next several years. Telecom's ability to satisfy its obligations to pay
principal and interest under its financing agreements will depend upon various
factors
13
<PAGE>
including its future performance and results of operations. Many of these
factors, such as economic conditions, demand for Telecom's services and other
factors relating to the industry generally are beyond Telecom's control. On
February 3, 1998, Moody's Investors Service revised the outlook on Telecom's
credit rating from stable to negative, in line with changes in the outlook for
the sovereign credit rating of New Zealand. This revision has increased the
Company's financing costs. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Credit rating data is neither
an endorsement of, nor warning regarding the viability of, a particular
investment and should not be read as such.
EXPOSURE TO EXCHANGE RATE FLUCTUATIONS
Telecom's revenues and expenses are denominated predominantly in NZ dollars.
Capital expenditures may be denominated in a variety of foreign currencies
depending on the source of the equipment purchased by Telecom. Telecom has a
policy of hedging a substantial portion of its exposure to exchange rate
fluctuations from the time a firm order has been placed. However, in respect
of future capital expenditures not yet the subject of firm orders,
fluctuations in foreign currency impact upon the cost to Telecom of such
foreign sourced purchases. In addition, a substantial portion of Telecom's
borrowings are denominated in U.S. dollars and other foreign currencies.
Telecom also has a policy of hedging a substantial portion of its exposure to
exchange rate fluctuations in respect of its foreign currency borrowings.
While these hedging arrangements should serve in most circumstances to
minimize the risk of currency rate fluctuations, Telecom is exposed to the
risk that the counterparties to such arrangements may fail to perform their
obligations. See "Exchange Rates."
RAPID TECHNOLOGICAL CHANGE
Rapid changes in telecommunications and information technology are
redefining the markets in which Telecom operates, the products and services
demanded by customers and the ability of enterprises to compete in the
telecommunications industry. Such changes are broadening the range, reducing
the costs and expanding the capacity and function of infrastructures capable
of delivering these products and services. Partially as a result of these
changes, the prices that can be charged for many products and services are
falling. There is a risk that competitors will deploy or develop technologies
that provide them with lower costs or other operating advantages relative to
Telecom, which could require Telecom to reduce the prices of its products and
services and incur significant expenditures in addition to those already
planned in order to remain competitive. See "Business--Competition--Impact of
Rapid Technological Change."
Telecom has invested substantial capital and other resources in the
development and modernization of its networks and systems. With the
accelerating pace of technological change, Telecom sometimes is required to
reassess its strategies and the outcome of such investments is increasingly
less certain. For example, the reassessment of Telecom's residential hybrid
fiber/coax ("HFC") program has resulted in losses and is likely to result in
further losses, which further losses are not currently expected to be
material. See "Business--Technology" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
GOVERNMENT REGULATION
Although Telecom now operates in a comparatively deregulated environment,
like other New Zealand businesses, the Company is subject to the Commerce Act
1986 (the "Commerce Act") which prohibits various forms of restrictive trade
practices that have the purpose or effect of substantially lessening
competition. There can be no assurance that the New Zealand government will
not introduce laws to further regulate the telecommunications industry in New
Zealand in the future. See "Business--Regulatory Framework."
RELATIONSHIP WITH NEW ZEALAND GOVERNMENT
A special rights preference share of Telecom (the "Kiwi Share") was created
and retained by the New Zealand government in connection with the sale of
Telecom to Ameritech and Bell Atlantic in 1990. Telecom's Constitution
provides that, unless the holder of the Kiwi Share otherwise consents, Telecom
must (i) maintain a
14
<PAGE>
local free-calling option for all residential customers, although Telecom may
also offer optional tariff packages that include local call charges, (ii)
charge no more than the standard residential rental charge for ordinary
residential telephone service and not, except in certain limited
circumstances, increase the standard residential rental charge for ordinary
residential telephone service more than the percentage increase in the New
Zealand Consumer Price Index ("CPI"), (iii) charge residential users in rural
areas no more for line rental than the standard residential rental charge and
(iv) continue to make ordinary residential telephone service as widely
available as it was on September 11, 1990.
NEW ZEALAND ECONOMY
Telecom's business is substantially dependent on the state of the New
Zealand economy. Certain factors have recently emerged that could adversely
affect continued growth, including a widening of the country's balance of
payments current account deficit, a weakening of the New Zealand dollar and
increased interest rates. In addition, New Zealand's economy has a significant
exposure to other Asian/Pacific economies. As a result, the recent Asian
market crisis introduces considerable uncertainty into New Zealand's economic
prospects. A weakening in the New Zealand economy due to the Asian market
crisis or other factors could have a material adverse effect on Telecom's
business and results of operations. On January 30, 1998, Moody's Investors
Service revised the outlook on New Zealand's Aa1 sovereign credit rating from
stable to negative, reflecting concerns about New Zealand's widening current
account deficit as well as the potential impact of events unfolding in Asia.
See "Business--New Zealand Economy" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
YEAR 2000
The majority of computer software worldwide is programmed to process
transactions using only two digits for the year of the transaction (e.g., "98"
for 1998) rather than four digits. Computer systems which process year 2000
transactions (and beyond) with the year "00" will encounter significant
processing inaccuracies and potentially even inoperability. Almost all of the
services which Telecom offers its customers are based on technology-driven
systems, including the exchanges and other components in Telecom's fixed-wire,
cellular and paging networks. This issue also affects many of Telecom's
traditional information technology applications. In addition, Telecom's
customers and suppliers are subject to the same risks and, if they are so
affected, such event could, in turn, adversely affect Telecom. Planning to
address this issue started in August 1996. The first phase of the project, to
identify those of Telecom's systems which are not year 2000 compliant, has
been completed. The development of detailed plans and timetables to minimize
the risk that any of Telecom's business-critical systems are not year 2000
compliant by December 31, 1999 was completed in May 1997, at which time the
identification of and search for the necessary human resources commenced. Such
resources are generally in short supply both in New Zealand and world wide and
it is expected that competition for the necessary skills will intensify as the
year 2000 draws near. The operating cost of making the modifications necessary
to maintain existing functionality into the year 2000 and beyond is estimated
at NZ$87.0 million (US$50.5 million). The Company will also make capital
expenditures in connection with this issue estimated at approximately NZ$20.0
million (US$11.6 million). While Telecom has established a reserve to account
for Year 2000 costs, there can be no assurance that the Year 2000 program will
be successful, additional costs may not be incurred, Telecom's customers or
suppliers will not be adversely affected or such issues will not otherwise
have a material adverse effect on Telecom's business, financial condition or
results of operations.
POTENTIAL EFFECTS OF BELL ATLANTIC TRANSACTION
Bell Atlantic has issued Exchangeable Notes which are exchangeable,
commencing in September 1999, under certain circumstances, into 24.95% of
Telecom's Shares. There can be no assurance that the delivery of the
underlying Shares upon any future exchange of the Exchangeable Notes or the
anticipation of such an exchange will not have an adverse effect on the market
price of the Shares, the ADSs, the IRs or the Interim ADSs. See "--Imputation
Credits," "Management" and "Principal and Selling Shareholders."
15
<PAGE>
IMPUTATION CREDITS
In general, dividends payable by Telecom are eligible for imputation credits
in New Zealand based upon tax paid by Telecom, and such credits, if available,
reduce the New Zealand taxes payable by recipients of such dividends. United
States holders can indirectly use these imputation credits under the Foreign
Investor Tax Credit regime to reduce the financial impact of New Zealand
withholding tax on cash dividends.
However, if there are changes in the ownership of Telecom's Shares such that
there is a greater than 34% change in continuity of ownership, such credits
will be lost if they have not already been used in relation to dividends. The
Global Offering will count towards such 34% threshold. Based upon the
Company's understanding of the Bell Atlantic transaction, Telecom does not
currently believe that the initial offering by Bell Atlantic of its
Exchangeable Notes counts toward the threshold, but that the delivery of the
underlying Shares upon any future exchange of the Exchangeable Notes may
count. See "--Potential Effects of Bell Atlantic Transaction" and "Principal
and Selling Shareholders." However, whether and the extent to which other
transactions in Shares would cause a loss of imputation credits cannot be
predicted. If such credits were to be lost, this could result in greater taxes
on dividends until such time as Telecom's imputation credit account is
restored through future tax paid. See "Taxation--New Zealand Taxation."
PERCEIVED HEALTH RISKS ASSOCIATED WITH ELECTROMAGNETIC ENERGY
Allegations have been made, but not proven, that mobile telecommunications
equipment may pose health risks due to emissions of electromagnetic energy
from such devices. The weight of national and international scientific opinion
is that there is no substantial evidence of detrimental public health effects
from cellular transmission equipment operating at typical levels.
Investigations are continuing into the safety of cellular handsets. In its
operations, Telecom complies with the electromagnetic energy emissions levels
permitted by the applicable New Zealand standard. However, there is a risk
that an actual or perceived health risk associated with mobile
telecommunications equipment could lead to litigation, adversely affect the
Company through a reduction in the number of subscribers or the growth rate of
mobile telecommunications services or reduced usage per customer or hinder the
Company's placement of new mobile telecommunications equipment.
DISASTER RECOVERY
The computer systems used by Telecom to support its sales and service
operational groups and for the processing of data for billing and financial
reporting purposes are situated principally in one location. The Company does
not presently have back-up processing facilities adequate for the timely
processing of this data in the event of the destruction or substantial
impairment of its primary processing facilities, which could occur as a result
of earthquake, fire, flood or other disaster. Were such an event to occur, the
Company could experience significant problems in servicing customers, delays
in the processing of customer bills and the receipt of related payments and
the production of financial accounts.
In addition, as Telecom's network continues to develop, it becomes more
concentrated and more dependent upon computer technology. The concentration of
more lines terminating in fewer switches means that the possible impact of
earthquakes, fires, floods or other disasters is likely to be greater. Greater
dependence on computer technology also means a greater susceptibility to the
usual array of computer-related problems.
LIMITATIONS ON OWNERSHIP
Certain provisions of Telecom's Constitution and New Zealand law impose
restrictions on the ownership of Shares. In particular:
. No person may have a relevant interest in 10% or more of the Company's
voting shares without the prior written approvals of the Board and the
holder of the Kiwi Share. No person who is not a New Zealand National (as
defined in the Company's Constitution) may have a relevant interest in
more than 49.9% of the Company's voting shares without the prior written
approval of the holder of the Kiwi Share. The term
16
<PAGE>
"relevant interest" is broadly defined. There are certain exceptions for
custodial and similar relationships. The sanctions for breach include
removal of voting rights and forced sale of shares.
. Under New Zealand law, persons who hold a relevant interest in 5% or more
of the voting securities of the Company must notify, and report certain
subsequent changes in their interest in writing to the Company and to the
NZSE.
. Subject to certain limited exceptions, under the Overseas Investment
Regulations an overseas person (as defined therein) must obtain consent
from the Overseas Investment Commission before the overseas person enters
into certain acquisitions of Shares or interests in Shares. Consent is
required for acquisitions which result in the overseas person:
(i) acquiring a beneficial entitlement or interest in 25% or more of
the outstanding Shares or interests, or the right to exercise or control
the exercise of 25% or more of the votes entitled to be cast at a
meeting of the Company;
(ii) increasing its entitlements, interests or rights beyond 25%; or
(iii) being able to appoint or control the appointment of 25% or more
of the Board.
The sanctions for breach include a court ordered disposal of Shares
acquired in contravention of the regulations.
Such restrictions may have the effect of inhibiting or discouraging an attempt
to acquire a substantial or controlling interest in Telecom. See "Description
of Shares--Limitation on Shareholdings."
DEFERRED PAYMENT CHARACTERISTICS OF IRS AND INTERIM ADSS
Payment for the Shares and the ADSs is to be made in two instalments.
Holders of IRs and Interim ADSs will be deemed to have agreed to pay the Final
Instalment when due, failing which a holder's position may be liquidated in
whole or in part pursuant to the Selling Shareholder's security interest and
such holder will remain liable for any deficiency in the proceeds of such sale
and (if applicable) default interest, enforcement costs and certain other
payments. The partial payment characteristics of IRs and Interim ADSs may make
percentage price movements in them, other things being equal, greater than
percentage price movements in fully paid Shares and ADSs. At the time of
payment of the Final Instalment, the respective market prices of the Shares
and ADSs may be less than the total of the First Instalment and Final
Instalment with respect to the Shares and ADSs, respectively. See "Description
of Instalment Receipts and Trust Deed" and "Description of Interim American
Depositary Receipts and American Depositary Receipts--Interim ADRs."
17
<PAGE>
THE GLOBAL OFFERING
The Selling Shareholder is offering 397,346,064 Shares, representing 22.68%
of the issued and outstanding Shares of the Company, in the Global Offering.
The Global Offering may be increased up to a total of 436,070,670 Shares,
representing 24.94% of the issued and outstanding Shares, if the over-
allotment option described below is exercised in full. See "Underwriting."
The Global Offering comprises:
(i) the New Zealand Offering:
79,500,000 Shares through the several New Zealand Underwriters to the
public in New Zealand;
(ii) the Australian Offering:
59,600,000 Shares through the several Australian Underwriters to the
public in Australia; and
(iii) the International Offering of 258,246,064 Shares in the aggregate
consisting of:
(a) the U.S. Offering:
87,400,000 Shares, in the form of Shares or ADSs, through the
several U.S. Underwriters to the public in the United States and
to institutional investors in Canada; and
(b) the Rest of the World Offering:
170,846,064 Shares, in the form of Shares or ADSs, through the
several Rest of the World Underwriters to institutional
investors in the Rest of the World.
The Global Offering is being coordinated by Credit Suisse First Boston
Corporation and Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Joint
Global Coordinators"). Credit Suisse First Boston NZ Securities Limited and
Merrill Lynch (New Zealand) Limited are the lead managers of the New Zealand
Offering. Credit Suisse First Boston Australia Securities Limited and Merrill
Lynch International (Australia) Limited are the lead managers of the
Australian Offering. Credit Suisse First Boston Corporation and Merrill Lynch,
Pierce, Fenner & Smith Incorporated are the lead managers of the U.S.
Offering. Credit Suisse First Boston (Europe) Limited and Merrill Lynch
International are the lead managers of the Rest of the World Offering.
Payment for the Shares is to be made in NZ dollars and payment for the ADSs
is to be made in U.S. dollars. Payment for Shares in the retail portion of the
Australian Offering is to be made in Australian dollars. The First Instalment
per Share is NZ$4.70 and the First Instalment per ADS is US$ . The Final
Instalment per Share, due on March 31, 1999, is NZ$ . The ADS Purchase
Price will be the sum of US$ for the First Instalment and the U.S. dollar
equivalent of NZ$ for the Final Instalment based on the NZ dollar to U.S.
dollar exchange rate on March 30, 1999. Accordingly, the total amount
ultimately payable in U.S. dollars with respect to each ADS may be higher or
lower than the U.S. dollar purchase price per ADS referred to in this
Prospectus. The initial public offering price and underwriting discount per
Share and ADS will be identical for the entire Global Offering and are set
forth on the cover page hereof. Each portion of the Global Offering will be
conditional upon closing the other portions concurrently.
Under the terms and conditions of the New Zealand and Australian
Underwriting Agreement and the International Underwriting Agreement (each as
defined herein), the New Zealand Underwriters and Australian Underwriters are
required to procure subscribers for or, failing which, to subscribe for
themselves all of the Shares to be initially offered for sale in New Zealand
and Australia, respectively, but not paid for immediately prior to the closing
of the Global Offering, and the International Underwriters are committed to
take and pay for all of the Shares or ADSs offered by them, if any are taken.
For a further discussion of the underwriting arrangements in connection with
the U.S. and Rest of the World Offerings and a discussion of certain
agreements among the Underwriters with respect to the Global Offering, see
"Underwriting."
NEW ZEALAND AND AUSTRALIAN OFFERINGS
The New Zealand and Australian Offerings comprise offerings to retail and
institutional investors in New Zealand and Australia. The offerings to retail
investors in New Zealand and Australia will be made through
18
<PAGE>
application directly by such investors. The minimum application amount is 500
Shares. Applications in the New Zealand and Australian retail offerings must
be accompanied by a check payable in New Zealand dollars and Australian
dollars, respectively, in the amount of the First Instalment. Institutional
investors in New Zealand and Australia will submit bids for Shares at various
prices during a period specified in the offering materials relating to the New
Zealand and Australian Offerings.
OVER-ALLOTMENT OPTION
The Selling Shareholder has granted to the International Underwriters an
option, exercisable for 30 days from the date of this Prospectus, to purchase
a maximum of 39,624,606 additional Shares (all or a portion of which the
International Underwriters may elect to receive in the form of ADSs) at the
initial public offering price per Share, less the underwriting discount,
solely to cover over-allotments, if any. See "Underwriting."
ALLOCATIONS
The allocation of Shares among the New Zealand, Australian, U.S. and Rest of
the World Offerings will be determined by the Joint Global Coordinators and is
subject to reallocation after pricing. Pursuant to an agreement among the
several Underwriters (the "Agreement among Syndicates"), it has been agreed
that sales may be made among the several Underwriters of such number of Shares
or ADSs as they may agree. Except as otherwise permitted by the Agreement
among Syndicates, the price of any Shares or ADSs so sold will be the initial
public offering price, less an amount not greater than the applicable selling
concession or such other amount as may be agreed. See "Underwriting."
INSTALMENT PAYMENT ARRANGEMENTS
Payment for the Shares and the ADSs is to be made in two instalments.
Holders of IRs and Interim ADRs will be deemed to have agreed to pay the Final
Instalment when due, failing which a holder's position may be liquidated in
whole or in part pursuant to the Selling Shareholder's security interest and
such holder will remain liable for any deficiency in the proceeds of such sale
and (if applicable) default interest, enforcement costs and certain other
payments. The partial payment characteristics of IRs and Interim ADSs may make
percentage price movements in them, other things being equal, greater than
percentage price movements in fully paid Shares and ADSs. At the time of
payment of the Final Instalment, the respective market prices of the Shares
and ADSs may be less than the total of the First Instalment and Final
Instalment with respect to the Shares and ADSs, respectively. IR holders have
the right to prepay the Final Instalment and receive their Shares early by
giving notice to the IR Registrar along with payment in full of the Final
Instalment plus an administration fee of NZ$200. In order for the owners of
Interim ADRs to prepay the Final Instalment and receive Shares early, the
owners must first turn in their Interim ADRs in exchange for IRs in accordance
with the Interim Deposit Agreement. See "Description of Instalment Receipts
and Trust Deed" and "Description of Interim American Depositary Receipts and
American Depositary Receipts--Interim ADRs."
19
<PAGE>
DIVIDENDS
The present dividend policy of the Board, which came into effect in fiscal
1996, is to pay a quarterly dividend in September, December, March and June in
respect of each fiscal quarter. The first dividend to be received by holders
of IRs and Interim ADSs will be the dividend in respect of the quarter ended
March 31, 1998, which is expected to be paid in June 1998. The amount of such
dividend is expected to be reduced by the amount of a NZ3.5 cents per Share
special dividend which was paid on April 1, 1998. Telecom's current policy is
to distribute at least 70% of its net earnings in respect of each fiscal year.
However, future dividends, if any, are not assured and will depend on a number
of factors, including those discussed in "Risk Factors," and the taxation
position of Telecom. Holders of IRs and Interim ADRs will be entitled to the
benefit of any dividends declared by Telecom. To the extent that dividends
paid by Telecom in the period from the consummation of the Global Offering to
the Final Instalment Payment Date do not in the aggregate exceed twice the
dividends paid by Telecom during the period from April 1, 1997 to March 31,
1998 (calculated after making any adjustment appropriate to reflect the issue,
buyback or cancellation of Shares during the two periods in question), any
dividends declared will be paid to holders of IRs and Interim ADRs. Any
dividends (other than supplementary dividends paid to non-New Zealand tax
residents) declared which in the aggregate exceed such amount will be applied,
on behalf of the holders of IRs and Interim ADRs, to reduce or extinguish the
amount of the Final Instalment. See "Description of Instalment Receipts and
Trust Deed--Dividends" and "Taxation."
The table below sets forth the dividends paid to shareholders for the
periods presented based on the current ratio of eight Shares to one ADS:
<TABLE>
<CAPTION>
NZ$ PER SHARE(A) US$ PER ADS(A)(B)
------------------------------------- -------------------------------------
FISCAL INTERIM/ INTERIM/
YEAR QUARTERLY FINAL TOTAL QUARTERLY FINAL TOTAL
------ --------- ----- ----- --------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
1993 0.091 0.103 0.194 0.449 0.511 0.960
1994 0.103 0.148 0.251 0.601 0.688 1.289
1995 0.135 0.165 0.300 0.630 0.770 1.399
1996 0.085(c) -- 0.396(a) --
0.085(c) -- 0.396(a) --
0.085 -- 0.396 --
0.095 -- 0.350 0.443 -- 1.632
1997 0.095 -- 0.443 --
0.095 -- 0.443 --
0.095 -- 0.443 --
0.105 -- 0.390 0.490 -- 1.819
1998 0.105 -- 0.490 --
0.105 -- 0.490 --
0.035(d) -- 0.163(d) --
</TABLE>
- --------
(a) The dividend amounts for periods up to March 1994 have been adjusted
(upwards) for the March 1994 cancellation of one Share for every five on
issue.
(b) The dividend amounts for ADSs have been adjusted for the March 1994 Share
cancellation. All ADS figures are based on eight Shares per ADS. The US$
per ADS amounts are the amounts that would have been paid at the exchange
rate of 0.5803 prevailing on December 31, 1997 rather than the amounts
actually paid.
(c) The first and second quarter dividends with respect to fiscal 1996 were
paid together in November 1995.
(d) Special dividend paid on April 1, 1998.
20
<PAGE>
EXCHANGE RATES
The following table sets forth certain information concerning the Noon
Buying Rate for NZ dollars:
<TABLE>
<CAPTION>
AT AVERAGE
PERIOD RATE
END (A) HIGH LOW
------ ------- ------ ------
(EXPRESSED IN U.S. DOLLARS
PER NZ$1.00)
<S> <C> <C> <C> <C>
FISCAL YEAR
1993............................................ 0.5316 0.5299 0.5488 0.5053
1994............................................ 0.5610 0.5532 0.5785 0.5157
1995............................................ 0.6549 0.6154 0.6549 0.5593
1996............................................ 0.6807 0.6650 0.6890 0.6435
1997............................................ 0.6965 0.6932 0.7148 0.6678
1998 (through April 3, 1998)....................
</TABLE>
- --------
(a) The average of the Noon Buying Rates on the last business day of each
month during the period.
The NZ dollar is convertible into other currencies at freely floating rates
and there are no New Zealand restrictions on the flow of New Zealand currency
across borders. There are no governmental controls on the exchange rate of the
NZ dollar. Telecom's revenues and expenses are denominated predominantly in NZ
dollars. Capital expenditures may be denominated in a variety of foreign
currencies depending on the source of the equipment purchased by Telecom.
Telecom has a policy of hedging a substantial portion of its exposure to
exchange rate fluctuations from the time a firm order has been placed. In
addition, a substantial portion of Telecom's borrowings are denominated in
U.S. dollars and other foreign currencies. Telecom also has a policy of
hedging a substantial portion of its exposure to exchange rate fluctuations in
respect of its foreign currency borrowings. See "Risk Factors--Exposure to
Exchange Rate Fluctuations."
Fluctuations in the NZ dollar to U.S. dollar exchange rate will affect the
U.S. dollar equivalent of the NZ dollar price of the Shares and the IRs on the
NZSE and, as a result, are likely to affect the market price of Telecom's ADSs
and Interim ADSs in the United States. Such fluctuations would also affect the
U.S. dollar amounts received by holders of ADSs and Interim ADSs on conversion
by the Depositary or Interim Depositary, as the case may be, of cash dividends
paid in NZ dollars on the Shares and the IRs underlying the ADSs and Interim
ADSs, respectively. In addition, such fluctuations will affect the amount of
the Final Instalment with respect to the ADSs, due on March 31, 1999, which
will be the U.S. dollar equivalent of the Final Instalment per Share based on
the NZ dollar to U.S. dollar exchange rate on March 30, 1999 and adjusted to
reflect the ratio of eight Shares per ADS. See "The Global Offering."
21
<PAGE>
PRICE RANGE OF SHARES AND ADSS
The principal listing of the Shares is on the NZSE. The Shares are also
listed on the ASX. The ADSs are listed on the NYSE and are also traded on the
Pacific and Philadelphia Stock Exchanges. SEAQ International quotes trading in
both Shares and ADSs.
The following table sets forth, for the periods indicated, the highest and
lowest sale prices for the Shares as derived from the Daily Official List of
the NZSE, and the highest and lowest sale prices of the ADSs quoted on the
NYSE, based on the current ratio of eight Shares to one ADS.
<TABLE>
<CAPTION>
NZ$ PER
SHARE US$ PER ADS
--------- -----------------
PERIOD HIGH LOW HIGH LOW
- ------ ---- ---- -------- --------
<S> <C> <C> <C> <C>
April 1-June 30, 1995............................... 6.25 5.51 33 1/2 29 3/8
July 1-September 30, 1995........................... 6.21 5.71 33 3/16 30 5/8
October 1-December 31, 1995......................... 6.60 5.88 34 11/16 30 7/8
January 1-March 31, 1996............................ 6.85 6.16 37 1/4 32 3/8
April 1-June 30, 1996............................... 6.52 5.73 35 7/16 30 11/16
July 1-September 30, 1996........................... 7.03 6.12 39 1/8 33 1/2
October 1-December 31, 1996......................... 7.62 6.85 43 13/16 38
January 1-March 31, 1997............................ 7.57 6.29 42 9/16 35
April 1-June 30, 1997............................... 7.50 6.43 40 3/4 35 5/8
July 1-September 30, 1997........................... 8.25 7.28 42 4/9 37 3/4
October 1-December 31, 1997......................... 8.95 6.92 44 3/8 36 1/4
January 1, 1998-March 31, 1998......................
April 1-April 3, 1998...............................
</TABLE>
As of , 1998, Shares (other than those represented by
ADSs) were outstanding and held of record by holders (of which were
record holders in the United States) and ADSs were held of record
by holders (of which were record holders in the United States).
22
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated long term debt and capital
funds of Telecom in accordance with New Zealand GAAP as of December 31, 1997,
on a pro forma basis after giving effect to the issuance of US$300 million
aggregate principal amount of restricted capital securities on February 10,
1998.
<TABLE>
<CAPTION>
AS OF DECEMBER
31, 1997
----------------
NZ$ US$
------- -------
(IN MILLIONS)
<S> <C> <C>
Long term debt:
TeleBonds.................................................. 372.3 216.0
Eurobonds.................................................. 802.0 465.4
Other loans................................................ 129.0 74.9
------- -------
Total long term debt..................................... 1,303.3 756.3
Capital securities(a):
TeleNotes.................................................. 436.9 253.5
Restricted capital securities.............................. 510.6 296.3
------- -------
Total capital securities................................. 947.5 549.8
Shareholders' funds:
Special rights convertible preference share, no par value,
one share issued, outstanding and fully paid(b)........... -- --
Shares, no par value, 1,751,948,050 Shares issued,
outstanding and fully paid(c)............................. 902.8 523.9
Retained earnings.......................................... 78.0 45.3
Other reserves............................................. (0.7) (0.4)
------- -------
Total shareholders' funds(d)............................. 980.1 568.8
------- -------
Total capitalization..................................... 3,230.9 1,874.9
======= =======
</TABLE>
- --------
(a) See note 13 to the Unaudited Consolidated Financial Statements. On
February 10, 1998, the Company issued US$300 million principal amount of
its restricted capital securities.
(b) See "Description of Shares--Kiwi Share."
(c) Does not include 2,650,507 Shares reserved for issuance under stock
options. See note 16 to the Audited Consolidated Financial Statements for
a description of stock options.
(d) As of December 31, 1997, total shareholders' funds in accordance with U.S.
GAAP was NZ$1.3 billion (US$0.8 billion). See note 18 to the Unaudited
Consolidated Financial Statements.
23
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA
The selected consolidated financial information and other data of Telecom
presented below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements.
The selected consolidated statements of financial performance and financial
position and other data for, and as of the end of, each year in the five year
period ended March 31, 1997, have been derived from Telecom's consolidated
financial statements for these periods, which have been audited by Coopers &
Lybrand, independent accountants, subject to certain reclassifications of data
from prior years to conform to current period classifications. The
Consolidated Financial Statements have been prepared and presented in
accordance with New Zealand GAAP, which differs in certain material respects
from U.S. GAAP. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." See also note 28 to the Audited
Consolidated Financial Statements.
Selected financial data as of, and for the nine months ended, December 31,
1996 and 1997 set forth below have been derived from the Unaudited
Consolidated Financial Statements. Such selected financial data are unaudited
but, in the opinion of Telecom's management, include all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation
thereof. In addition, the operating statistics set forth below are unaudited.
Results of operations for the nine months ended December 31, 1997 are not
necessarily indicative of the results that may be expected for the full year.
Certain reclassifications of data presented for the nine-month period ended
December 31, 1996 have been made to conform to current classifications.
24
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------------------------
1993 1994 1995 1996 1997 1997
---------- ---------- ---------- ---------- ---------- ----------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS, PER ADS AMOUNTS AND
OPERATING STATISTICS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF FINANCIAL
PERFORMANCE DATA(A):
Amounts in accordance
with New Zealand GAAP:
Operating revenues:
Local service.......... NZ$ 723.1 NZ$ 748.8 NZ$ 784.2 NZ$ 826.7 NZ$ 829.3 US$ 481.2
National calls......... 468.7 451.5 488.1 542.4 545.3 316.5
International.......... 469.9 443.1 466.1 469.0 485.0 281.5
Interconnection(b)..... -- -- -- -- 65.7 38.1
Cellular and other
mobile services....... 142.7 175.2 228.5 313.3 316.4 183.6
Enhanced network
services.............. 86.4 106.8 167.1 227.2 301.6 175.0
Other operating
revenues.............. 583.5 558.8 549.5 530.0 540.2 313.5
---------- ---------- ---------- ---------- ---------- ----------
Total operating
revenues.............. 2,474.3 2,484.2 2,683.5 2,908.6 3,083.5 1,789.4
Operating expenses:
Net personnel costs.... 347.1 317.3 298.6 317.9 346.9 201.3
Depreciation........... 492.0 472.4 490.1 493.7 544.4 315.9
Cost of sales.......... 342.3 337.9 373.1 394.6 404.6 234.8
Maintenance............ 181.6 162.6 163.1 150.7 201.3 116.8
Other operating
expenses.............. 313.8 309.1 322.0 337.2 354.9 206.0
Abnormal costs(c)...... 493.2 -- -- -- 151.5 87.9
---------- ---------- ---------- ---------- ---------- ----------
Total operating
expenses.............. 2,170.0 1,599.3 1,646.9 1,694.1 2,003.6 1,162.7
---------- ---------- ---------- ---------- ---------- ----------
Surplus from continuing
operations............. 304.3 884.9 1,036.6 1,214.5 1,079.9 626.7
Investment income....... 37.1 42.0 27.9 32.9 27.0 15.6
Interest expense........ 177.8 162.0 131.5 125.0 126.4 73.3
---------- ---------- ---------- ---------- ---------- ----------
Surplus from continuing
operations before tax.. 163.6 764.9 933.0 1,122.4 980.5 569.0
Income tax.............. 55.7 237.3 308.3 376.0 311.3 180.7
---------- ---------- ---------- ---------- ---------- ----------
Net surplus from
continuing operations.. 107.9 527.6 624.7 746.4 669.2 388.3
Loss from discontinued
operations(a).......... -- -- 4.4 29.6 87.6 50.8
Earnings after income
tax.................... 107.9 527.6 620.3 716.8 581.6 337.5
Share of profits of
associated company
after income tax....... 0.7 1.1 0.6 0.6 0.5 0.3
Earnings after income
tax and associated
company................ 108.6 528.7 620.9 717.4 582.1 337.8
Minority interest in
profits of
subsidiaries........... 0.9 0.6 0.7 0.6 0.7 0.4
Net earnings............ 107.7 528.1 620.2 716.8 581.4 337.4
Dividends............... 366.1 499.5 596.6 726.9 830.5 481.9
Tax credit on
supplementary
dividends.............. -- 25.9 29.7 65.4 100.4 58.3
Retained earnings....... 82.0 136.5 189.8 245.1 96.4 56.0
Earnings per Share from
continuing
operations(e).......... 0.046 0.227 0.331 0.395 0.355 0.206
Earnings per ADS from
continuing
operations(e).......... 0.37 1.82 2.65 3.16 2.84 1.65
Dividends per Share(f).. 0.155 0.230 0.300 0.350 0.390 0.226
Amounts in accordance
with U.S. GAAP(g):
Net surplus from
continuing
operations(d) NZ$ 109.3 NZ$ 532.2 NZ$ 618.0 NZ$ 744.6 NZ$ 762.6 US$ 442.5
Net earnings(d)......... 109.3 532.2 613.6 715.0 675.0 391.7
Basic earnings per Share
from continuing
operations(e).......... 0.046 0.230 0.327 0.394 0.404 0.234
Basic earnings per ADS
from continuing
operations(e).......... 0.37 1.84 2.62 3.15 3.23 1.87
Diluted earnings per
Share from continuing
operations(e).......... 0.046 0.230 0.327 0.394 0.404 0.234
Diluted earnings per ADS
from continuing
operations(e).......... 0.37 1.84 2.62 3.15 3.23 1.87
STATEMENT OF FINANCIAL
POSITION DATA(A):
Amounts in accordance
with New Zealand GAAP:
Fixed assets............ NZ$3,810.9 NZ$3,692.2 NZ$3,597.7 NZ$3,632.4 NZ$3,763.1 US$2,183.7
Total assets............ 4,750.0 4,558.0 4,492.5 4,491.6 4,618.3 2,680.0
Total tangible assets... 4,735.6 4,546.7 4,483.8 4,478.7 4,612.3 2,676.5
Debt due within one year
(including overdrafts). 462.1 325.2 392.9 271.7 524.4 304.3
Long term debt.......... 874.3 1,238.1 1,070.0 1,287.5 1,285.2 745.8
Total liabilities....... 2,299.6 2,525.6 2,402.5 2,343.2 2,975.7 1,726.8
Net tangible asset
backing per Share...... 1.03 1.07 1.10 1.13 0.89 0.52
Total capital funds(h).. 2,450.4 2,032.4 2,090.0 2,148.4 1,642.6 953.2
Amount in accordance
with U.S. GAAP(g):
Total shareholders'
funds(h)............... NZ$2,656.9 NZ$2,346.7 NZ$2,433.9 NZ$2,358.1 NZ$1,963.0 US$1,139.1
OPERATING STATISTICS:
Total access lines (at
period end)............ 1,534,000 1,593,000 1,658,000 1,719,000 1,782,000 1,782,000
National call minutes
(millions)............. 1,423.5 1,502.2 1,640.7 1,884.9 2,143.4 2,143.4
International outward
call minutes
(millions)............. 145.0 165.6 199.6 238.6 265.6 265.6
International inward
call minutes
(millions)............. 160.0 176.9 200.5 240.6 279.2 279.2
Cellular connections (at
period end)............ 100,200 143,800 229,200 339,500 422,800 422,800
Operating revenues per
employee............... NZ$191,066 NZ$230,072 NZ$305,551 NZ$345,563 NZ$357,798 US$207,630
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31,
-----------------------------------
1996 1997 1997
---------- ------------ ----------
(IN MILLIONS, EXCEPT PER SHARE
AMOUNTS,
PER ADS AMOUNTS AND OPERATING
STATISTICS)
<S> <C> <C> <C>
STATEMENT OF FINANCIAL PERFORMANCE DATA(A):
Amounts in accordance with New Zealand
GAAP:
Operating revenues:
Local service............................. NZ$ 621.4 NZ$ 642.1 US$ 372.6
National calls............................ 412.1 451.8 262.2
International............................. 366.6 379.2 220.0
Interconnection........................... 51.3 51.6 29.9
Cellular and other mobile services........ 236.4 312.1 181.1
Enhanced network services................. 220.1 274.3 159.2
Other operating revenues.................. 380.2 412.2 239.3
---------- ------------ ----------
Total operating revenues................ 2,288.1 2,523.3 1,464.3
---------- ------------ ----------
Operating expenses:
Net personnel costs....................... 264.0 290.2 168.4
Depreciation.............................. 395.1 422.3 245.1
Cost of sales............................. 304.1 383.9 222.8
Maintenance............................... 153.3 136.9 79.4
Other operating expenses.................. 259.7 285.5 165.7
Abnormal costs............................ 0.9 -- --
---------- ------------ ----------
Total operating expenses................ 1,377.1 1,518.8 881.4
Surplus from continuing operations......... 911.0 1,004.5 582.9
Investment income.......................... 17.8 15.7 9.1
Interest expense........................... 93.6 114.5 66.4
---------- ------------ ----------
Surplus from continuing operations before
tax....................................... 835.2 905.7 525.6
Income tax................................. 267.3 293.7 170.5
---------- ------------ ----------
Net surplus from continuing operations..... 567.9 612.0 355.1
---------- ------------ ----------
Loss from discontinued operations(a)....... 39.8 -- --
Surplus after income tax................... 528.1 612.0 355.1
Share of profits of associated company
after income tax.......................... 0.5 0.1 0.1
Surplus after income tax and associated
company................................... 528.6 612.1 355.2
Minority interest in profits of
subsidiaries.............................. (0.5) -- --
Net surplus................................ 528.1 612.1 355.2
Distribution on capital securities after
tax....................................... -- 14.1 8.2
Net earnings............................... 528.1 598.0 347.0
Dividends.................................. 613.9 699.9 406.1
Tax credit on supplementary dividends...... 75.4 83.5 48.5
Retained earnings.......................... 234.7 78.0 45.3
Earnings per Share from continuing
operations(e)............................. 0.301 0.333 0.193
Earnings per ADS from continuing
operations(e)............................. 2.408 2.664 1.546
Dividends per Share(f)..................... 0.285 0.315 0.183
Amounts in accordance with U.S. GAAP(g):
Net surplus from continuing operations(d).. NZ$ 563.3 NZ$ 545.8 US$ 316.7
Net earnings(d)............................ 523.5 545.8 316.7
Basic earnings per Share from continuing
operations(e)............................. 0.298 0.304 0.176
Basic earnings per ADS from continuing
operations(e)............................. 2.384 2.432 1.408
Diluted earnings per Share from continuing
operations(e)............................. 0.298 0.305 0.177
Diluted earnings per ADS from continuing
operations(e)............................. 2.384 2.440 1.416
STATEMENT OF FINANCIAL POSITION DATA(A):
Amounts in accordance with New Zealand
GAAP:
Fixed assets............................... NZ$3,713.7 NZ$ 3,791.7 US$2,200.3
Total assets............................... 4,627.7 4,738.0 2,749.5
Total tangible assets...................... 4,616.1 4,688.9 2,721.0
Debt due within one year (including
overdrafts)............................... 401.5 896.9 520.5
Long term debt............................. 1,301.7 1,303.3 756.3
Total liabilities.......................... 2,489.1 3,314.8 1,923.6
Net tangible asset backing per Share....... 1.13 0.78 0.45
Total capital funds(h)..................... 2,138.6 1,423.2 825.9
Amount in accordance with U.S. GAAP(g):
Total shareholders' funds(h)............... NZ$2,345.2 NZ$ 1,304.1 US$ 756.7
OPERATING STATISTICS:
Total access lines (at period end)......... 1,761,000 1,823,000 1,823,000
National call minutes (millions)........... 1,600.5 1,661.8 1,661.8
International outward call minutes
(millions)................................ 197.2 226.9 226.9
International inward call minutes
(millions)................................ 208.8 242.5 242.5
Cellular connections (at period end)....... 410,300 469,400 469,400
Operating revenues per employee............ NZ$351,738 NZ$ 391,870 US$227,402
</TABLE>
26
<PAGE>
- --------
(a) During fiscal 1997, the operations of Pacific Star group were classified
as discontinued and a formal plan of disposal or wind-down of its business
was commenced. The comparative figures for prior years have been
reclassified accordingly.
(b) Interconnection revenues for fiscal 1993, 1994, 1995 and 1996 are not
separately disclosed due to confidentiality agreements, but are instead
included in local service, national calls, international and other
operating revenues.
(c) The costs associated with a strategic restructuring of Telecom announced
in the fourth quarter of fiscal 1993, of NZ$450 million, together with
redundancy costs incurred in the first three quarters of fiscal 1993,
amounting to NZ$43.2 million, were charged against earnings in fiscal 1993
as an aggregate abnormal restructuring charge amounting to NZ$493.2
million.
The costs associated with a further strategic restructuring of Telecom
together with a provision for the cost of making all business-critical
computer platforms and applications Year 2000 compliant were charged
against earnings in fiscal 1997 as an aggregate abnormal charge amounting
to NZ$151.5 million.
(d) After deduction of minority interests and including Telecom's share of
associate companies' profits and losses.
(e) Per Share amounts have been calculated based on the weighted average
number of Shares outstanding during the periods indicated. Per ADS amounts
have been calculated based on a ratio of eight Shares per ADS. Diluted
earnings per Share and per ADS amounts reflect the dilutive effects of
options and capital securities.
(f) Dividends per Share are presented on the basis of the period to which they
relate.
(g) The principal differences between the amounts shown in accordance with New
Zealand GAAP and those shown in accordance with U.S. GAAP arise from the
treatment of the capitalization of interest costs, the recognition of
costs incurred in terminating interest rate swaps, accruals for
compensated absences, the write-off of research and development
expenditures, the method of providing for deferred income taxes, the
recognition of deferred compensation expense relating to the executive
share ownership plan, the recognition of accruals for restructuring and
Year 2000 modification costs and the timing of reflection of dividends in
retained earnings. In estimating the amounts shown in accordance with U.S.
GAAP, it has not been possible to quantify the impact on earnings and
total shareholders' funds arising as a result of ascribing fair values to
the fixed assets acquired by Telecom from the Post Office as of April 1,
1987 as required under New Zealand GAAP rather than using historical book
values as required under U.S. GAAP because the Post Office did not
maintain a separate fixed asset register or separate historical cost
records of all fixed asset additions in respect of the telecommunications
business. See also note 28 to the Audited Consolidated Financial
Statements.
(h) Capital funds includes both shareholders' funds and other items included
in equity under New Zealand GAAP, such as capital securities. For U.S.
GAAP, such other items are not included in shareholders' equity.
At an extraordinary general meeting of Telecom held in fiscal 1994,
shareholders passed a special resolution to cancel one Share for every five
on issue and to pay shareholders the par value of NZ$1 per cancelled Share.
The cancellation of Shares was completed in March 1994 for a total payment
of NZ$472.4 million.
In February 1997, Telecom commenced a Share repurchase program subject to
the requirements of Telecom's Constitution, the New Zealand Companies Act
1993 and the NZSE. The repurchase program was completed on December 19,
1997. As of March 31, 1997, 54,735,582 Shares had been repurchased at a
total cost of NZ$357.5 million and as of December 31, 1997 a total of
138,093,860 Shares had been repurchased at a total cost of NZ$1,001.3
million.
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW OF RESULTS OF OPERATIONS
The following tables set forth the major components of Telecom's operating
revenues and expenses for fiscal 1995, 1996 and 1997 and for the nine months
ended December 31, 1996 and 1997 in absolute terms and expressed as a
percentage of total operating revenues. Certain reclassifications of data
presented for fiscal 1995, 1996 and 1997 and for the nine months ended
December 31, 1996 have been made to conform to December 31, 1997
classifications.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------------- CHANGE
1995 1996 1997 1997:1996
-------------- -------------- -------------- -------------
$ % $ % $ % $ %
------- ----- ------- ----- ------- ----- ------ -----
(IN NZ$ MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Local service........... 784.2 29.2 826.7 28.4 829.3 26.9 2.6 0.3
National calls.......... 488.1 18.2 542.4 18.7 545.3 17.7 2.9 0.5
International........... 466.1 17.4 469.0 16.1 485.0 15.7 16.0 3.4
Interconnection(a)...... -- -- -- -- 65.7 2.1 65.7 --
Cellular and other
mobile services......... 228.5 8.5 313.3 10.8 316.4 10.3 3.1 1.0
Enhanced network
services................ 167.1 6.2 227.2 7.8 301.6 9.8 74.4 32.7
Other operating revenues
Directories........... 108.2 4.0 119.8 4.1 135.6 4.4 15.8 13.2
Leased services....... 132.5 4.9 133.2 4.6 127.7 4.1 (5.5) (4.1)
Equipment revenue..... 224.7 8.5 202.1 6.9 197.9 6.4 (4.2) (2.1)
Miscellaneous other
services.............. 84.1 3.1 74.9 2.6 79.0 2.6 4.1 5.5
------- ----- ------- ----- ------- ----- ------ -----
549.5 20.5 530.0 18.2 540.2 17.5 10.2 1.9
------- ----- ------- ----- ------- ----- ------ -----
Total operating
revenues................ 2,683.5 100.0 2,908.6 100.0 3,083.5 100.0 174.9 6.0
------- ----- ------- ----- ------- ----- ------ -----
OPERATING EXPENSES:
Gross personnel costs... 496.1 18.5 508.1 17.4 521.8 16.9 13.7 2.7
Labor capitalized....... (41.7) (1.6) (50.6) (1.7) (48.7) (1.6) 1.9 3.8
Labor recovered......... (155.8) (5.8) (139.6) (4.8) (126.2) (4.0) 13.4 9.6
------- ----- ------- ----- ------- ----- ------ -----
Net personnel costs..... 298.6 11.1 317.9 10.9 346.9 11.3 29.0 9.1
Depreciation............ 490.1 18.3 493.7 17.0 544.4 17.7 50.7 10.3
Cost of sales........... 373.1 13.9 394.6 13.5 404.6 13.1 10.0 2.5
Maintenance............. 163.1 6.1 150.7 5.2 201.3 6.5 50.6 33.6
Other operating
expenses................ 322.0 12.0 337.2 11.6 354.9 11.5 17.7 5.2
------- ----- ------- ----- ------- ----- ------ -----
1,646.9 61.4 1,694.1 58.2 1,852.1 60.1 158.0 9.3
Abnormal costs.......... -- -- -- -- 151.5 4.9 151.5 --
------- ----- ------- ----- ------- ----- ------ -----
Total operating
expenses................ 1,646.9 61.4 1,694.1 58.2 2,003.6 65.0 309.5 18.3
------- ----- ------- ----- ------- ----- ------ -----
Surplus from continuing
operations.............. 1,036.6 38.6 1,214.5 41.8 1,079.9 35.0 (134.6) (11.1)
======= ===== ======= ===== ======= ===== ====== =====
</TABLE>
- --------
(a) Interconnection revenues for fiscal 1995 and 1996 are not separately
disclosed due to confidentiality agreements, but are instead included in
local service, national calls, international and other operating revenues.
28
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
------------------------------ CHANGE
1996 1997 1997:1996
-------------- -------------- ------------
$ % $ % $ %
------- ----- ------- ----- ----- -----
(IN NZ$ MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Local service.................... 621.4 27.2 642.1 25.5 20.7 3.3
National calls................... 412.1 18.0 451.8 17.9 39.7 9.6
International.................... 366.6 16.0 379.2 15.0 12.6 3.4
Interconnection.................. 51.3 2.2 51.6 2.0 0.3 0.6
Cellular and other mobile
services........................ 236.4 10.3 312.1 12.4 75.7 32.0
Enhanced network services........ 220.1 9.6 274.3 10.9 54.2 24.6
Other operating revenues
Directories.................... 81.8 3.6 88.8 3.5 7.0 8.6
Leased services................ 95.1 4.2 98.5 3.9 3.4 3.6
Equipment revenue.............. 147.8 6.5 154.4 6.1 6.6 4.5
Miscellaneous other services... 55.5 2.4 70.5 2.8 15.0 27.0
------- ----- ------- ----- ----- -----
380.2 16.7 412.2 16.3 32.0 8.4
------- ----- ------- ----- ----- -----
Total operating revenues......... 2,288.1 100.0 2,523.3 100.0 235.2 10.3
------- ----- ------- ----- ----- -----
OPERATING EXPENSES:
Gross personnel costs............ 399.6 17.4 411.8 16.3 12.2 3.1
Labor capitalized................ (39.2) (1.7) (34.0) (1.3) 5.2 13.3
Labor recovered.................. (96.4) (4.2) (87.6) (3.4) 8.8 9.1
------- ----- ------- ----- ----- -----
Net personnel costs.............. 264.0 11.5 290.2 11.6 26.2 9.9
Depreciation..................... 395.1 17.3 422.3 16.7 27.2 6.9
Cost of sales.................... 304.1 13.3 383.9 15.2 79.8 26.2
Maintenance...................... 153.3 6.7 136.9 5.4 (16.4) (10.7)
Other operating expenses......... 259.7 11.4 285.5 11.3 25.8 9.9
------- ----- ------- ----- ----- -----
1,376.2 60.2 1,518.8 60.2 142.6 10.4
Abnormal costs................... 0.9 -- -- -- (0.9) --
------- ----- ------- ----- ----- -----
Total operating expenses......... 1,377.1 60.2 1,518.8 60.2 141.7 10.3
------- ----- ------- ----- ----- -----
Surplus from continuing
operations...................... 911.0 39.8 1,004.5 39.8 93.5 10.3
======= ===== ======= ===== ===== =====
</TABLE>
The information presented above should be read in conjunction with the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Management Commentary" in Appendix A to this Prospectus.
29
<PAGE>
BUSINESS
OVERVIEW
Telecom is a major supplier of telecommunications services in New Zealand.
Telecom provides a full range of telecommunications products and services
including local, national and international telephone services, cellular and
other mobile services, enhanced network services, equipment sales and
installation services, leased services and directories. In addition, Telecom
is a leading provider of Internet services in New Zealand.
As of December 31, 1997, Telecom had total assets of approximately NZ$4.7
billion (US$2.7 billion). Telecom generated approximately NZ$0.6 billion
(US$0.3 billion) and NZ$0.6 billion (US$0.3 billion) of net earnings from
approximately NZ$3.1 billion (US$1.8 billion) and NZ$2.5 billion (US$1.5
billion) of operating revenues for fiscal 1997 and the nine months ended
December 31, 1997, respectively. Telecom is the largest New Zealand company
listed on the NZSE in terms of market capitalization.
Approximately 70.8% of Telecom's operating revenues for the nine months
ended December 31, 1997 were derived from the Company's core business
comprising the provision of local (25.5%), national (17.9%) and international
(15%) telephone services and cellular and other mobile services (12.4%). The
Company's other telecommunications services including enhanced network
services, equipment sales and installation services, leased services and
directories contributed the remaining 29.2% of the Company's operating
revenues for the nine months ended December 31, 1997.
Telecom operates an advanced telecommunications network with over 99% of
Telecom's customers connected to digital telephone exchanges. Telecom's
international network provides services via optical fiber submarine cables and
satellite earth stations and is also over 99% digitalized. Telecom's cellular
service is available to approximately 96% of New Zealand's population. The
network consists of both digital (DAMPS) and analog (AMPS) services.
Unlike telecommunications companies in many other countries, Telecom
operates in a comparatively deregulated environment and is not prohibited from
offering a full range of telecommunications services. Except for certain
limitations on standard residential charges and general competition law
constraints, Telecom is free to increase or decrease the prices it charges for
all of its services. See "Risk Factors--Relationship with New Zealand
Government" and "Description of Shares--Kiwi Share."
Telecom was established by the New Zealand government in 1987 for the
purpose of acquiring the telecommunications business of the Post Office as
part of a broad range of reforms instituted by the New Zealand government that
were designed to place government-owned trading agencies on an equal footing
with private industry. Since 1989, there have been no statutory barriers to
entry to any part of the telecommunications industry in New Zealand.
Consequently, the telecommunications market in New Zealand is now very
competitive. Telecom expects competition to continue to intensify, with the
prospect of existing participants extending their activities as well as new
competitors entering the market. Competition exists in each of Telecom's
markets, including local, national and international telephone services,
cellular and other mobile services, equipment sales and installation services
and leased services. Certain of Telecom's competitors are large multi-national
corporations, or affiliates thereof, with substantial resources, including
Telstra, BT, MCI, Sprint and BellSouth. See "Risk Factors--Competition" and
"--Competition."
The Company is organized into divisions as follows:
. SERVICES: provides residential, general business and corporate customers
a full range of both fixed-wire and wireless based telecommunications
services.
. NETWORK: plans, develops, operates and is responsible for the
maintainance of all Telecom's fixed-wire, international, broadband and
mobile networks.
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. ENTERPRISES: includes Telecom Directories, Telecom Systems, Internet
services and ConnecTel, a network design, build and maintenance company.
STRATEGY
The Company's business strategy is to continue to grow its core business
while expanding and diversifying its revenue base primarily through
stimulating increased customer use of mobility, value added and Internet
services. The primary components of the Company's business strategy are
described below.
Grow Core Business
The Company's strategy to continue to grow revenue from local access
services is to promote growth in business usage and access lines and the use
of second access lines in the residential market. The long distance calling
markets in New Zealand are very competitive. Telecom's long distance strategy
is to keep its tariffs competitive while stimulating increased demand for call
services. Increased calling volumes are being pursued through innovative
marketing programs and pricing promotions. Telecom is also using its strong
brand awareness and customer loyalty programs to increase customer penetration
and long distance usage. Hubbing and routing of international call transit
traffic may also offer further revenue opportunities. In the fourth quarter of
fiscal 1998, Telecom reduced international toll call base rates for
residential customers by 16% to 66%, depending on the country being called,
offset in part by the removal of duration discounts. Telecom also reduced
international business toll call base rates by similar percentages. Cellular
rates were also reduced. Telecom had instituted toll reductions in
international and national rates earlier in fiscal 1998. Intense competition
and price declines are expected to continue.
Promote Mobility and Personalization
The Company has implemented a strategy to increase the number of cellular
subscribers and cellular revenues through innovative marketing programs and
pricing promotions. In addition, it is offering and promoting the use of
value-added mobile services such as voice dialing, direct connect and cellular
packet data services and mobile services that integrate fixed-wire and
wireless communication. For example, the Company recently introduced extension
dialing and "business zone," which allows users to make calls from within
their offices or "business zone" for less than a standard mobile phone call.
As the leading provider of cellular and fixed-wire services in New Zealand,
Telecom believes it is well positioned to lead the development of integrated
fixed-wire and mobile services.
Enhanced Services
The Company has embarked on a strategy in recent years to diversify its
revenue base by developing and offering new and enhanced network services
including 0800 capability, managed network services, voice messaging, ISDN
lines, caller display and other value added services. The Company believes
that penetration of many of these services in New Zealand is lower than in
some other comparable markets and that there is potential for further growth
in the use of these services.
Increase Internet Service Revenues
The Company is a leading provider of Internet services in New Zealand.
Telecom's goal is to increase Internet service revenues by continuing to grow
the number of subscribers for its XTRA service and increasing usage by
promoting electronic commerce applications in New Zealand. In addition,
Telecom intends to continue to grow revenues by attracting advertising and
Internet traffic over its network. Growth in the Company's Internet service
business is also stimulating demand for second access lines and fast data
services by business and residential customers.
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Contain Costs
The Company's overall strategy is to maximize profitability by increasing
revenues, as described above, and by containing cost growth. The Company's
Performance 2000 program has enabled the Company to identify additional cost
reduction opportunities which have been or are currently being implemented,
including improved fault diagnosis and repair procedures, more centralized
vendor management, reduced property and accommodation costs, increased
automation at calling centers and streamlined network design and planning.
PRODUCTS AND SERVICES
Introduction
For the nine months ended December 31, 1997, approximately 58.4% of
Telecom's operating revenues were derived from the provision of local,
national and international telephone services.
Local Service
Local service contributed approximately 25.5% of Telecom's operating
revenues for the nine months ended December 31, 1997. The components of local
telephone service are business and residential line rentals and local call
charges (predominantly paid by business customers). Local telephone service
provides the customer with access to the local telephone exchange, allowing
telephone communication between customers in a local calling area and access
to national and international toll services.
Local telephone service is provided by cable or radio links that connect
customers to the Telecom network and exchanges that enable customers to
connect to one another.
National Calls
National calls contributed approximately 17.9% of Telecom's operating
revenues for the nine months ended December 31, 1997. National calls (also
known as inland toll calls or, in the United States, long distance calls)
include calls to a location outside the caller's local calling area, calls to
the cellular network originating within the fixed-wire network and operator
service charges.
Most national calls are placed by direct dialing, also known as Subscriber
Toll Dialing. Telecom also provides operator assistance for such services as
price required calls, transfer charge calls, collect calls, person-to-person
calls, conference calls and calls using Telecom Calling Cards. There is a
charge for use of operator services.
National calls are carried on "trunk lines" which are long-line transmission
systems connecting exchanges. Telecom's trunk lines are almost completely
fiber optic cables and microwave radio links.
International Services
International services contributed approximately 15% of Telecom's operating
revenues for the nine months ended December 31, 1997. International services
provided by Telecom include outgoing international calls made in New Zealand,
collect, credit card and "New Zealand Direct" calls to New Zealand, receipts
from overseas telecommunications administrations and companies for calls to
New Zealand that use Telecom's facilities and calls from international
switched traffic transiting Telecom's facilities. Revenues are also derived
from international leased services and private networks used by New Zealand
business customers. Telecom makes payments to overseas administrations and
companies for the use of their facilities for outward and transit calls from
New Zealand to their countries.
Telecom provides international services via cables and satellite earth
stations, which receive and transmit international traffic, and international
gateway exchanges, which route incoming and outgoing traffic. Telecom is
directly linked to 62 carriers in 50 countries by submarine cable and
satellite and through those countries to the rest of the world. Telecom owns a
significant interest in TASMAN 2, a South Pacific submarine fiber optic cable.
Telecom also owns an interest in PacRim East, which links New Zealand and
Hawaii, and in PacRim West,
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which links Australia and Guam. PacRim West, together with TASMAN 2, PacRim
East, TPC-5 (linking Guam, Japan and Hawaii) and HAW-5 (linking Hawaii to the
United States mainland), form a Pacific network of fiber optic cables linking
New Zealand to North America and Asia.
Telecom's largest international traffic route is between New Zealand and
Australia. For the nine months ended December 31, 1997, approximately 48.2% of
the volume of Telecom's outgoing international calls, and approximately 42.3%
of outgoing international call revenues, were derived from calls from New
Zealand to Australia. Outgoing international calls to other Pacific islands,
the United Kingdom, the United States, Japan and Canada comprise the next
largest streams.
Telecom has authority under Section 214 of the Communications Act of 1934
(United States) to acquire and operate communications facilities in the United
States, and has established a presence in the United States with a transit
switch which became fully operational in December 1996. In addition, Telecom
has obtained a license to operate similar facilities in the United Kingdom.
Telecom is planning a joint venture with other international
telecommunications organizations to build and operate a trans-Pacific
submarine optical fiber cable called the Southern Cross Cable Network
("Southern Cross"), linking Australia and New Zealand with Hawaii and the West
Coast of the United States. Southern Cross is intended to provide
international capacity to meet expected growth of traffic generated by data
services, including Internet traffic, and is expected to commence operations
in 1999 and achieve full operational capacity in 2000. Telecom currently
anticipates entering into a take or pay commitment to purchase capacity from
Southern Cross and is considering making an equity investment in the entity
formed to manage it.
Cellular and Other Mobile Services
Telecom's cellular and other mobile services contributed approximately 12.4%
of Telecom's operating revenues for the nine months ended December 31, 1997.
Cellular. Telecom began operating a cellular network in 1987 and, until
March 1993, was the only cellular network operator in New Zealand. Telecom's
cellular service is available to approximately 96% of the New Zealand
population. The network consists of both digital (DAMPS) and analog (AMPS)
services, with most of Telecom's customers subscribing to the network's AMPS
service. As of December 31, 1997, Telecom had approximately 469,400
connections (up from approximately 410,300 connections, or 14%, from December
31, 1996).
Special features provided through the Telecom cellular telephone service
include: optional rate plans; part-minute charging; customized billing;
Cellular Secretary (voice mail); call diversion; three-way conferencing;
international roaming; Voice Dial (where a customer can make a call by
speaking numbers or names); MobileNote (where text messages can be sent to the
screen of a customer's phone); and Tandem (where two phones operate on one
number).
Telecom is developing personal communications services which bring together
the benefits of fixed and mobile technologies and applications, primarily
using its existing fixed-wire and cellular infrastructure. The first of these
services, Mobile Extension (which allows users to dial internal fixed
extension numbers from their mobile phones), was launched in November 1996.
Another service that allows users to make calls from within their offices or
"business zone" for less than the price of a standard mobile phone call was
launched recently.
The Telecom cellular network has, until recently, been retailed by Telecom
and three independent service providers through more than 250 dealers
nationwide. In 1997 Telecom purchased the businesses of two of the independent
service providers for the retailing of Telecom's cellular network and took
over the direct management of the customers of those service providers.
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As part of its marketing strategy for its cellular services, the Company
provides dealers with handset subsidies which are passed directly to
subscribers. These subsidies are in addition to revenue-based dealer
commissions. The amount of the handset subsidy is dependent upon the length
and type of service contract that the subscriber selects. Handset subsidies
for new subscribers are expected to increase over time as more new subscribers
select Telecom's DAMPS network, which requires more expensive handsets.
Paging. Telecom provides an extensive paging service which is available to
approximately 95% of the population. Telecom offers alpha-numeric (message)
paging services which operate in conjunction with the Telecom paging message
center. Telecom also offers simple tone and numeric paging services and
private paging systems such as wide area paging networks for the health
sector. Telecom has also introduced a paging service called "Minicall" aimed
at the consumer market which involves customers purchasing a pager with
callers to the pager paying a per call charge.
Mobile Radio. Telecom operates a national mobile radio network that covers
approximately 90% of New Zealand through its 1,750 channels and 190 mobile
radio repeater sites located strategically throughout the country. Most of
Telecom's mobile radio customer base of 35,000 terminals are companies with
vehicle fleets operating from a central base.
The number of mobile radio systems per capita in New Zealand is high in
comparison with other countries. This is largely attributable to the low cost
of the service to users and national coordination of the network. Telecom's
mobile radio network can connect to the PSTN to allow telephone calls.
Telecom's mobile services also include Fleetlink (trunked radio), Sealink
(automatic marine telephone service) and mobile data capability.
Enhanced Network and Miscellaneous Other Services
Revenues from enhanced network services and miscellaneous other services
contributed approximately 10.9% and 2.8%, respectively, of Telecom's operating
revenues for the nine months ended December 31, 1997.
Telecom offers a range of "Smartphone" services such as call waiting, call
diversion, 3-way calling, do not disturb, quick dial and caller display.
Customer awareness and usage of these services is growing. Based on trends in
other countries, Telecom expects the use of these services to grow in the
future. Telecom also offers network based call answering and messaging
services such as call minder and message manager.
Telecom's 0800 services automatically charge the called party and are free
to the calling party. This service is used mainly by businesses to encourage
long-distance calls from customers. Telecom offers a call analysis package as
part of its 0800 service. Telecom also offers 0800 services for residential
customers.
Netway Communications Limited ("Netway"), a wholly owned subsidiary of the
Company, is a specialist business operating in the large business sector.
Netway specializes in designing and managing customized solutions for the
telecommunications needs of large organizations. As part of its services,
Netway operates telephone and computer networks, fax, E-Mail and electronic
data interchange (EDI) services. Netway has over the past year become more
closely integrated into Telecom's services division.
Telecom offers PACNET, a data transport system that uses packet switching
technology to accumulate and transmit information in "packets." PACNET is used
as a basis for value-added services such as electronic mail, online database
systems and EFT-POS (Electronic Funds Transfer at the Point-of-Sale).
Telecom's frame relay service provides high speed links between LAN host
computers and high performance work stations designed to address the growing
market for high speed data services.
Telecom offers Centrex, a PABX-like service provided directly from Telecom
telephone exchanges. Centrex is primarily designed to meet the requirements of
business customers and provide access to a wide range of features normally
available only from an advanced business system.
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The Company is a leading provider of Internet services in New Zealand.
Telecom's strategy to increase Internet service revenues is to continue to
grow the number of subscribers to its XTRA service and increase usage by
promoting electronic commerce applications in New Zealand. In addition,
Telecom intends to continue to grow revenues by attracting advertising and
Internet traffic over its network. Growth in the Company's Internet service
business is also stimulating demand for second access lines and fast data
services by business and residential customers.
Telecom owns a 60% interest in Telecom Cook Islands Limited, a joint venture
with the government of the Cook Islands, which provides a full range of
telecommunications services to the Cook Islands.
Telecom also operates ISDN, 0900, public payphone, teleconferencing and
consultancy services.
Equipment Sales and Installation Services
Revenues from Telecom's equipment sales and installation services
contributed approximately 6.1% of Telecom's operating revenues for the nine
months ended December 31, 1997. Telecom supplies and installs a range of
customer premises equipment ("CPE"), including telephones, PABXs, keyphones,
pagers, facsimile and other data terminals and equipment. All CPE supplied by
Telecom is manufactured by non-affiliated suppliers.
Before deregulation of the CPE market in New Zealand, Telecom was the
provider of most CPE and provided CPE on a rental basis only. As a result, a
significant proportion of Telecom's CPE revenues comes from continuing monthly
rentals. Since deregulation of the supply of telephones in 1988 and PABXs in
1989, many customers have chosen to purchase their own CPE from Telecom or
other suppliers rather than continuing to rent.
Telecom Business Systems Limited, a wholly owned subsidiary of the Company,
provides sales and marketing support, installation, rental and maintenance for
business customers requiring complex or sophisticated CPE. Telecom provides
rental telephones for business and residential customers but does not sell
telephones to residential customers except in limited cases such as to
encourage the uptake of network services (e.g., caller display). Telecom also
supplies PABXs and other business systems on a rental and sale basis and
through third party leasing arrangements.
Leased Services
Telecom's leased services contributed approximately 3.9% of Telecom's
operating revenues for the nine months ended December 31, 1997. Telecom offers
a wide range of dedicated circuit services to satisfy the needs of customers
requiring use of exclusive telecommunications links. These services are used
extensively in corporate data networks. Dedicated circuits are commonly used
for applications such as linking PABXs and for private data networks. Other
uses include transporting fire and other alarm signals to centralized
monitoring centers and transporting radio and television signals between
studio facilities and transmission sites.
Directories
Telecom's directories business contributed approximately 3.5% of Telecom's
operating revenues for the nine months ended December 31, 1997. Telecom
annually publishes 18 regional directories listing customers' names and
telephone numbers ("White Pages"), and 15 local, and three specialist,
directories. Telecom also has contracts to publish the Western Samoan and Cook
Islands telephone directories. Telecom has entered into separate ageements
with Clear and Telstra New Zealand Limited ("Telstra NZ") for their respective
customers to be listed in Telecom's directories.
A standard listing in the regional and local directories is free to both
residential and business customers. Special listings are available on a
charged basis. Regional advertising directories classified by product or
service ("Yellow Pages") are also published every year.
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Telecom distributes to homes and businesses in New Zealand, at no charge,
one copy of the White Pages and Yellow Pages for the region in which they are
located. Additional copies may be purchased. In addition, a national directory
of facsimile numbers is published and distributed to customers listed in the
facsimile directory at no charge and to others for a fee.
Telecom offers four color advertising, bold and super bold entries and logos
in its directories. Telecom also provides electronic and Internet access to
White Pages and Yellow Pages.
Interconnection
Telecom exchanges calls with competing telecommunications operators which
require access to Telecom's networks in order to provide their customers with
service capability throughout New Zealand. Prices and terms for this
interconnection are determined by agreement between the parties and Telecom's
revenues include payment for calls carried on behalf of other service
providers.
Telecom entered into its first interconnection agreement in 1991 with Clear.
Clear is a joint venture among BT, MCI, Todd Corporation Limited (a large
privately owned New Zealand investment company) and Television New Zealand
Limited (a state owned television company) formed to operate a competing
telecommunications network in New Zealand.
Telecom and Clear entered into a comprehensive new interconnection agreement
which came into effect on January 1, 1996. The interconnection agreement
includes prices for local service interconnection whereby Clear and Telecom
pay each other interconnection charges for local calls. It also includes
revised prices for toll interconnection and 0800 interconnection and for Clear
customers calling Telecom cellular customers. Clear has filed a suit against
the Company challenging, among other things, the validity of both Clear's
current and original interconnection agreements. See "--Legal Proceedings." On
November 26, 1997, Telecom and Clear signed an agreement establishing number
portability between their two networks.
Clear's interconnection agreement with Telecom requires Clear to pay Telecom
charges for interconnection and call charges to the extent Clear's customers'
calls go over the Telecom network and vice versa. The interconnection
agreement does not require that Telecom bill Clear customers or provide Clear
with the names and addresses of Telecom customers. Instead, Clear enters into
agreements with new customers on an individual basis and bills its customers
directly. In order to access the Clear network for toll interconnection, Clear
customers must either dial an access code or arrange for non-code access. Non-
code access, which provides customers with the ability to preselect a long
distance carrier, became available in April 1993. Clear pays additional
charges to Telecom in order to provide non-code access to its customers. Clear
is currently withholding certain payments for services supplied under its
interconnection agreement. See "--Legal Proceedings."
Telecom concluded an interconnection agreement with Saturn Communications
Limited ("Saturn") in June 1997. Saturn offers pay television services over a
cable network it has installed. The interconnection agreement with Telecom
enables Saturn to provide local and national call services.
In March 1995, Telecom entered into an interconnection agreement with Global
One Telecommunications (New Zealand) Limited ("Global One"), an affiliate of
Sprint. Global One is currently offering international services.
In June 1996 Telecom concluded its first interconnection agreement with
Telstra NZ, a subsidiary of Telstra. Telstra is the major supplier of
telecommunications services in Australia. The interconnection agreement with
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Telecom enabled Telstra NZ to offer national and international calls and 0800
service. Telstra NZ has also stated its intention of offering leased data
services. On November 11, 1997, Telecom signed a new interconnection
agreement, which replaced the June 1996 agreement and also covered local
service. Telecom also signed a local number portability agreement with Telstra
NZ. Telstra NZ has announced its intention to provide local services.
In February 1998, BellSouth New Zealand ("BellSouth NZ") and Telecom entered
into a comprehensive new interconnection agreement, replacing the original
March 1993 agreement between the parties. This interconnection agreement
covers a broad range of interconnection services, including interconnection
with BellSouth NZ's cellular network.
Telecom has an interconnection agreement with Teamtalk Limited (a wholly
owned subsidiary of International Wireless Communications) covering the
trunked mobile dispatch service operated by Teamtalk.
Telecom also has interconnection agreements with Compass Communications Ltd.
and Worldxchange Limited ("Worldxchange").
TARIFFS
There is no statutory regulation of Telecom's prices for telephone network
access or usage or for any of its other services in New Zealand. Consequently,
Telecom is not required to appear before any regulatory authority in order to
increase or decrease its rates. However, under Telecom's Constitution, Telecom
is restricted, except in certain limited circumstances, from raising its
standard residential line charges above the percentage increase in the CPI.
See "Risk Factors--Relationship with New Zealand Government" and "Description
of Shares--Kiwi Share."
Historically, telecommunications tariffs were set by the Post Office on the
basis of financial targets set by the New Zealand government to achieve social
and political objectives. This pricing structure resulted in significant
cross-subsidization among various elements of Telecom's services. The foremost
example was the subsidy of local telephone services by other revenues,
principally from national calls. This cross-subsidization continues to a
lesser degree.
Under Telecom's tariff structure, residential customers ordinarily pay a
fixed monthly access charge of NZ$31.70 (before Goods and Services Tax
("GST")) that entitles them to make local calls without additional charge.
Telecom also offers residential customers various optional payment plans
relating to monthly access charges and per call pricing, which provide, for
example, residential customers with the option to pay for local calls in
return for a reduced access charge.
Most business customers now pay a uniform fixed-wire rental, plus a usage
charge for local calls. The current level of the standard fixed access charge
is NZ$58.42 per month (before GST). The usage charge is NZ 4.55 cents per
minute (before GST) between 7am and 10pm and NZ 0.99 cents per minute (before
GST) at other times. Some business customers receive discounts on their line
rental and local call charges as part of business discount plans available to
the business market.
Residential and business customers are charged for direct dial national
calls on a 1 minute + 1 second basis, which charges customers for the first
minute of use at the time the call is connected and on a per second basis from
the completion of the first minute of calling. The prices for national calls
vary according to traffic route, distance and time of day. Promotions and
price specials are run periodically to stimulate growth in volume. Telecom
offers a range of discount plans to its business and residential customers
designed to ensure that prices for national calls are competitive within the
most important market segments.
International calls are also charged on a 1 minute + 1 second basis.
Promotions and price specials are used periodically to stimulate growth in
international calls. Telecom offers a range of discount plans to its business
and residential customers designed to ensure that prices for international
calls are competitive.
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Telecom offers a range of cellular plans to its business and residential
customers, which consist of monthly access fees and per call charges on a 1
minute +1 second basis. Telecom also offers discounts to business customers.
Originators of calls to cellular telephones generally pay all usage charges.
Telecom charges subscribers a monthly access charge for subscription to its
value-added services such as voice messaging and caller display.
MARKETING
Telecom's marketing activities are focused on positioning Telecom as a major
competitive provider of telecommunications services to business and
residential customers in New Zealand. There are three major marketing teams
within Telecom structured around three main groups of customers: Consumer,
Business and large Corporate customers. Each of these marketing teams focuses
on their respective customer groups. All three marketing teams cover both
fixed and mobile services. Each of the Consumer, Business and Corporate groups
also operate a range of direct and indirect channels, including face-to-face
account management of key business customers and Telecom's top 600 customers.
Telecom maintains an advertising program, through broadcast and print media,
to support its sales effort. The focus of Telecom's advertising strategy is to
increase customer awareness of products, stimulating usage and building the
Telecom brand.
TECHNOLOGY
Telecom operates an advanced telecommunications network. Over 99% of
Telecom's customers are connected to digital telephone exchanges.
Approximately 99% of Telecom's transmission links between cities (inter-city
links) and links within urban areas (urban links) have digital capacity. Of
these, approximately 99% of urban transmission systems are now fiber optic.
Inter-city links are fiber optic cables (86%) with some digital microwave
radio (14%). Local loop technology includes copper cable, radio and fiber
optic. A network of digital transmission systems connects the major switching
nodes. Telecom has adopted the internationally standardized CCS No.7 signaling
system as a key component of its network design. Telecom commenced operation
of an Intelligent Network ("IN") in 1992. The IN enhances the operation of the
existing network and allows Telecom to more easily provide new services.
Telecom began deployment of synchronous transmission systems in 1993.
Telecom's network is managed through a computerized management system which
monitors the network, records network traffic flows and rearranges network
capacity as necessary. This is intended to enable swift restoration of service
after any failure and to maintain maximum network availability.
Telecom began in January 1996 to deploy residential HFC cable in Auckland
and Wellington for commercial delivery of information and entertainment
services to the home. The first stage of this roll-out is now virtually
complete with more than 68,000 homes in the Auckland and Wellington suburbs
passed. However, during the program, it became clear that alternative
technologies are rapidly likely to become more appropriate for the carriage of
fast data, and possibly video in other geographical areas. Accordingly, the
deployment of HFC cable was halted after the first stage. The costs associated
with reorganizing this program and discontinuing the HFC roll-out have
resulted in losses and is likely to result in further losses, which further
losses are not currently expected to be material. Telecom has commenced a
trial in Wellington of ADSL (asymmetric digital subscriber line) network
technology which enables broadband services, such as high speed data,
additional voices services and, potentially, video services, to be deployed
over existing copper cabling. From early 1996 Telecom has been testing ATM
(asynchronous transfer mode) network technology, providing broadband data
networking capability, with a number of New Zealand universities and research
establishments.
Telecom's international network provides international services via optical
fiber submarine cables and satellite earth stations. The international network
is 99.7% digital.
Telecom does not manufacture telecommunications equipment but concentrates
on the design and development of its networks with the best technology
available. Research and development costs are, therefore,
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not material. Equipment is purchased on supply contracts after international
tendering of bids. Turnkey supply and installation contracts and flexible
supply contracts (typically of three to five years duration) are used for
equipment installed by Telecom in its network. Telecom has long-term equipment
supply relationships with NEC Corporation of Japan ("NEC"), Fujitsu Limited of
Japan ("Fujitsu"), Nokia Telecommunications of Finland ("Nokia") and L.M.
Ericsson of Sweden ("Ericsson"), which has enabled it to develop an integrated
network of high technical quality. NEC has been the provider of main exchange
switches to the Telecom network since 1973, first with crossbar
electromechanical switches and, since 1982, with digital switches. NEC has
also provided IN and international gateway switches. Fujitsu, Nokia and
Siemens are the main providers of transport systems. Ericsson has supplied
Telecom with its cellular network since 1986, including cell sites and
switches.
Telecom has no obligation to continue to purchase equipment from NEC,
Fujitsu, Nokia or Ericsson and Telecom believes there are sufficient
alternative sources of supply. Telecom also controls a joint venture company
with NEC for software writing, fault servicing and turnkey installation of
switching equipment for the national network.
YEAR 2000
The majority of computer software worldwide is programmed to process
transactions using only two digits for the year of the transaction (e.g., "98"
for 1998) rather than four digits. Computer systems which process year 2000
transactions (and beyond) with the year "00" will encounter significant
processing inaccuracies and potentially even inoperability. Almost all of the
services which Telecom offers its customers are based on technology-driven
systems, including the exchanges and other components in Telecom's fixed-wire,
cellular and paging networks. This issue also affects many of Telecom's
traditional information technology applications. In addition, Telecom's
customers and suppliers are subject to the same risks and, if they are so
affected, such event could, in turn, adversely affect Telecom. Planning to
address this started in August 1996. The first phase of the project, to
identify those of Telecom's systems which are not year 2000 compliant, has
been completed. The development of detailed plans and timetables to minimize
the risk that any of Telecom's business-critical systems are not year 2000
compliant by December 31, 1999 was completed in May 1997, at which time the
identification of, and search for, the necessary human resources commenced.
Such resources are generally in short supply both in New Zealand and world
wide and it is expected that competition for the necessary skills will
intensify as the year 2000 draws near. The operating cost of making the
modifications necessary to maintain existing functionality into the year 2000
and beyond is estimated at NZ$87.0 million (US$50.5 million). The Company will
also make capital expenditures in connection with this issue estimated at
approximately NZ$20.0 million (US$11.6 million). While Telecom has established
a reserve to account for Year 2000 costs, there can be no assurance that the
Year 2000 program will be successful, additional costs may not be incurred,
Telecom's customers or suppliers will not be adversely affected or such issues
will not otherwise have a material adverse effect on Telecom's business,
financial condition or results of operations.
NEW ZEALAND ECONOMY
New Zealand is a parliamentary democracy located in the South Pacific, with
a population of 3.6 million people. New Zealand has a market economy with
sizeable manufacturing and services sectors complementing what is considered a
highly efficient, export-oriented agricultural sector. However, on January 30,
1998, Moody's Investors Service revised the outlook on New Zealand's Aa1
sovereign credit rating from stable to negative reflecting concerns about New
Zealand's widening current account deficit as well as the potential impact of
events unfolding in Asia.
Growth in New Zealand over the last two years has been moderate, as monetary
policy has remained tight to keep inflation within the New Zealand Reserve
Bank's 0-3% target range. Certain factors have recently emerged that could
adversely affect continued growth, including a widening of the country's
balance of payments current account deficit, a weakening of the New Zealand
dollar and increased interest rates. In addition, New Zealand's economy has a
significant exposure to other Asian/Pacific economies. As a result, the recent
Asian market crisis introduces considerable uncertainty into New Zealand's
economic prospects.
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COMPETITION
Introduction
Since 1989, there have been no statutory barriers to entry to any part of
the telecommunications industry in New Zealand, and vigorous competition has
developed in the various telecommunications markets in New Zealand. Telecom
expects competition to continue to intensify, with the prospect of existing
participants extending their activities as well as additional competitors
entering the market.
Competition exists in each of the markets in which Telecom operates,
including local (primarily business to date), national and international
telephone services, cellular and other mobile services, equipment sales and
installation services and leased services. Certain of Telecom's competitors
are large multi-national corporations, or affiliates thereof, with substantial
resources, including Telstra, BT, MCI, Sprint and BellSouth.
Broadly speaking, Telecom competes on the basis of product range, service,
quality and price.
The Company is required to make publicly available certain pricing
information that may place it at a competitive disadvantage in the market. See
"--Regulatory Framework--The New Zealand Regulatory Environment--
Telecommunications (Disclosure) Regulations 1990." There can be no assurance
that the competitive environment will not have a material adverse effect on
Telecom's business, financial condition or results of operations.
Impact of Rapid Technological Change
Rapid changes in telecommunications and information technology are
redefining the markets in which Telecom operates, the products and services
demanded by customers and the ability of enterprises to compete in the
telecommunications industry. Such changes are broadening the range, reducing
the costs and expanding the capacity and function of infrastructures capable
of delivering these products and services. Partially as a result of these
changes, the prices that can be charged for many products and services are
falling. There is a risk that competitors will deploy or develop technologies
that provide them with lower costs or other operating advantages relative to
Telecom, which could require Telecom to reduce the prices of its products and
services to remain competitive and incur significant expenditures in addition
to those already planned in order to remain competitive.
Telecom has invested substantial capital and other resources in the
development and modernization of its networks and systems. With the
accelerating pace of technological change, Telecom sometimes is required to
reassess its strategies and the outcome of such investments is increasingly
less certain. For example, the reassessment of Telecom's residential HFC
program has resulted in losses and is likely to result in further losses,
which further losses are not currently expected to be material. See "--
Technology" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Local Service
While there is currently only limited competition in local call services,
Telecom anticipates significant competition in this area will develop. In
particular, Clear is offering local call services to a small number of
targeted business customers in the Auckland, Wellington and Christchurch
central business districts and Telecom expects Clear to expand the rollout of
this service. In addition, Clear has stated it might offer local call services
to some residential customers. The impact on Telecom's revenues as Clear
extends its services cannot be reliably assessed at this time. The
interconnection agreements signed with several other carriers will also allow
each of them to provide local service. See "--Interconnection." Saturn has
indicated that it intends to commence providing local service shortly.
As detailed in "--Interconnection," Telecom has signed local number
portability agreements with Clear and Telstra NZ which allow customers to
retain a telephone number when changing carriers. Telecom has begun porting
local numbers. Telecom is currently in negotiation with other carriers in
respect of local, 0800 and mobile to mobile number portability. The effect, if
any, of number portability upon Telecom's revenues cannot be measured at this
time.
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National Calls
Competition in the national call markets commenced in 1991 with the signing
of the first interconnection agreement between Telecom and Clear. See "--
Interconnection." Vigorous competition between Telecom and Clear in this
market has been further fueled by the launch of Telstra NZ's national tolls
offering in 1996, followed in 1997 by offerings from Global One and
Worldxchange. Each of these new entrants depends upon a network of resellers
for distribution, targeting business and consumer markets. Intensive price
competition is expected to continue.
International Services
Telecom is facing intense competition from a variety of sources in
international services. Clear provides international telephone services to New
Zealand customers via its satellite earth stations and its ownership interest
in the TASMAN 2 submarine cable. Telstra NZ and several other carriers also
offer international services. There are also a range of resellers, refilers
and call-back operators offering competing international services.
The environment for international services is changing rapidly as the
regulated trading regime for international traffic shifts to competition-based
pricing. Such changes result from, among other things, the global trend toward
deregulation of the telecommunications industry in many countries and from the
attendant increase in competition. Increased competition has put pressure on
the traditional accounting rate regime as telecommunications organizations
endeavor to lower their costs through reducing settlement rates or through
various forms of arbitrage. Arbitrage activity in the industry is growing
rapidly, which is also forcing settlement rates toward the real costs of
termination for international calls. While total payments and receipts are
both declining as settlement rates move towards cost, the rates of movement
are dissimilar. Historically, Telecom's net settlement position was
substantially in balance, but that position moved to a net settlement deficit
as a result of traffic being arbitraged into New Zealand at a rate faster than
settlement rates for outgoing traffic can be lowered and outgoing traffic
growing at a faster rate than incoming traffic.
In the fourth quarter of fiscal 1998, Telecom announced reductions in
international toll call rates averaging approximately 20% which were in part,
a response to competitive pressures discussed above. While price elasticity
and market growth have historically partially or wholly tended to offset price
declines, given the size of this decrease, management expects some decline in
international tolls revenues for the fourth quarter of fiscal 1998 relative to
the fourth quarter of fiscal 1997. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Mobile Services
BellSouth, through BellSouth NZ, commenced operating a competing mobile
cellular network in 1993 and is currently Telecom's only competitor in the
mobile cellular market. In the fourth quarter of fiscal 1998, Telecom
announced reductions in cellular rates which were, in part, a response to
competitive pressures.
In May 1993, the New Zealand government sold spectrum management rights in
the TACS-BGSM band to Telstra NZ. In December 1997, Telstra NZ announced an
agreement with BellSouth NZ involving the transfer of Telstra NZ's rights in
the TACS-BGSM band to BellSouth NZ and allowing Telstra NZ to offer mobile
services using the BellSouth NZ network but providing its own phones and
customer service. Telstra NZ announced that it expected to launch its service
early in 1998.
Telecom has also entered into an interconnection agreement with Teamtalk (a
wholly owned subsidiary of International Wireless Communications) covering the
trunked mobile dispatch service operated by Teamtalk.
The New Zealand government has announced that it will conduct an auction of
spectrum in the second half of 1998 in the 2 GHz range which can be used to
provide a range of second and third generation cellular services. The Company
has not yet determined whether it will participate in this auction. If it
decides to participate, there can be no assurance that Telecom will be
successful or, if successful, that Telecom could obtain New Zealand Commerce
Commission (the "Commerce Commission") approval for an acquisition of
spectrum. The Commerce Commission has indicated that Telecom's acquisition of
additional spectrum within the 2 GHz band may raise dominance issues. Telecom
disputes this position and is engaged in ongoing discussions with the Commerce
Commission. The New Zealand government is also considering auctioning the
remaining GSM management rights at the same time. Such spectrum could be used
to establish a number of additional competing cellular networks in New
Zealand. See "--Regulatory Framework--Radiocommunications Act 1989."
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Customer Premises Equipment
The CPE market is competitive with a wide range of products available from
numerous competitors. See "--Products and Services--Equipment Sales and
Installation Services" for a description of Telecom's role in the CPE market.
Other Services
A number of large companies operate private networks for domestic
communications on dedicated lines leased from Telecom and other suppliers.
Several companies resell excess capacity on dedicated lines to other users but
it is difficult to assess the extent of such use. Other companies have
established businesses based on acquiring bulk transmission capacity from
Telecom and reselling this capacity in smaller parcels with network management
services. Telecom has experienced increased competition since deregulation
from a number of companies providing voice mail, electronic messaging and
other value-added services using Telecom's network.
REGULATORY FRAMEWORK
The New Zealand Regulatory Environment
Unlike telecommunications companies in many other countries, Telecom
operates in a comparatively deregulated environment. Certain limitations on
its business are imposed by the Kiwi Share. See "Risk Factors--Relationship
with New Zealand Government" and "Description of Shares--Kiwi Share." The
principal statutory controls are discussed below.
Commerce Act 1986. Following the liberalization of the New Zealand
telecommunications market, the Commerce Act became the principal statute
controlling market behavior.
The Commerce Act prohibits various forms of restrictive trade practices in
New Zealand. These include entering into contracts, arrangements or
understandings that have the purpose of, or that have or are likely to have
the effect of, substantially lessening competition in a market. It also
prohibits any person who has a dominant position in a market from using that
position for the purpose of restricting the entry of others into any market,
preventing or deterring others from engaging in competitive conduct in any
market or eliminating others from any market. It further prohibits the
acquisition of assets of a business or shares by any person that is likely to
result in that or any other person acquiring or strengthening a dominant
position in a market without the consent of the Commerce Commission.
Applications for merger and takeover clearances and authorizations are now
made on a voluntary basis. However, the Commerce Act retains penalties for
mergers and takeovers which proceed without Commerce Commission clearance or
authorization and have anti-competitive effects which are likely to result in
any person acquiring or strengthening its dominant position in a market.
The Commerce Act gives the High Court the power to grant injunctions to
restrain conduct and to award damages and impose pecuniary penalties of up to
NZ$5.0 million against a company in respect of each breach. In addition, the
Commerce Act gives the New Zealand government power to introduce price
controls for goods or services supplied or acquired in a market where
competition is limited or likely to be lessened. The New Zealand government is
currently reviewing the penalties regime under the Commerce Act.
The Commerce Commission, as the government agency responsible for policing
the Commerce Act, investigates complaints about alleged contraventions of the
Commerce Act. Private persons can also bring actions under the Commerce Act.
Fair Trading Act 1986. Telecom is also subject to the Fair Trading Act 1986
(the "Fair Trading Act"), like all trading enterprises in New Zealand. The
Fair Trading Act prohibits misleading and deceptive conduct, false
representations and unfair trade practices. It also establishes a mechanism
for the prescription of consumer information and product safety standards.
Consumer Guarantees Act 1993
The Consumer Guarantees Act 1993 provides rights of redress against
suppliers and manufacturers of goods and services in respect of any failure to
comply with guarantees given, or deemed by the statute to be given, to
consumers.
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Telecommunications Act 1987. The Telecommunications Act 1987 (the
"Telecommunications Act"), removed Telecom's statutory monopoly on the
provision of network services from April 1, 1989. By removing entry
restrictions, it facilitated effective competition in the supply of
telecommunications goods and services.
The Telecommunications Act allows the establishment and maintenance of
telecommunications networks by any person. It also confers upon network
operators statutory rights of entry upon any land (including land owned by the
New Zealand government) for the purpose of gaining access to existing lines
constructed before April 1, 1989 and existing works constructed before January
1, 1988 owned by the network operator. Telecom is a network operator.
The Telecommunications Act is the enabling legislation for the
Telecommunications (International Services) Regulations 1994 and the
Telecommunications (Disclosure) Regulations 1990.
Telecommunications (International Services) Regulations 1994. The
Telecommunications (International Services) Regulations 1994 apply to all
persons who establish, operate or maintain facilities in New Zealand for the
purpose of providing to other persons in New Zealand, pursuant to an agreement
or arrangement between that person and an overseas operator, public switched
telecommunications services to or from territories outside New Zealand or
leased circuits that are connected both with public networks in New Zealand
and with public networks in the territory of the overseas operator. Any person
to whom the regulations apply must apply to become a registered operator.
The Secretary of the Ministry of Commerce (the "Commerce Secretary") may
(having regard to the desirability of promoting a competitive market in
international telecommunications services in New Zealand and the interests of
users of such services in New Zealand) at any time require any registered
operator:
. to ensure that any agreement or arrangement between the registered
operator and an overseas operator specified by the Commerce Secretary
provides for the registered operators to pay a fee for terminating
traffic to the overseas operator, which fee shall be at a rate, and in
accordance with a method, fixed by the Commerce Secretary; and
. to ensure that any agreement or arrangement between the registered
operator and an overseas operator specified by the Commerce Secretary
provides for the registered operator's share of total traffic to New
Zealand from that overseas operator to be in a similar proportion to that
registered operator's share of total traffic from New Zealand to that
overseas operator.
Registered operators are also required to:
. comply with such international telecommunications agreements and
conventions to which New Zealand is a party as the Commerce Secretary may
notify;
. provide to the Commerce Secretary such statements, reports and agreements
with overseas operators as the Commerce Secretary may require; and
. pay such fees as are payable under the Regulations. A registration fee of
NZ$10,000 and an annual fee of NZ$l0,000 thereafter are currently
payable.
Telecommunications (Disclosure) Regulations 1990. The Telecommunications
(Disclosure) Regulations 1990 (the "Disclosure Regulations") are intended to
support the regulatory regime under the Commerce Act by making more
information about Telecom's activities available to the public.
The information which Telecom is required to make publicly available at
regular intervals is as follows:
. year end (audited) and six monthly (unaudited) financial statements of
its principal operating subsidiary;
. Telecom's standard prices, terms and conditions for "prescribed
services." Prescribed services are essentially basic network services,
leased circuits and network interconnection;
. the principles or guidelines applied by Telecom in determining whether or
not to allow a discount and the maximum discount available;
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. where Telecom provides discounts of 10% or more on prescribed services,
the discount allowed, any relevant variation to the standard terms and
conditions and the principles applied in determining to give the
discount;
. where Telecom has supplied prescribed and other services and a discount
of 10% or more was applied in relation to the aggregate price of all the
services, the discount allowed and the fact that the discount applied to
services other than prescribed services; and
. the full text of any interconnection agreement relating to
interconnection to Telecom's public switched network.
The Company Secretary is required to make statutory declarations that the
Disclosure Regulations have been complied with, based on the Company
Secretary's reasonable inquiry.
Radiocommunications Act 1989. Until 1989, all radio frequencies were
allocated by the New Zealand government, which issued radio apparatus licences
to users in respect of transmitters or particular groups of transmitters. The
Radiocommunications Act 1989 instituted a new regime for the management of the
radio frequency spectrum, whereby the government decides to bring particular
frequency bands within the new regime and creates registrable management
rights and spectrum licences in those frequency bands. Until such time as a
frequency band is brought within the new regime, the old system of radio
apparatus licences remains in force.
Telecom currently holds:
. management rights until 2012 in respect of both the AMPS A and B bands
that its cellular network currently utilizes; and
. management rights until 2010 in respect of eight MMDS channels. Telecom's
future use of these channels is currently under review.
Such management rights are deemed to be assets of a business for the
purposes of the Commerce Act. On expiry, the management rights revert to the
New Zealand government, which can then sell them. The prior holder of the
management rights is given no first right of refusal or preference in that
sale.
Telecom also holds approximately 8,200 radio apparatus licences, relating to
frequencies which have not yet been brought under the new regime. These are
issued on an annual basis, and are generally renewed automatically, although
there is no statutory right to renewal. The radio apparatus licences include
licences in respect of transmitters used to provide service to households in
remote areas, trunked despatch services. land mobile, maritime mobile, paging
services and fixed point-to-point links that support a national
infrastructure.
The New Zealand government has indicated that it intends to bring a number
of the frequencies to which these radio apparatus licences relate within the
new regime during the period 1998-2005. The Radiocommunications Act provides
that where the new regime is applied to a frequency band in which a party
holds radio apparatus licences, that party has a right to obtain five year
spectrum licences which protect its existing rights, but only in respect of
radio apparatus licences that were first granted before July 1, 1989.
Approximately 50% of the Telecom transmitters covered by radio apparatus
licences are covered by licences first granted before July 1, 1989.
The New Zealand government intends to auction the 2 GHz frequency band in
the second half of 1998 (part of this band has been allocated internationally
for "third generation" mobile applications). Approximately 30% of the radio
apparatus licences Telecom holds within this band were first granted before
July 1, 1989. If Telecom wishes to obtain replacement licences for the balance
of its existing operations, or for additional uses, it will need to do so at
its own cost.
The acquisition of management rights and spectrum licences may require
Commerce Commission approval if it is likely to result in the person making
the acquisition or any other person acquiring or strengthening a dominant
position in a market. See "--Competition--Mobile Services" and "--Commerce Act
1986."
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Amendments to the Radiocommunications Act, including provision for
successive grants of management rights, and for interference issues to be
taken to arbitration, are currently under consideration.
Overseas Investment Regulations 1995. Under the Overseas Investment
Regulations 1995 ("Overseas Investment Regulations"), Telecom is deemed to be
an "overseas person" because of its foreign shareholders. Overseas persons are
required to obtain consent for certain business activities. Telecom must
obtain consent for business acquisitions in New Zealand where the value
exceeds NZ$10 million, or for acquisitions involving rural land.
United States Regulation
The Telecommunications Act of 1996 (United States) (the "1996 Act") imposes
various restrictions and obligations on the U.S. Bell Operating Companies
("BOCs") and their affiliates. By virtue of Ameritech's and Bell Atlantic's
ownership interests in Telecom, Telecom is deemed to be an affiliate of both
companies, and therefore is subject to the BOC-specific restrictions of the
1996 Act with respect to services it provides in the United States. These
restrictions will cease to apply with respect to Ameritech's in-region states
upon completion of the Global Offering (assuming that the International
Underwriters' over-allotment option is exercised in full). Telecom does not
believe its operations are materially affected by these restrictions, which
apply to the conduct of certain activities in the United States.
Telecom is subject to all rules, policies, and duties of the United States
Federal Communication Commission ("FCC") applicable to U.S. international
common carriers. The FCC regulates Telecom as a "dominant" carrier on the
U.S.-New Zealand route, and as a nondominant carrier on all other
international routes. As a dominant carrier on the U.S.-New Zealand route,
Telecom is required to operate on a structurally separate basis from its U.S.
affiliate. The 1996 Act also places certain duties on all telecommunications
carriers, to which Telecom is subject with respect to services it provides in
the United States.
In December 1996, the FCC granted Telecom authority under Section 214 of the
Communications Act of 1934 (United States) to operate as a United States
international facilities-based carrier and to acquire capacity in United
States international facilities in order to provide telecommunications
services between the United States and New Zealand and points beyond.
Certain laws of the United States, such as the Trading with the Enemy Act of
1917 and the Foreign Corrupt Practices Act of 1977, may restrict certain
activities of Telecom by virtue of Bell Atlantic's ownership interest in the
Company and the fact that the ADSs are, and the Interim ADSs will be, traded
on the NYSE.
EMPLOYEES
There has been a significant change since 1993 in Telecom's workforce
through a move from collective contracts to individual contracts. The number
of staff on agreed individual contracts has increased to 78% in 1998 from 10%
in 1993.
In 1996, Telecom sought to negotiate new collective contracts for
approximately 3,500 employees, representing 38% of total employees. The
balance of employees were on individual contracts and were not affected by
these negotiations. While Telecom proposed two or more collective contracts as
well as a number of individual contracts, the Engineering, Printing and
Manufacturing Union wanted a return to a single Telecom-wide collective
contract. This union recruited a proportion of the members of the
Communications and Energy Workers Union which had been placed in liquidation
and previously represented some 4,900 employees. About 2,000 employees took
intermittent industrial action to support the union claim. Telecom refused to
negotiate while such action continued. The provisions of the three expired
collective contracts agreed in 1994 remained in effect on an individual basis.
Service levels were impacted by the industrial action.
During March and April 1997 Telecom settled five collective contracts for
approximately 2,200 employees. The contracts provide for an average increase
in pay of 2-2.5% and are for variable terms terms ranging from
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fourteen to eighteen months. The contracts expire in 1998. The balance of
employees for whom Telecom was not prepared to negotiate a collective contract
have either remained on an individual employment contract based on their
expired collective contract or have accepted a new individual contract. These
employees received a salary review in April 1997.
PROPERTY
Telecom owns approximately 1,050 freehold sites and uses approximately 2,080
sites on a leasehold or other basis. Although Telecom's land assets are not
large in area, they include some strategic sites, such as the properties on
which its telephone exchanges are located. Most of Telecom's sites are related
directly to its telecommunications operations and are used for network
equipment of various types, such as telephone exchanges, transmission
stations, microwave radio equipment and cellular phone base station equipment.
Many of Telecom's operational sites are situated on leased land or land to
which Telecom has access by statutory right or other formal or informal
arrangement. In addition to its operational sites, Telecom owns or leases
other properties for office accommodation, storage and other miscellaneous
purposes.
Many of Telecom's sites may be subject to land claims pursuant to the Treaty
of Waitangi Act 1975 (the "Waitangi Act"). Under the Waitangi Act, the
Waitangi Tribunal has jurisdiction to consider claims by Maori who may be
prejudicially affected by government policy or practice or New Zealand
legislation that is inconsistent with the principles of the Treaty of
Waitangi. The Waitangi Tribunal can recommend a return to Maori ownership of
land previously owned by the New Zealand government that was transferred to
Telecom, or recommend that compensation be paid to the claimant. If the
Waitangi Tribunal recommends the return of land and no agreement can be
reached between the New Zealand government and the claimant for its return,
such recommendation is binding on the New Zealand government. Land declared to
have special spiritual, cultural or historical tribal significance may also be
taken back by the New Zealand government. If an order were made by the
Waitangi Tribunal for the return of any land acquired by Telecom under the
agreement between the Company and the New Zealand government pursuant to which
the Company purchased the telecommunications business of the Post Office,
Telecom would be entitled to compensation from the New Zealand government
under statute and also under such agreement. If any Telecom land is taken back
by the New Zealand government, Telecom would be entitled to compensation from
the New Zealand government under statute.
LEGAL PROCEEDINGS
In September 1995, Clear and BellSouth NZ commenced proceedings under the
Commerce Act against Telecom and Sky Network Television Limited ("Sky"), in
relation to Telecom's proposed acquisition of an interest in Sky, a New
Zealand corporation that provides subscription television services in New
Zealand, and also in relation to a proposed content agreement between Sky and
Telecom. Clear expanded its litigation to include claims against affiliates of
Bell Atlantic, Ameritech, TCI Communications, Inc. and Time Warner Inc.,
certain executives and directors of Telecom and the Commerce Commission. Clear
seeks unspecified damages together with injunctive relief. In March 1996,
Telecom decided not to pursue that acquisition or the content agreement. As a
consequence, Telecom reached an agreement with BellSouth NZ whereby BellSouth
NZ's proceedings were stayed and Telecom applied to have Clear's proceeding
struck out or stayed. However, in July 1996 Clear amended its proceedings
seeking to preclude Telecom from participating in pay television and related
areas of business, whether through association with Sky or otherwise. The
application by Telecom and the other defendants to strike out or stay all of
Clear's claims was successful. Clear has filed an appeal in the Court of
Appeal, but no hearing date has yet been allocated. The terms on which
BellSouth NZ's proceedings were stayed and Telecom's application to strike out
or stay was made include some restrictions on Telecom's ability to obtain
programming from Sky and to acquire an interest in Sky.
In November 1996, Clear issued proceedings against Telecom, Bell Atlantic
and Ameritech alleging breaches of the Commerce Act in relation to Telecom's
bundling practices, as well as claiming the existence of arrangements between
Telecom and Bell Atlantic and Ameritech that breach the Commerce Act. Also in
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November 1996, Clear issued proceedings against Telecom and a Telecom
executive alleging that Telecom has misused information which indicates that
customers have non-code access to the Clear network and that it has used such
data for sales and marketing purposes, in breach of the Commerce Act and the
Fair Trading Act. In December 1996, Clear issued proceedings against Telecom
alleging that Telecom has a deliberate policy of deactivating Clear non-code
access customers upon various pretexts for anti-competitive purposes, in
breach of the Commerce Act and the Fair Trading Act. Clear seeks unspecified
damages in these proceedings and no trial date has yet been set in any of
them.
In late 1996, a group of former employees of Telecom or its predecessor the
Post Office (or in some cases the surviving spouses of such employees) issued
proceedings against Telecom claiming damages in respect of Telecom's
cancellation of discounts on monthly access charges and toll calls. The
plaintiffs, of which there are currently approximately 1,100 (of a potentially
larger group), allege that they are entitled to such discounts from Telecom as
retirement benefits. The plaintiffs seek the value of past discounts, an order
providing future discounts (or their damages equivalent) and exemplary
damages. A hearing has been scheduled for June 1998.
In January 1997, BellSouth NZ issued proceedings against Telecom alleging
breaches of the Commerce Act in relation to Telecom's bundling practices,
Telecom's alleged misuse of information obtained through interconnection and
Telecom's alleged threats to terminate arrangements with suppliers if they
take services from Telecom's competitors. BellSouth NZ seeks unspecified
damages. No trial date has yet been set.
In March 1997, Telstra filed in the Supreme Court of Queensland, Australia,
a statement of claim against two companies within the Pacific Star group, a
group of companies formerly operating in Australia now owned by Telecom whose
operations have been classified as discontinued ("Pacific Star"), totalling
Australian $98.6 million, alleging non-payment of outstanding debts for
telecommunication services provided by Telstra, together with interest to the
date of judgment. Telstra has commenced similar proceedings against other
telecommunication service providers in Australia. Pacific Star has commenced
proceedings against Telstra in the Federal Court (New South Wales, Australia)
in relation to Telstra's billing practices. In December 1997, Telstra's
Queensland proceedings were transferred to the Federal Court (New South Wales,
Australia) to enable them to be heard with the proceedings brought in that
jurisdiction by Pacific Star. On February 27, 1998, Telstra and Pacific Star
announced that they had reached a commercial settlement of their dispute over
outstanding payments and cross claims. The successful implementation and
finalization of this commercial settlement is expected to result in all
existing legal proceedings between the parties being discontinued. The terms
of the commercial settlement are covered by a confidentiality agreement which
precludes disclosure of its terms except in specified circumstances.
In April 1997, Telecom issued proceedings against Clear for withholding
certain payments for service supplied under Clear's 1996 interconnection
agreement with Telecom. Telecom sought a declaration that the outstanding
amounts are payable and an injunction requiring Clear to pay for services
provided under the interconnection agreement. Clear's defense and counterclaim
allege that both its 1991 interconnection agreement and 1996 interconnection
agreement are invalid and unenforceable because the interconnection terms
(including the charges payable by Clear) have an anti-competitive purpose and
effect in breach of the Commerce Act, as does Telecom's retail pricing. Clear
seeks unspecified damages and other relief under the Commerce Act. Clear's
counterclaim also includes a claim against Telecom and the New Zealand
government for unspecified damages based on breach of "undertakings" allegedly
given by Telecom in the late 1980's regarding the provision of
interconnection. No trial date has yet been set.
The Directors of Telecom cannot reasonably estimate the adverse effect (if
any) on Telecom if any of the foregoing claims are ultimately resolved against
Telecom's interests, and there can be no assurance that such litigation will
not have a material adverse effect on Telecom's business, financial condition
or results of operations. In particular, the Clear and BellSouth NZ
proceedings could, if resolved against Telecom, affect the manner in which
Telecom conducts its business.
All of the proceedings summarized above have been commenced in the High
Court of New Zealand unless otherwise stated.
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MANAGEMENT
DIRECTORS
The business and affairs of Telecom are managed under the direction of the
Board. The Board is elected by the shareholders of the Company. The Board may
also appoint Directors to fill casual vacancies that occur or to add
additional persons to the Board up to the maximum number (12) prescribed by
the Company's Constitution. At each annual meeting of shareholders, all
Directors appointed by the Board must retire. In addition, at least one-third
of the other Directors must retire from office (other than the Managing
Director). If less than one-third of the other Directors are due to retire by
reason of age, or the expiry of their term of appointment or because they wish
to retire and not be re-elected, the remaining Directors who retire are those
Directors who have held office longest since their last appointment or
reappointment (other than the Managing Director). A retiring Director is
generally eligible for re-election except where precluded by age or
disqualification. At least one-half of the Board must be New Zealand Citizens
(as defined in the Company's Constitution).
The Directors of the Company (including the Managing Director) are:
MR. G. PETER SHIRTCLIFFE--CHAIRMAN
Mr. Shirtcliffe became the Telecom Chairman in September 1990 and has been
a Director since April 1987. Mr. Shirtcliffe is also Chairman of Trustees
of the Telecom Retirement Saving Plan. He was the Managing Director of the
Goodman Group Ltd. from 1976-1985 and Chairman of the New Zealand Trade
Development Board from 1985-1990. He is currently a member of the Executive
Committee of the Australia and New Zealand Business Council, the
independent member of the New Zealand Stock Exchange Disciplinary Committee
and a trustee of, or consultant to, a number of charitable trusts.
DR. RODERICK S. DEANE--MANAGING DIRECTOR
Dr. Deane has been Managing Director and Chief Executive Officer since
November 1992. Prior to that he was Chief Executive of the Electricity
Corporation of New Zealand Ltd. (1987-1992), Chairman of the State Services
Commission (1986-1987), Deputy Governor of the Reserve Bank of New Zealand
(1982-1986) and Alternate Executive Director of the International Monetary
Fund. Dr. Deane is currently a Director of Fletcher Challenge Ltd. and a
Director of the Australia and New Zealand Banking Group Ltd.
MR. WALTER S. CATLOW--DIRECTOR
Mr. Catlow is Executive Vice President for Ameritech and President of
Ameritech International. He began his career in telecommunications in 1968,
holding various financial, operations and marketing positions at Indiana
Bell and AT&T. Mr. Catlow has held various positions in Ameritech since
1984. Mr. Catlow is currently a director of Belgacom SA and TeleDanmark
A/S. Mr. Catlow became a Telecom Director in September 1994.
MR. ALAN GIBBS--DIRECTOR
Mr. Gibbs is the Chairman of Gibbs Holdings Ltd. and Tappenden Holdings
Ltd., a director of Lion Nathan Ltd. and an alternate director of Sky
Network Television Ltd. He joined the Telecom Board in September 1990.
MR. JOHN F. KILLIAN--DIRECTOR
Mr. Killian is Group President, International Telecommunications, at Bell
Atlantic Corporation. Mr. Killian has held positions within Bell Atlantic
over the past 18 years in accounting, finance, market planning, external
relations and operations. Mr. Killian was appointed to the Board in October
1997.
MR. JOHN C. KING--DIRECTOR
Mr. King is a senior partner with the law firm of Russell McVeagh McKenzie
Bartleet & Co. and is a member of the New Zealand Advisory Board of Westpac
Banking Corporation. Mr. King has been a Telecom Director since September
1990.
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MR. ROBERT LEVETOWN--DIRECTOR
Mr. Levetown is the retired Vice-Chairman and General Counsel of Bell
Atlantic. Mr. Levetown's career in telecommunications started in 1963 when
he joined the legal staff of the Chesapeake & Potomac Telephone Company. He
was named Vice President and General Counsel of Bell Atlantic in 1983 and a
director in 1989. Mr. Levetown retired from Bell Atlantic in 1992. Mr.
Levetown has been a Telecom Director since October 1992.
MR. RICHARD W. PEHLKE--DIRECTOR
Mr. Pehlke is Vice President and Treasurer of Ameritech. He joined
Ameritech in 1986 as Director of Investor Relations and assumed his current
position in January 1994. Mr. Pehlke is a director of Concordia Mutual Life
Association. He is also a member of the National Association of Corporate
Treasurers and the Financial Executives Institute. He joined the Telecom
Board in February 1996.
MS. PATRICIA L. REDDY--DIRECTOR
Ms. Reddy is a senior executive at Brierley Investments Ltd. Before joining
Brierley Investments Ltd., Ms. Reddy was a partner at the law firm of Rudd
Watts & Stone. She is a director of Air New Zealand Ltd. and Sky City
Limited. Ms. Reddy was appointed to the Telecom Board in December 1997.
The Directors have no fixed term of office but are subject to the retirement
provisions of the Constitution summarized above.
A shareholders agreement (the "Shareholders Agreement") entered into between
Ameritech and Bell Atlantic in 1991 provided that the parties would coordinate
with each other regarding certain matters involving their ownership of Shares,
including the nomination and election of Directors. The 1991 agreement was
terminated upon the sale by Bell Atlantic of its Exchangeable Notes. See "Risk
Factors--Potential Effects of Bell Atlantic Transaction." It is currently
anticipated that Messrs. Pehlke and Catlow, the two Directors who had been
nominated by Ameritech pursuant to the Shareholders Agreement, will resign as
Directors following the consummation of the Global Offering and will not be
nominated for a succeeding term. In connection with the termination of the
Shareholders Agreement, Bell Atlantic agreed with Ameritech to use its best
efforts to cause the two Directors nominated by it (currently Messrs. Killian
and Levetown) to resign not later than the date the Exchangeable Notes are
exchanged for 85% of the Shares held by Bell Atlantic. Telecom and Ameritech
understand that Bell Atlantic may be required by the terms of the Indenture
governing the Exchangeable Notes to take actions to cause Bell Atlantic to
cease to be an affiliate of Telecom prior to such exchanges of the
Exchangeable Notes, which could be as early as June 1999. Such actions may
include causing the Directors nominated by Bell Atlantic to resign.
EXECUTIVE OFFICERS
The Executive Officers of Telecom (except the Managing Director) are:
MR. DAVID BEDFORD--GROUP GENERAL MANAGER ENTERPRISES
Mr. Bedford joined Telecom in January 1993 as General Manager Human
Resources. In 1997 he was appointed to his present position. Mr. Bedford is
a director of First Media Ltd., Telecom Directories Ltd. and ConnecTel Ltd.
DR. JOHN BELL--GENERAL MANAGER BUSINESS DEVELOPMENT
Dr. Bell joined Telecom in April 1996 as General Manager Business
Development. Dr. Bell is a director of Pacific Star Communications Pty
Ltd., Telecom New Zealand Australia Pty Ltd. and various Pacific Star
subsidiaries.
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MR. KEN BENSON--GROUP GENERAL MANAGER NETWORK
Mr. Benson joined the Company in March 1990 as Customer Projects and
Operations Manager. He was appointed Group General Manager Network as from
April 1, 1996. Mr. Benson is also a director of Telecom New Zealand Ltd.,
Birell Properties Ltd., Telecom Pacific Investments Ltd., Telecom Cook
Islands Ltd., New Zealand Telecommunications Systems Support Centre Ltd.,
Telecom Samoa Cellular Ltd., Telecom New Zealand USA Ltd. and various
Telecom Cook Islands Ltd. subsidiaries.
MRS. ARIANE BURGESS--GENERAL MANAGER COMMUNICATIONS
Mrs. Burgess joined Telecom in June 1988 as Corporate Public Relations
Manager. She was appointed General Manager Communications as of April 1,
1996.
MS. KARYN DEVONSHIRE
Ms. Devonshire joined the Company in December 1997 as General Manager,
Information Services.
MS. THERESA GATTUNG--GROUP GENERAL MANAGER SERVICES
Ms. Gattung joined the Company in August 1994 as General Manager Marketing.
She was appointed Group General Manager Services as of April 1, 1996. Ms.
Gattung is also a director of Telecom New Zealand Ltd., Netway
Communications Ltd., Telecom Business Systems Ltd. and MSC Cellular Ltd.
MR. MALCOLM GILLESPIE--GENERAL COUNSEL AND COMPANY SECRETARY
Mr. Gillespie joined Telecom as General Counsel and Company Secretary in
April 1996. Mr. Gillespie is a director of Telecom New Zealand Ltd., Teleco
Insurance (NZ) Ltd., Telecom New Zealand Australia Pty Ltd., Digital Video
Productions Pty Ltd., TCNZ Finance Ltd. and several other financing
subsidiaries of Telecom. Mr. Gillespie is secretary of all of Telecom's New
Zealand subsidiaries except New Zealand Telecommunication Systems Support
Centre Ltd.
MR. CHRIS RUTLEDGE--GENERAL MANAGER HUMAN RESOURCES
Mr. Rutledge joined Telecom in May 1993 as Manager Human Resources
Development. He was appointed to his present position in February 1997. Mr.
Rutledge is a trustee of the Telecom Retirement Savings Plan.
DR. VAUGHAN SMITH--GENERAL MANAGER STRATEGY
Dr. Smith joined Telecom in November 1996 as General Manager Strategy.
MR. JEFFREY WHITE--CHIEF FINANCIAL OFFICER
Mr. White joined Telecom in January 1993 as Chief Financial Officer. Mr.
White's current term of appointment is due to expire in April 2000. Mr.
White is a director of Telecom New Zealand Ltd., First Media Ltd., TCNZ
Finance Ltd. and several other financing subsidiaries of Telecom. Mr. White
is also a trustee of the Telecom Retirement Savings Plan.
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PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth the ownership of the Shares as of March 6,
1998 by (i) any person known by Telecom to own more than 10% of the Shares and
(ii) Telecom's Directors and Executive Officers as a group:
<TABLE>
<CAPTION>
NUMBER % OF
OWNED CLASS
----------- ------
<S> <C> <C>
The Selling Shareholder (a)............................... 437,080,670 24.95%
Bell Atlantic NZ.......................................... 437,080,670 24.95%
Directors and Executive Officers as a Group (b)........... 3,864,164 *
</TABLE>
- --------
* Directors and Executive Officers as a group beneficially own less than 1%
of the outstanding Shares.
(a) At March 6, 1998, the Shares being offered under this Prospectus were held
by Ameritech Holdings Limited, a wholly owned subsidiary of Ameritech.
They subsequently were transferred to the Selling Shareholder.
(b) Messrs. Killian and Levetown may be deemed to share voting and dispositive
power with respect to Shares held by Bell Atlantic NZ by virtue of their
positions or former positions with Bell Atlantic and Messrs. Catlow and
Pehlke may be deemed to share voting and dispositive power with respect to
the Shares referred to in the preceding footnote by virtue of their
positions with Ameritech. Messrs. Killian, Catlow, Levetown and Pehlke
disclaim beneficial ownership of such Shares.
The Selling Shareholder is offering a total of 397,346,064 Shares in the
Global Offering (436,070,670 Shares if the International Underwriters' over-
allotment option is exercised in full). As a result of the Global Offering,
the Selling Shareholder's ownership interest in the Company will be reduced
from 24.95% to 2.27%. If the International Underwriters' over-allotment option
is exercised in full, the Selling Shareholder's ownership interest in the
Company will be reduced to 110,000 Shares. It is currently anticipated that
Telecom, the Selling Shareholder and Ameritech will reach an agreement prior
to the consummation of the Global Offering which would require Ameritech or a
wholly owned subsidiary of Ameritech to hold not less than 110,000 Shares
until at least April 1, 2000. It is also anticipated that such agreement would
require Telecom to furnish certain tax related information to Ameritech for a
specified period. The Selling Shareholder and Ameritech have agreed to be
responsible for certain expenses of the Global Offering, including printing
and insurance, and to make a payment of US$4.0 million to Telecom in respect
of certain other expenses of the Global Offering.
The Selling Shareholder and Ameritech have also agreed to reimburse the
Company for incremental expenses associated with the Company's cooperation in
providing notices and other information to the holders of IRs and to indemnify
the Company, its Directors and certain of its officers against certain
liabilities in connection with the Global Offering. The Selling Shareholder
has also obtained insurance on behalf of the Company and its directors and
officers against certain of such liabilities.
Bell Atlantic, which holds 24.95% of Telecom's Shares through Bell Atlantic
NZ, has issued Exchangeable Notes which are exchangeable, commencing in
September 1999, under certain circumstances, into 24.95% of Telecom's Shares.
The Shareholders Agreement entered into between Ameritech and Bell Atlantic in
1991 provided that the parties would coordinate with each other regarding
certain matters involving their ownership of Shares. The 1991 agreement was
terminated upon the sale by Bell Atlantic of its Exchangeable Notes. See "Risk
Factors--Potential Effects of Bell Atlantic Transaction." It is currently
anticipated that Messrs. Pehlke and Catlow, the two Directors who had been
nominated by Ameritech to the Shareholders Agreement, will resign as Directors
following the consummation of the Global Offering and will not be nominated
for a succeeding term. In connection with the termination of the Shareholders
Agreement, Bell Atlantic agreed with Ameritech to use its best efforts to
cause the two Directors nominated by it (currently Messrs. Killian and
Levetown) to resign not later than the date the Exchangeable Notes are
exchanged for 85% of the Shares held by Bell Atlantic. Telecom and Ameritech
understand that Bell Atlantic may be required by the terms of the Indenture
governing the Exchangeable Notes to take actions to cause Bell Atlantic to
cease to be an affiliate of Telecom prior to such exchanges of the
Exchangeable Notes, which could be as early as June 1999. Such actions may
include causing the Directors nominated by Bell Atlantic to resign.
In connection with its 1997 Share buyback program, the Company repurchased
an aggregate of 31,979,330 Shares from an affiliate of the Selling Shareholder
at an aggregate price of NZ$232,710,232 (US$135,041,747). The Company also
repurchased the same amount of Shares at the same aggregate price from Bell
Atlantic NZ.
Bell Atlantic and Telecom were previously involved in a joint venture,
Pacific Star Communications Pty Limited (part of Pacific Star), providing
telecommunications facility management services to government agencies in
Queensland, Western Australia and the Australian Capital Territory and to
corporate clients. However, Telecom is now in the process of implementing a
formal plan of disposal or wind-down of the Pacific Star businesses. As part
of that disposal and wind-down, Telecom purchased Bell Atlantic's interests in
the joint venture in June 1997 and agreed to release and indemnify Bell
Atlantic from any further liabilities and obligations arising from the joint
venture's operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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<PAGE>
DESCRIPTION OF SHARES
Set forth below is certain information concerning the Shares and material
provisions of the Company's Constitution. The following summary does not
purport to be complete and is qualified in its entirety by the Company's
Constitution, which has been filed as an exhibit to the registration statement
of which this Prospectus forms a part (the "Registration Statement"). The
rights of holders of Interim ADRs and IRs in certain limited respects differ
from the rights of holders of ADRs and Shares. See "Description of Interim
American Depositary Receipts and American Depositary Receipts" and
"Description of Instalment Receipts and Trust Deed."
GENERAL
As of December 31, 1997, the Company had issued and outstanding
1,751,948,050 Shares and the Kiwi Share.
The Company's organizational document is its Constitution. The Company is a
"limited liability" company, which limits the liability of its shareholders to
the amount, if any, unpaid on the Shares held by them. However, shareholders
may also be liable to repay any distribution made to them when the statutory
solvency test is not met. See "--Distributions." Except with respect to the
Kiwi Share provisions, the Constitution does not contain any limitation on the
Company's objectives or powers. The Company's Constitution, together with the
New Zealand Companies Act 1993 and the Listing Rules of the NZSE, embodies the
regulations for the administration and operation of the Company, including the
method of appointment, powers and duties of directors, the rights and
obligations of shareholders and other procedural matters such as the convening
and conduct of shareholder meetings, the issue of new Shares and the transfer
of existing Shares. So long as the Company is listed on the NZSE, the Company
and the Company's Constitution must comply with the Listing Rules of the NZSE
as in effect from time to time, subject to any exemption or waiver granted by
the NZSE. Failure to comply with the Listing Rules of the NZSE may result in
delisting or enforcement action by the NZSE or the Company's shareholders.
NZSE rulings authorizing any act or omission which would otherwise be in
contravention of the Listing Rules of the NZSE or the Constitution will
authorize that act or omission, unless a contrary intention appears in the
Constitution.
Under New Zealand law, Directors of the Company owe a fiduciary duty to the
Company. This fiduciary duty obliges each Director to act in good faith and in
what that Director considers is in the best interests of the Company. This
duty applies in relation to all transactions proposed to be entered into by
the Company, whether with affiliated parties of the Company or of the
Directors or with other parties. The Company's Constitution also requires
Directors interested in a proposed transaction to disclose their interest and,
except in relation to certain exempted transactions, interested Directors are
prohibited from voting.
SHAREHOLDER MEETINGS AND VOTING RIGHTS
The Company is required to hold an annual meeting of shareholders in each
calendar year not later than 15 months after the date of the preceding annual
meeting and not later than six months after the end of the fiscal year of the
Company. The Board may convene a special meeting at any time. The Board is
also required to convene a special meeting upon the written request of
shareholders holding Shares carrying together not less than 5% of the voting
rights to be exercised on the issue. Meetings require 10 working days' prior
written notice. A quorum for any meeting (other than an interest group meeting
(as defined below)) consists of two shareholders having the right to vote at
the meeting present in person or by proxy, attorney or representative. The
quorum for an interest group meeting is members of the interest group holding
at least 5% of the Shares held by all members of that group having the right
to vote at the meeting. An "interest group" is a group of shareholders (who
may hold Shares of the same or different classes) whose affected rights are
identical and whose rights are affected by an action or proposal in the same
way. If a quorum is not present within 30 minutes of the time appointed for
the meeting, the meeting, if called at the request of shareholders, is
dissolved, or, if called at the request of the Board, is adjourned to the same
time and place in the next week or such other date, time and place as the
Board
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<PAGE>
may appoint. If in any such adjourned meeting a quorum is not present within
30 minutes of the time appointed for the meeting, those shareholders present
will constitute a quorum.
At any meeting, a resolution put to the vote of the meeting is decided by
voice vote or a show of hands, unless a poll is demanded (i) by the
chairperson of the meeting, (ii) by not less than five shareholders entitled
to vote at the meeting, (iii) by any shareholder or shareholders having the
right to exercise at least 10% of the total votes entitled to be exercised at
the meeting or (iv) by any shareholder or shareholders holding voting shares
upon which the sum paid is not less than 10% of the total sum paid on all
shares conferring that right. Under certain circumstances, a poll may be
demanded by the Depositary, the Interim Depositary or the Trustee in
accordance with the provisions of the Deposit Agreement, the Interim Deposit
Agreement or the Trust Deed, respectively. See "Description of Interim
American Depositary Receipts and American Depositary Receipts--Voting of the
Underlying Shares" and "Description of Instalment Receipts and Trust Deed--
Voting and Telecom Shareholder Meetings." In general, on a vote by voice or on
a show of hands, every holder present in person or by proxy, attorney or
representative has one vote, and on a poll, every shareholder present in
person or by proxy, attorney or representative has one vote for every voting
share held.
Under New Zealand law, an ordinary resolution requires the affirmative vote
of shareholders holding not less than a majority of the votes cast and a
special resolution requires the affirmative vote of not less than 75% of the
votes cast or any greater percentage specified in the relevant company's
constitution. Telecom's Constitution does not modify the 75% figure. The
election of directors, certain issues of new Shares, appointment of auditors
and other general matters may be passed by ordinary resolution. Amendments to
the Constitution, any transaction involving the acquisition or disposition of
assets or the incurring of liabilities, the value of which is more than half
the value of the Company's assets prior to the transaction, certain
amalgamations and the voluntary liquidation of the Company must be approved by
special resolution and certain amendments to the Constitution require the
consent of the holder of the Kiwi Share. See "--Kiwi Share." The Company's
Constitution and the Listing Rules of the NZSE require the approval of the
Company's shareholders by ordinary resolution for (i) any transaction that
would change the essential nature of the Company's business, (ii) any
transaction in which the gross value of the transaction is greater than 50% of
shareholders' funds, subject to any waiver granted by the NZSE, or (iii)
certain transactions entered into with, or for the benefit of, directors,
substantial shareholders or their respective associates. The Listing Rules of
the NZSE also require the approval of the Company's shareholders by ordinary
resolution for any issue of Shares that would materially increase the ability
of any person, or group of associated persons, to exercise or direct the
exercise of effective control of the Company. The Company may issue, buy-back
or redeem Shares, subject to restrictions required by the Listing Rules of the
NZSE, which generally require such transactions to be approved by an ordinary
resolution of shareholders.
The Listing Rules of the NZSE prohibit a shareholder from voting on
resolutions that ratify certain issues and buy backs of Shares to, or approve
a non pro rata issue of Shares to, certain transactions with or benefiting, or
the provision of certain benefits to, the shareholder or an associated person
of the shareholder. They also prohibit shareholders who are directors or
associated persons of the Company or its directors from voting in certain
circumstances where they may receive greater benefit from the resolution than
other shareholders. The Company's Constitution prohibits the exercise of
voting rights and transfer of Shares in certain circumstances. The Company's
Constitution also allows the Board to set the record date for determining who
may vote and what Shares may be voted at a meeting of shareholders. Such
record date may be as late as 5:00 p.m. on the day before such meeting.
The Constitution provides that shareholders may attend meetings and exercise
the right to vote by being present in person or represented by proxy or
representative (if a shareholder is a body corporate). Proxies and
representatives are entitled to be heard at a meeting of shareholders as if
they were shareholders. Holders of equity securities are entitled under the
Constitution to receive copies of all notices, reports and financial
statements issued generally to shareholders.
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<PAGE>
DISTRIBUTIONS
The Board, if satisfied on reasonable grounds that the Company will
immediately after the distribution satisfy the solvency test (as defined
below), may authorize distributions to shareholders at times and of amounts as
it thinks fit. There is no requirement for shareholder approval of
distributions if made or offered on a pro rata basis. A "distribution" is the
transfer of any money or property (other than Shares in the Company) to or for
the benefit of a shareholder or the incurring of a debt to, or for the benefit
of, a shareholder, in relation to Shares in the Company held by the
shareholder. (The term "distribution," therefore, includes a non-stock
dividend). For the solvency test to be satisfied, the Company must be able to
pay its debts as they become due in the normal course of business and the
value of the Company's assets must be greater than the value of its
liabilities (including contingent liabilities). The Board may not authorize a
disproportionate dividend to some shareholders of a class unless such
disproportionate dividend reflects the differing amounts paid up on the Shares
of that class to the Company or the distribution is a supplementary dividend
to non-resident shareholders who qualify for the supplementary dividend in
terms of the Income Tax Act 1994. Supplementary dividends are authorized and
paid and the amount of the supplementary dividend will be calculated in
accordance with the applicable provisions of the Income Tax Act 1994.
Entitlement to receive a distribution is dependent upon being on the Company's
share register on the date set by the Board as the date for determining
entitlement to the distribution.
The present dividend policy of the Company's Board, which came into effect
in fiscal 1996, is to pay a quarterly dividend in September, December, March
and June in respect of each fiscal quarter. Telecom's current policy is to
distribute at least 70% of its net earnings in respect of each fiscal year.
However, future dividends, if any, are not assured and will depend on a number
of factors, including those discussed in "Risk Factors," and the taxation
position of Telecom. See "Dividends."
LIMITATIONS ON ISSUE OF SHARES
The Company's Constitution and the Listing Rules of the NZSE place certain
restrictions on issues of new Shares and other specified securities. The Board
may issue securities of such type, provided that such issues are either
approved by a separate ordinary resolution of each class of quoted securities
of the Company whose rights could be affected by the issue, offered to
existing shareholders in proportion to the number of Shares (or other
securities of the relevant class) already held by them, made pursuant to
certain takeover offers, made to employees under certain circumstances or do
not exceed in any 12 month period more than 10% of the total number of
securities of the relevant class outstanding, and in certain other limited
circumstances. Before issuing any Shares the Board must resolve that in its
opinion the consideration for, and the terms of, the issue are fair and
reasonable to the Company and to all existing shareholders, and, if issued
other than for cash, such consideration is not less than the amount to be
credited in respect of the Shares.
PRIOR NOTICE TO NZSE OF CERTAIN TRANSFERS
The Company's Constitution requires 15 business day's notice to the NZSE of
certain details of transactions where an insider will acquire Shares alone or
with others which would cause them and their associated persons to control
over 20% of the votes attaching to the Company's Shares or, once that 20%
threshold has been exceeded, to increase such control by more than 5% in any
12 month period. For these purposes, insiders are directors, associated
persons of directors or persons with non-public materially price sensitive
information about the Company. Failure to give the required notice empowers
the Company to prevent the defaulting party from voting all or any of its
Shares on a poll and allows the Company to sell such Shares on one month's
notice provided the default has not been remedied and those Shares have not
already been transferred.
LIMITATION ON SHAREHOLDINGS
No person may have a relevant interest in 10% or more of the Company's
voting shares without the prior written approvals of the Board and the holder
of the Kiwi Share. No person who is not a New Zealand National
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<PAGE>
(as defined in the Company's Constitution) may have a relevant interest in
more than 49.9% of the Company's voting shares without the prior written
approval of the holder of the Kiwi Share. The term "relevant interest" is
broadly defined to include beneficial ownership, the power to vote or control
the vote of voting shares, the power to acquire or dispose of or control the
acquisition or disposition of voting shares, and an interest pursuant to any
agreement or arrangement under which any of the foregoing rights arise,
whether express, implied, direct, indirect, actual, contingent, present,
future, shared with others, legally enforceable or not, which is held directly
or by a related body corporate. The term excludes certain limited interests
arising from particular financial, custodial, trading and similar
relationships. If the Board (or the holder of the Kiwi Share after
consultation with the Board) determines that there are reasonable grounds for
believing that a person has a relevant interest in voting shares in excess of
the above limitations, the Board (or the holder of the Kiwi Share if the Board
fails to act in a manner that remedies the determination) may, after following
certain procedures, prohibit the exercise of voting rights (in which case
voting rights vest in the chairperson) and may force the sale of Shares. The
Board may also decline to register a transfer of Shares if it reasonably
believes that the transfer would breach the above restrictions. Ameritech,
Bell Atlantic, the Depositary, the Interim Depositary and the Trustee have
each received consents from the New Zealand Minister of Finance (as the holder
of the Kiwi Share) and the Board to acquire and hold the relevant interest in
the Shares held, or to be held, by them.
In addition, under New Zealand law, persons who hold a relevant interest in
5% or more of the voting securities of the Company must notify, and report
certain subsequent changes in, their interest in writing to the Company and to
the NZSE.
Overseas persons must comply with the Overseas Investment Regulations. The
High Court can order the disposal of Shares acquired in contravention of the
Overseas Investment Regulations. The Overseas Investment Regulations require
that an overseas person obtains consent from the Overseas Investment
Commission before the overseas person enters into certain acquisitions of
Shares or interests in Shares. Consent is required for acquisitions which
result in the overseas person:
(i) acquiring a beneficial entitlement or interest in 25% or more of the
outstanding Shares or interests, or the right to exercise or control the
exercise of 25% or more of the votes entitled to be cast at a meeting of
the Company;
(ii) increasing its entitlements, interests or rights beyond 25%; or
(iii) being able to appoint or control the appointment of 25% or more of
the Board.
There are limited exceptions to these requirements. An overseas person in
this context is a company or body corporate incorporated outside New Zealand,
subsidiaries of an overseas person (as defined by the Overseas Investment
Regulations), any company or building society the Shares or voting power of
which is held 25% or more by an overseas person or persons, a person who is
not a New Zealand citizen and not ordinarily resident in New Zealand (as
defined in the Overseas Investment Regulations) and any nominee of any
overseas person. "Nominee" has an extended definition under the Overseas
Investment Regulations.
TRANSFER OF SHARES
Shares are transferred by the entry of the name of the transferee on the
Company's share register. The Board may refuse or delay registration of a
transfer in certain circumstances including, if the transfer is not
accompanied by documentation establishing entitlement to the transfer,
registration of the transfer would result in the proposed transferee holding
securities of less than the minimum holding set by the NZSE or the transfer is
in breach of the restrictions described under "--Limitation on Shareholdings"
above. The Board may require forfeiture of Shares registered under an
electronic transfer system if the Board believes on reasonable grounds that it
could have refused to register the transfer at the time the transfer was
registered. The Company may sell Shares of less than the minimum holding set
by the NZSE.
ALTERATION OF RIGHTS
Except in certain limited circumstances prescribed in the Constitution, the
Company must not take any action that affects the rights attached to quoted
equity securities unless that action has been approved by a special
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<PAGE>
resolution of each interest group. An issue by the Company of Shares in
accordance with the Company's Constitution does not constitute a modification
of rights of the ordinary shareholders.
DISTRIBUTION OF SURPLUS ASSETS
Upon a liquidation of the Company, the assets of the Company shall be
applied to satisfy its debts and liabilities. If any surplus remains, it shall
be applied first to repay the amount of NZ$1.00 on the Kiwi Share, and
thereafter, subject to the rights of holders of any Shares issued with special
rights as to the repayment of capital, shall be divided among the holders of
the Shares in proportion to the number of Shares held by them.
KIWI SHARE
The Kiwi Share is registered in the name of, and may be held only by, the
Minister of Finance on behalf of the New Zealand government. The holder of the
Kiwi Share is entitled to receive notice of and to attend any meeting of the
Company's shareholders and to speak on any matter relating to the Kiwi Share,
but the holder of the Kiwi Share is not entitled to vote and has no other
rights to act at meetings. The holder of the Kiwi Share is not entitled to
participate in the capital or profits of the Company, except for the repayment
of NZ$1.00 of capital upon a liquidation of the Company in priority to the
repayment of capital to other shareholders. The Kiwi Share may be converted to
a Share at any time by the holder thereof, at which time all rights and powers
attaching to the Kiwi Share (including the requirements relating to the
provision of telephone services described below) will cease to have any
application.
The amendment, removal or alteration of the effect of certain provisions of
the Company's Constitution, and any act or omission that contravenes or fails
to comply with such provisions, is deemed to be a variation of the rights
attaching to the Kiwi Share and is accordingly not effective without the
written consent of the holder of the Kiwi Share. Such provisions include the
rights attaching to the Kiwi Share, the limitations on shareholdings described
above and the requirement that at least one-half of the Board be New Zealand
Citizens (as defined in the Company's Constitution). The Company's
Constitution also contains provisions that require the Company and the Board
to observe certain principles relating to the provision of telephone services
and their prices. Unless the holder of the Kiwi Share otherwise consents,
these provisions require Telecom to (i) maintain a local free-calling option
for all residential customers, although Telecom may also offer optional tariff
packages that include local call charges, (ii) charge no more than the
standard residential rental charge for ordinary residential telephone service
and not, except in certain limited circumstances, increase the standard
residential rental charge more than the percentage increase in the CPI, (iii)
charge residential users in rural areas no more for line rental than the
standard residential rental charge and (iv) continue to make ordinary
residential telephone service as widely available as it was on September 11,
1990. The Company's Constitution provides that these provisions are not
intended to confer any benefit on and are not enforceable by any person other
than the holder of the Kiwi Share.
MINORITY BUY-OUT RIGHTS
If the Company resolves, by special resolution, (i) to alter or revoke its
Constitution, and the alteration imposes or removes a restriction on the
activities of the Company, (ii) to approve a major transaction (being a
transaction involving an acquisition or disposition of assets or the acquiring
of rights or incurring of obligations or liabilities, the value of which is
more than half the value of the Company's assets prior to the transaction),
(iii) to approve a statutory amalgamation or (iv) to take action that affects
the rights attached to Shares, then any shareholder which casts all the votes
attached to the Shares registered in its name and having the same beneficial
owner against the resolution, is entitled to require the Company to purchase,
or to arrange for some other person to purchase, those Shares for a fair and
reasonable price nominated by the Company, or if the shareholder objects to
the price so nominated, a fair and reasonable price determined by arbitration.
The Company is obliged to comply with such requirement unless it arranges to
have the special resolution rescinded or obtains exemption from the court. The
Company would be entitled to apply for such an exemption on the ground that it
would not be just and equitable to require the Company to purchase the Shares
or, provided the Company has made
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reasonable efforts, but has been unable, to arrange for another person to
purchase the Shares, that the purchase would be disproportionately damaging to
the Company or that the Company cannot reasonably be required to finance the
purchase. The Company is obliged to seek exemption from the court if the
repurchase of the Shares would result in the Company failing to meet the
statutory solvency test and the Company has made reasonable efforts, but has
been unable, to arrange for another person to purchase the Shares.
COMPULSORY ACQUISITION
As required by the Listing Rules of the NZSE, the Company's Constitution
provides that where a person (or group of associated persons) acquires
beneficial ownership of 90% or more of a class of Shares (a "majority
holder"), a notice must be given to the remaining holders within 20 business
days stating whether the majority holder intends to compulsorily acquire all
the Shares held by the remaining holders, or that any remaining holder(s) may
require the majority holder to acquire their Shares for a consideration
offered by the majority holder. The consideration offered must be confirmed as
fair by an independent expert. If remaining holders, holding 10% or more of
the Shares held by remaining holders, object to the price offered, another
independent expert must be appointed to determine the price to be paid.
FINANCIAL ASSISTANCE
The Company may only give financial assistance for the purpose of, or in
connection with, the acquisition of Shares or other specified securities to be
issued by the Company if the giving of the financial assistance is approved by
a separate ordinary resolution of each class of quoted securities of the
Company whose rights could be affected by the financial assistance, or if
certain other limited circumstances prevail, and in each case in accordance
with the New Zealand Companies Act 1993 and the Listing Rules of the NZSE.
Such financial assistance may include the lending of money, the giving of a
guarantee or the provision of security. As the deferral of payment of the
Final Instalment for the Shares offered for sale pursuant to this Prospectus
is financial assistance provided by the Selling Shareholder and not by
Telecom, the above restriction does not affect the deferred payment nature of
the Global Offering.
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DESCRIPTION OF INSTALMENT RECEIPTS AND TRUST DEED
The following summary of the material provisions of the IRs and of the Trust
Deed governing the IRs does not purport to be complete and is qualified in its
entirety by reference to the Trust Deed (including the Form of IR), which has
been filed as an exhibit to the Registration Statement. The Trust Deed may
also be inspected at the offices of the Trustee, Level 1, 105 Queen Street,
Auckland, New Zealand. Terms used herein and not otherwise defined have the
meanings assigned to them in the Trust Deed. The following summary should be
read in conjunction with the "Description of Shares" and "Description of
Interim American Depositary Receipts and American Depositary Receipts."
GENERAL
The Shares to be sold by the Selling Shareholder will be sold with payment
to be made in two instalments. Prior to the payment of the Final Instalment,
purchasers of the Shares will initially be issued IRs. Each IR will evidence
beneficial ownership in a particular Share, subject to a security interest in
favor of the Selling Shareholder securing final payment of the Final
Instalment for that Share.
IR holders are entitled to the benefit of dividends and have certain rights
to direct the voting with respect to the Shares underlying their IRs. See "--
Dividends" and "--Voting and Telecom Shareholder Meetings." IR holders may not
create any encumbrances (such as a mortgage) over the underlying Shares. The
IR holders may transfer their IRs in accordance with the Trust Deed. IR
holders are required by the Trust Deed to pay certain duties and taxes
relating or referable to those holders, their holdings of IRs, Interim ADRs or
the underlying Shares. See "--Duties and Taxes."
INSTALMENTS AND TRANSFER TO TRUSTEE
Following allocation of the Shares offered for sale pursuant to this
Prospectus, the Selling Shareholder will transfer legal title to those Shares
to the Trustee who will hold such Shares in trust pursuant to the Trust Deed.
The names and other relevant details relating to purchasers of Shares will
(subject in respect of the holders of Interim ADRs to the comments below under
"--Interim ADRs" and in respect of DPB Holders (as defined herein) to the
comments below under "--DTC Arrangements and DPB Holders") be entered in an
instalment receipt register to be maintained by Corporate Registry Services
Limited and such persons will be issued IRs. Each IR will evidence:
(a) that the First Instalment of the price of the corresponding Share has
been paid;
(b) that the Trustee holds the beneficial interest in that Share for the
registered holder of the IR ("IR holder") subject to a security interest in
favor of the Selling Shareholder; and
(c) that the IR holder is entitled to the rights, and is subject to the
obligations, set out in the Trust Deed, including (without limitation) the
right to be transferred legal title to the relevant underlying Shares upon
payment of the Final Instalment in accordance with, and subject to the
terms of, the Trust Deed.
The Share which corresponds to a particular IR is referred to in this
section as an "underlying Share."
PAYMENT OF FINAL INSTALMENT
The person liable to pay the Final Instalment in respect of an IR will
(subject in respect of Interim ADRs to the comments below under "--Interim
ADRs" and in respect of DPB Holders to the comments below under "--DTC
Arrangements and DPB Holders") be the person registered as the holder of that
IR at the close of business on the ninth business day prior to and inclusive
of the Final Instalment Payment Date (i.e., March 19, 1999) (the "Obligor
Determination Time").
If the Final Instalment is paid in cleared funds by the sixth business day
after, but not including, the Final Instalment Payment Date (the "Payment
Notification Time"), the Trustee will transfer the underlying Share to the IR
holder within eight Business Days after the Final Instalment Payment Date. If
the Final Instalment is paid
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by the Final Instalment Payment Date, but the funds have not cleared by the
Payment Notification Time, the Trustee will transfer the underlying Shares
promptly after clearance. Upon such transfer, the security interest of the
Selling Shareholder will be extinguished, and the relevant IRs will be
cancelled.
The IR Registrar will send reminder notices to IR holders prior to the Final
Instalment Payment Date. Failure to send or non receipt of a reminder notice
by an IR holder will not affect that holder's obligation to pay the Final
Instalment on the due date.
If an IR holder defaults in payment of the Final Instalment, the Trustee may
sell the underlying Shares pursuant to the Selling Shareholder's security
interest and apply the proceeds in paying the Final Instalment (and any costs,
expenses, taxes, interest and similar charges). The IR holder will receive any
remaining balance. If the net proceeds of such sale are insufficient to pay
the Final Instalment, the Trust Deed provides that the IR holder will (subject
in respect of Interim ADRs to the comments below under "--Interim ADRs" and in
respect of DPB Holders to the comments below under "--DTC Arrangements and DPB
Holders") remain personally liable for the deficiency.
A person who fails to pay on the due date the Final Instalment (or other
amounts payable under the Trust Deed) will be required to pay interest on the
unpaid amount (at the 90 day bank bill rate plus 2% per annum) until payment
in full.
IR holders have the right to prepay the Final Instalment and receive their
Shares early by giving notice to the IR Registrar along with payment in full
of the Final Instalment plus an administration fee of NZ$200. Shares will be
transferred within eight business days of receipt of the payment. Early
payment can also occur in certain other circumstances. See "--Dividends," "--
Takeover Bids," "--Compulsory Acquisition or Sale" and "--Share Buy-Backs." In
order for the owners of Interim ADRs to prepay the Final Instalment and
receive Shares early, the owners must first turn in their Interim ADRs in
exchange for IRs in accordance with the Interim Deposit Agreement.
RESTRICTIONS AFFECTING LENDERS
The obligation of IR holders to pay the Final Instalment is secured by an
absolute security interest in favor of the Selling Shareholder over the
underlying Shares. IR holders may not create any encumbrance (such as a
mortgage) over the underlying Shares, and no encumbrance may be created, arise
or exist which could have the effect that any person acquires any right in
respect of the underlying Shares before the security interest has been
released.
TRANSFERS OF IRS AND REGISTER
IR holders may transfer their IRs in accordance with the Trust Deed. Once a
transferee is entered in the register of IR holders, or becomes the registered
holder of an Interim ADR or a DPB Holder (provided this occurs on or before
the Obligor Determination Time), the transferee is conclusively deemed to be
bound by all of the terms of the Trust Deed (and the Interim Deposit
Agreement, if applicable), including the obligation to pay the Final
Instalment. The transferor is discharged from such obligations in respect of
the IRs or Interim ADRs so transferred.
IRs are generally freely tradeable in accordance with the Trust Deed,
however, see "--Limitations on Ownership." IR holders may transfer their IRs
by a transfer document in the form prescribed by the Trust Deed or otherwise
approved by the Trustee or by any other method of transfer of marketable
securities which is not contrary to any law, and which may be operated in
accordance with the listing rules of the NZSE or any other relevant securities
exchange and which is approved by the Trustee.
The last day for trading the IRs on the NZSE is expected to be ,
1999 (so as to facilitate determination of those IR holders on the register of
IR holders at the Obligor Determination Time). On the next trading day,
trading of the Shares underlying the IRs is expected to commence on a
"deferred delivery" basis. Trading on this "deferred delivery" basis is
expected to continue until three trading days after the Shares are transferred
to IR Holders by the Trustee. Thereafter, the Shares will be quoted in the
same way as all other Shares.
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IR holders should be aware that, if any sale of IRs has not for any reason
been settled and registered prior to 5:00 p.m. on March 19, 1999, they will
remain liable to pay the Final Instalment and accordingly should make
appropriate arrangements if selling their IRs in the period immediately prior
to March 19, 1999.
The Trust Deed provides for a register of IR holders to be kept and permits
the maintenance of a branch register in connection with the listing of the IRs
on any exchange other than the NZSE. The relevant register will be the only,
and conclusive evidence of the holding of IRs and of the beneficial interest
evidenced by IRs.
The Trust Deed provides for any person to have the right to inspect, and
subject to certain conditions, take a copy of, or extracts from, the register.
IR holders must notify any change of name, or change in their address, entered
on the register. No notice of any trust (express, implied or constructive) may
be entered on the register, or recognized by the Trustee or the instalment
receipt registrar.
BENEFITS RECORD TIME
The Trustee and the instalment receipt registrar have the right to determine
the date and time as at which any right conferred, or obligation imposed by,
the holding of IRs, or underlying Shares, is determined. These rights include
rights to Telecom dividends and voting rights at Telecom shareholder meetings.
The Trust Deed provides that any Benefits Record Time shall, as nearly as
practically possible, be the same as the benefits record time fixed by Telecom
in respect of the relevant event. See, however, "--Voting and Telecom
Shareholder Meetings" below.
DIVIDENDS
The Trust Deed draws a distinction between "Qualifying Dividends" and "Non
Qualifying Dividends." Qualifying Dividends are all dividends paid by Telecom
in the period from the consummation of the Global Offering to the Final
Instalment Payment Date to the extent that those dividends do not in the
aggregate exceed twice the dividends paid by Telecom during the period from
April 1, 1997 to March 31, 1998 (calculated after making any adjustment
appropriate to reflect the issue, buyback or cancellation of Shares during the
two periods in question) and supplementary dividends paid to non-New Zealand
tax residents.
Non Qualifying Dividends are dividends that are not Qualifying Dividends.
The Trust Deed provides that the Trustee will (a) cause Qualifying Dividends
to be paid to the IR holders and (b) cause Non Qualifying Dividends to be
applied, on behalf of the holders of IRs and Interim ADRs, to reduce or
extinguish the amount of the Final Instalment.
The Trustee will take reasonable steps to (a) confer on IR holders the
benefit of imputation credits, or tax benefits (if any), as the case may be,
attached to any dividends, and (b) assure that payments of all Qualifying
Dividends to IR holders will be made directly by Telecom, as if those IR
holders were the registered holders of Shares, at the relevant time and
otherwise in the same manner, and by the same means, as applies to holders of
Telecom Shares. However, if the Trustee receives payment of a dividend after
the Final Instalment Payment Date then:
(a) if the payment is attributable to a Share in respect of which the Final
Instalment has been paid by a cleared payment, the Trustee shall take
all reasonable steps to pay the dividend to the relevant IR holder; or
(b) if the payment is attributable to a Share in respect of which there has
been a default in payment of the Final Instalment, the dividend shall
be applied in or towards payment of the unpaid amounts due to the
Selling Shareholder.
VOTING AND TELECOM SHAREHOLDER MEETINGS
Registered IR holders will receive Telecom annual reports and other
shareholder notices (including notices of Telecom annual meetings) directly
from Telecom as if they were holders of Shares, but have no right to attend,
or vote directly at, Telecom shareholder meetings.
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The Trust Deed provides that, in respect of each meeting of Telecom
shareholders, the Trustee will send or cause to be sent to IR holders a form
inviting holders to instruct the Trustee as to the manner in which votes on
the underlying Shares are to be exercised. Such instructions must be received,
on a properly completed form, by the instalment receipt registrar not less
than five business days before the meeting. The Trustee, as holder of the
underlying Shares, will vote in accordance with those instructions on a poll.
The Trustee will not vote Shares in respect of which the Trustee receives no
instructions, and will not vote on a resolution determined by voice vote or a
show of hands.
The Trustee shall requisition a meeting of Telecom shareholders, and/or call
for a poll at a meeting of Telecom shareholders, in each case if entitled to
do so under Telecom's Constitution or the New Zealand Companies Act 1993, if
so requested in writing by persons holding IRs which represent at least that
number of underlying Shares which, if the underlying Shares were registered in
the names of those IR holders themselves, would entitle such holders to
requisition such meeting or call for a poll.
If in respect of any meeting the Trustee decides that the period of time
between receipt by the Trustee of notice of the meeting, and the meeting
itself, is such that it is not practicable for the Trustee to give notice to
IR holders and obtain instructions as to voting, the Trustee may decide not to
give that notice, or to seek instructions as to voting, in respect of that
meeting.
If a resolution at a meeting of Telecom shareholders relates to a merger or
amalgamation involving Telecom, and the consideration per Share arising from
such merger or amalgamation is less than the Final Instalment, or if in the
opinion of the Selling Shareholder or the Trustee there is an appreciable risk
that the consideration will be less than the Final Instalment, the Trustee
will not vote in favor of such resolution unless the Selling Shareholder
agrees that the Trustee may do so. This overrides any instruction from IR
holders.
The restrictions on voting contained in the Listing Rules of the NZSE
referred to under "Description of Shares--Shareholders Meetings and Voting
Rights" will extend in appropriate circumstances to holders of IRs who wish to
instruct the Trustee how to vote on a poll.
TAKEOVER BIDS
A takeover bid is defined in the Trust Deed as a written offer to acquire
Shares (as opposed to the IRs) made in compliance with applicable New Zealand
legislation.
The Trust Deed provides that in the event of a takeover bid for underlying
Shares:
. If the consideration offered in the takeover bid is in whole or in part
otherwise than in cash, the Trustee will cause the consideration to be
valued.
. If the consideration is less than the Final Instalment, or if in the
opinion of the Selling Shareholder or the Trustee there is an appreciable
risk that the consideration will be less than the Final Instalment, the
Selling Shareholder may determine whether or not IR holders should have
the right to decide whether the takeover bid should be accepted.
. If the consideration is equal to or greater than the Final Instalment, or
if the consideration is less than the Final Instalment but the Selling
Shareholder determines that IR holders should have the right to decide
whether or not the takeover bid should be accepted, the Trustee will
notify the IR holders and will seek instructions from them as to whether
to accept the takeover bid in respect of the underlying Shares. The
Trustee will act in accordance with instructions received in accordance
with, and within the time limits specified in, the Trustee's
notification.
If underlying Shares are disposed of by the Trustee pursuant to a takeover
bid, then if and to the extent that the consideration is not cash, the Trustee
will cause the consideration to be sold. The Trustee will apply all cash
proceeds of the takeover bid (whether received directly in the takeover bid,
or from the sale of consideration received in the takeover bid) in payment of
the Final Instalment (and any costs, expenses, taxes, interest and similar
charges) and will account to the IR holder for the balance.
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The Trustee is not liable to IR holders, or to any other person, for the
accidental omission to send any materials relating to a takeover bid to any IR
holder, or in relation to the non-receipt of any such materials by any IR
holder, for any reason whatsoever.
If in respect of any takeover bid the Trustee decides that the period of
time between receipt by the Trustee of that takeover bid, and the latest date
for acceptance, is such that it is not practicable for the Trustee to give
notice to IR holders and obtain instructions in respect of the takeover bid,
the Trustee may decide not to give that notice, or seek instructions, in
respect of that takeover bid.
COMPULSORY ACQUISITION OR SALE
If Shares held by the Trustee are compulsorily acquired, or are compulsorily
sold (whether pursuant to the takeover provisions, or "Kiwi Share" provisions,
of Telecom's Constitution, or otherwise), the Trustee will apply all cash
proceeds (whether received directly as a result of the compulsory acquisition
or sale, or from the sale of consideration received in the compulsory
acquisition or sale) in payment of the Final Instalment (and any costs,
expenses, taxes, interest and similar charges) and will account to the IR
holder for the balance. If and to the extent that the consideration is not
cash, the Trustee will cause the consideration to be sold.
ENTITLEMENTS OFFER
If Telecom makes an entitlements offer (being an offer to holders of Shares
to subscribe for securities of the Company or any other person) in respect of
Shares prior to the Preliminary Notice Day:
. The Trustee has no obligation to respond to that offer, or, if it is
renounceable, to dispose of it.
. The Trustee will seek the advice of Telecom, the instalment receipt
registrar, or some other suitably qualified person as to what reasonable
steps the Trustee is able to direct the instalment receipt registrar to
take to confer the benefit of the entitlements offer on IR holders.
. If the Trustee is advised that there are reasonable steps that can be
taken, the Trustee will take those steps. If the advice is that there are
no such reasonable steps, the Trustee will disregard the entitlements
offer.
The Trustee is precluded from taking any action in respect of an
Entitlements Offer made on or after the Preliminary Notice Day.
SHARE BUY-BACKS
If Telecom makes a buy-back offer for underlying Shares (other than an "on
market" buy-back offer) and if the buy-back price is less than the Final
Instalment, the Trustee will seek instructions from the Selling Shareholder as
to whether the IR holders should be given the opportunity to instruct the
Trustee whether the buy-back offer should be accepted. If the Selling
Shareholder determines that IR holders should not be given that opportunity,
the Trustee will reject the buy-back offer and shall not be bound to give
notice to IR holders. If the buy-back price is equal to or greater than the
Final Instalment, or the buy-back price is less, but the Selling Shareholder
determines that IR holders should be given that opportunity, the Trustee will
notify IR holders and will seek instructions from them as to whether to accept
the buy-back offer in respect of the underlying Shares. The Trustee will act
in accordance with instructions received in accordance with, and within the
time limits specified in, the Trustee's notification. The Trustee will apply
the proceeds of any buy-back in payment of the Final Instalment (and any
costs, expenses, taxes, interest and similar charges) and will account to the
IR holder for the balance. The Trustee has no obligation to respond to, or
take any action in respect of, an "on market" buy-back offer.
OTHER EVENTS
If Telecom makes a bonus issue of Shares or other securities, if Telecom is
involved in any merger or amalgamation, or any other benefit, or right of any
kind, not elsewhere provided for in the Trust Deed, is provided in respect of
underlying Shares, the Trust Deed requires the Trustee to classify the bonus
issue, the consideration received in that amalgamation or merger, or the other
right or benefit (together a "benefit"). The Trustee will determine either (a)
that the benefit is in the nature of an addition to or replacement of the
underlying
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Shares, in which case the Trustee will hold the benefit on trust until the
Final Instalment is paid, or the underlying Shares are sold to enforce payment
of the Final Instalment, or (b) that the benefit is in the nature of an
incident of the beneficial interest held by the IR holder in the underlying
Shares, in which case the Trustee will take reasonable steps to transfer the
benefit to the IR holder, or if that is not possible, will hold the benefit on
trust for the IR holder. In making the determination referred to above, the
Trustee may take, and rely on, the advice of a lawyer, accountant, or other
expert.
POSITION OF TRUSTEE
Except as set out in the Trust Deed, the Trustee has no powers, rights or
discretions in respect of the underlying Shares. The Trustee has certain
powers to delegate various tasks, and to rely on various persons and things.
The Trust Deed contains limitations on the liability of the Trustee to IR
holders and other persons, including a provision that the Trustee is not
liable to any person for any loss or damage arising out of the exercise or
non-exercise of the Trustee's discretion, or for any other act or omission on
the Trustee's part, unless caused by the negligence, wilful misconduct or
fraud of the Trustee.
The Trustee has no right to be reimbursed or indemnified out of the assets
held on trust by the Trustee. The Trustee is however entitled to be reimbursed
and indemnified by the Selling Shareholder against costs, losses or
liabilities incurred by the Trustee in the execution or purported execution of
its duties and powers as Trustee.
AMENDMENTS TO TRUST DEED
The Trustee and the Selling Shareholder may, by agreement between them,
amend the Trust Deed in a broad range of circumstances set out in the Trust
Deed. However, no amendment may (a) impair the rights of any IR holder, by
payment of the Final Instalment as provided in the Trust Deed, to receive a
transfer of the relevant underlying Shares and, pending such transfer, to
enjoy the beneficial interest in respect of such underlying Shares, subject to
the terms of the Trust Deed, (b) vary the date for payment, or amount, of the
Final Instalment or (c) except to the extent that it results from an amendment
arising from an event, transaction or resolution concerning Telecom, abrogate
any right which any IR holder would otherwise have to receive Qualifying
Dividends in respect of the underlying Shares.
CHANGE OF TRUSTEE
The Trustee may retire at any time by two month's notice to the Selling
Shareholder. The Selling Shareholder may remove the Trustee from office at any
time by one month's notice. The Selling Shareholder alone has the power to
appoint a new trustee.
LIMITATIONS ON OWNERSHIP
The provisions referred to under "Description of Shares--Prior Notice to
NZSE of Certain Transfers," and "--Limitation on Shareholdings" will apply to
an IR holder because of the nature of the holder's interest in the underlying
Shares. Accordingly, if any such holder is in breach of any such provisions
the Shares to which such holder's IRs relate may be disenfranchised or
compulsorily sold. The Trust Deed provides, in particular, that the Trustee is
absolutely entitled to act, without enquiry, on any direction or decision of
the Board or the Kiwi Shareholder made or purporting to be made under the
applicable provisions of the Constitution. See "--Compulsory Acquisition or
Sale" for the consequences of the compulsory sale of Shares.
DUTIES AND TAXES
The Trustee is entitled to recover from IR holders, holders of Interim ADRs
and DPB Holders, duties or taxes relating or referable to those holders, their
holdings of IRs or Interim ADRs, or underlying Shares.
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In particular, if the Trustee receives a demand or an assessment from a
revenue or other authority, or otherwise becomes aware that it may be liable
to pay such duties and taxes, then if the Trustee is advised that it is bound
to pay the same, such part of the sum to be paid as is referable to an IR or
to an underlying Share is payable by the relevant IR holder, Interim ADR
holder or DPB Holder to the Trustee upon demand.
If payment is not received by the Trustee in the manner, and within the
period prescribed by a notice (a "Tax Notice") given to the IR holder, Interim
ADR holder or DPB Holder under the Trust Deed, the Trustee is entitled to take
all necessary and appropriate action to recover the relevant amount as a debt
due from the IR holder, Interim ADR holder or DPB Holder as the case may be.
The Trustee is empowered to sell all or any of the underlying Shares to which
the IR holding, or the Interim ADR holding, relates and to apply the proceeds
of sale in accordance with the priority order set out in the Trust Deed.
The obligation of the IR holder, Interim ADR holder or DPB Holder to make
payment, and the Trustee's powers to enforce that obligation, are not affected
by any non-receipt of, accidental failure by the Trustee to give, or failure
by the Interim Depositary to pass on, any Tax Notice.
INTERIM ADRS
Applicants for IRs may elect to have their IRs represented by Interim ADRs.
See "Description of Interim American Depositary Receipts and American
Depositary Receipts." In respect of applicants who so elect (a) IRs will be
issued to a custodian appointed by the Interim Depositary and (b) the Interim
Depositary will cause to be issued to the applicant Interim ADRs representing
the applicant's interest in the IRs.
The Trust Deed contains various provisions relating to Interim ADRs. These
include provisions that:
. The holder of Interim ADRs, rather than the holder of the IRs represented
by those Interim ADRs, is liable to pay the Final Instalment (and to pay
interest upon default, costs and any shortfall arising after sale of
underlying Shares to enforce payment of the Final Instalment).
. Apart from the payment obligations of Interim ADR holders, the Trustee
shall treat the custodian to which IRs have been issued as the IR holder
in its own right. The Trustee shall not be required to consider the
interests of, nor have any obligations to, an Interim ADR holder.
The Interim ADRs are governed by the Interim Deposit Agreement. See
"Description of Interim American Depositary Receipts and American Depositary
Receipts."
DTC ARRANGEMENTS AND DPB HOLDERS
Applicants for IRs may elect:
. that their IRs be represented by Interim ADRs and that such Interim ADRs
be registered in the name of a nominee (the "DTC Nominee") for DTC; or
. with the prior consent of the Trustee and the Selling Shareholder, that
their IRs be registered in the name of the DTC Nominee.
DTC or the DTC Nominee will keep records of the owners of Interim ADRs or
IRs registered in the name of the DTC Nominee. A person shown in those records
as such owner is described in the Trust Deed as a "Direct Participant
Beneficial Holder" (a "DPB Holder").
The Trust Deed contains provisions that a DPB Holder, rather than the holder
of the relevant IRs or Interim ADRs, is liable to pay the Final Instalment
(and to pay interest upon default, costs and any shortfall after sale of the
underlying Shares to enforce payment of the Final Instalment).
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INTERMEDIARIES
The Trust Deed contains provisions relating to "Intermediaries," which are
defined as:
. DTC or the DTC Nominee or any other entity registered as a "Clearing
Agency" pursuant to Section 17A of the Exchange Act;
. any DPB Holder holding beneficial interests in IRs or Interim ADRs for
another person; or
. any indirect participant in DTC or a "Clearing Agency" which has notified
the Selling Shareholder and the Trustee that it holds IRs or Interim ADRs
for others.
If before 5:00 pm on the second business day after the Final Instalment
Payment Date, an Intermediary transfers an IR or Interim ADR to the person for
whom the Intermediary holds such IR or Interim ADR, such person, rather than
the Intermediary, shall become liable to pay the Final Instalment and become
subject to all other obligations relating to such IR or Interim ADR.
GOVERNING LAW
The Trust Deed is governed by New Zealand law except for certain provisions
dealing with the Interim ADR facility and DTC arrangements. Principally, these
provisions are governed by the laws of the State of New York and provide that
Interim ADR holders and DPB Holders shall be bound by all of the terms and
conditions of the Trust Deed by becoming Interim ADR holders or DPB Holders.
The Trust Deed provides that the courts of New Zealand shall have non-
exclusive jurisdiction to determine all actions, claims, disputes and
proceedings in connection with the IRs and the Trust Deed. Each IR holder,
each Interim ADR holder and each DPB Holder will be deemed to have submitted
to the jurisdiction of those courts and to have waived any immunity in respect
of obligations under the terms of the Trust Deed from the jurisdiction of any
court or any legal or arbitration process for any reason.
Nothing in the Trust Deed limits the rights of the Selling Shareholder, a
Replacement Entity or the Trustee to issue proceedings against any IR holder,
Interim ADR holder or DPB Holders, in any other manner permitted by law or in
any other court of competent jurisdiction. The taking of proceedings in one or
more jurisdictions will not preclude the taking of proceedings in any other
jurisdiction, whether concurrently or not.
OTHER PROVISIONS
The Trust Deed also contains provisions to the following effect:
(a) if Telecom pays any Qualifying Dividends wholly or partly other than
in cash, the Trustee will take reasonable steps to cause such dividend (or
the non-cash portion) to vest in IR holders;
(b) the Selling Shareholder shall bear all expenses of the Trust (other
than expenses arising from any enforcement actions regarding the Selling
Shareholder's security interest and certain other recovery costs), except
that the Memorandum of Understanding described below in "--Memorandum of
Understanding" provides that certain expenses are to be reimbursed by the
Company;
(c) where the Trustee takes action to recover amounts owing by IR or
Interim ADR holders or DPB Holders, or to enforce the Selling Shareholder's
security interest, the Trustee acts as agent for the Selling Shareholder,
and is to have regard, to the full extent the law permits, solely to the
interests of the Selling Shareholder. There are various provisions limiting
IR or Interim ADR holders' or DPB Holders' recourse with respect to the
timing or manner of sales of underlying Shares or IRs;
(d) information held by the Trustee regarding the identity of IR and
Interim ADR holders, and other information obtained by it in connection
with its role as Trustee, may be provided to the Selling Shareholder and
Telecom. The Selling Shareholder is authorized to supply to the Trustee and
to Telecom, information provided by applicants for IRs and Interim ADRs in
their application forms;
(e) joint holders of IRs or Interim ADRs owe the obligations imposed on
IR or Interim ADR holders under the Trust Deed jointly and severally;
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(f) all payments required to be made by IR holders, Interim ADR holders
or DPB Holders must be made free of any right to counterclaim or set-off,
and by cleared payment without deduction of any kind;
(g) if an IR holder, Interim ADR holder or DPB Holder is required by law
to make a deduction or withholding payment, such person is obliged to
"gross up" the relevant payment so that the Trustee or the Selling
Shareholder receives the amount it would have received if the deduction or
withholding had not been required, except to the extent that the gross up
obligation is imposed, or the amount thereof is increased, by virtue of any
change in the tax residency (i.e., United States) of the Selling
Shareholder from that existing as of the date of this Prospectus. The
Trustee is entitled to make any deduction or withholding required by law
from any payment to any IR holder, Interim ADR holder or DPB Holder,
without any obligation to "gross up";
(h) the Trustee may discharge its obligations to pay moneys (including
dividends) or send materials to IR holders by arranging for Telecom to do
so directly. Neither the Trustee, Telecom nor the Selling Shareholder is
responsible to any person for any neglect or default on the part of Telecom
to do so, for any accidental omission to send any materials to IR holders
or for failure by IR holders to receive materials for any reason (See "--
Dividends" above); and
(i) there are general provisions allowing changes to times and dates
(other than the Final Instalment Payment Date) in the event of non-business
days or otherwise where the NZSE or another securities exchange permits the
change.
ASSIGNMENT BY THE SELLING SHAREHOLDER
The Trust Deed provides that the Selling Shareholder may, in the
circumstances set forth in the Trust Deed, assign and transfer all of its
rights and obligations under and in respect of the Trust Deed and the IRs
(including the Security Interest) to Ameritech or any wholly owned subsidiary
of Ameritech (provided that Ameritech guarantees the obligations of such
wholly owned subsidiary).
MEMORANDUM OF UNDERSTANDING
A Memorandum of Understanding has been entered into among the Selling
Shareholder, the Trustee and Telecom apportioning the costs, as between
Telecom and the Selling Shareholder, of administrative arrangements which will
apply to IR holdings in relation to such matters as:
(a) direct payments of Qualifying Dividends to IR holders;
(b) direct transmittal to IR holders of financial statements, reports and
notices which are sent to Telecom shareholders; and
(c) conduct of the instalment receipt registry in conjunction with
Telecom's share registry.
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DESCRIPTION OF INTERIM AMERICAN DEPOSITARY RECEIPTS AND
AMERICAN DEPOSITARY RECEIPTS
The following summary of the material provisions of the Interim Deposit
Agreement and the Deposit Agreement pursuant to which Interim ADRs and ADRs,
as the case may be, are to be issued does not purport to be complete and is
qualified in its entirety by reference to the Interim Deposit Agreement
(including the Form of Interim ADS) and the Deposit Agreement, which have been
filed as exhibits to the Registration Statement. The following summary should
be read in conjunction with the "Description of Shares" and "Description of
Instalment Receipts and Trust Deed."
The Interim Deposit Agreement is among Telecom, the Selling Shareholder, the
Trustee, the Interim Depositary and the owners and beneficial owners from time
to time of the Interim ADRs. The Deposit Agreement is among Telecom, the
Depositary and the owners and holders from time to time of the ADRs. The
summary that follows with respect to ADRs, ADSs, Shares and the Deposit
Agreement applies as well to Interim ADRs, Interim ADSs, IRs and the Interim
Deposit Agreement, respectively, unless otherwise indicated or the context
otherwise requires. The Interim Deposit Agreement and the Deposit Agreement
are governed by the laws of the State of New York. Terms used herein and not
otherwise defined have the meanings assigned to them in the Interim Deposit
Agreement and the Deposit Agreement, as applicable.
The term "Interim Depositary" shall mean The Bank of New York acting under
the Interim Deposit Agreement. The term "Depositary" shall mean The Bank of
New York acting under the Deposit Agreement, and, unless otherwise indicated
or the context otherwise requires, the Interim Depositary acting under the
Interim Deposit Agreement.
ADRS
ADRs evidencing ADSs are issuable by the Depositary pursuant to the Deposit
Agreement. Each ADS represents eight Shares (or evidence of rights to receive
Shares) together with any securities, cash or other property held in respect
of such Shares deposited with the Depository or its custodial agent or agents
(each, a "Custodian").
INTERIM ADRS
Interim ADRs evidencing Interim ADSs are issuable by the Interim Depositary
pursuant to the Interim Deposit Agreement. Each Interim ADS represents eight
IRs (or evidence of rights to receive IRs) together with any securities, cash
or other property held in respect of such IRs deposited with the Interim
Depositary or a Custodian. Only persons in whose names ADRs or Interim ADRs
are registered will be treated by Telecom (or the Selling Shareholder and the
Trustee, in the case of Interim ADRs) and the Depositary (or the Interim
Depositary, in the case of Interim ADRs) as the owners of ADRs or Interim
ADRs, as the case may be ("Owners").
Owners of Interim ADRs are parties to the Interim Deposit Agreement, which
provides among other things that each owner of an Interim ADR is bound by the
terms and conditions thereof and of the Trust Deed. Accordingly, each owner of
an Interim ADR has agreed to pay the Final Instalment of the purchase price of
the underlying Shares when due in accordance with the Trust Deed and the
Interim Deposit Agreement. The person liable to pay the Final Instalment in
respect of an IR represented by an Interim ADS evidenced by an Interim ADR
will be the person registered as the holder of that Interim ADR as at 5:00
p.m. New Zealand Time on the ninth business day prior to and inclusive of the
Final Instalment Payment Date (i.e., March 19, 1999) (subject to the comments
about Intermediaries and beneficial owners below under "--Default in Respect
of Payment of Final Instalments"). In order for the owners of Interim ADRs to
prepay the Final Instalment and receive Shares early, the owners must first
turn in their Interim ADRs in exchange for IRs in accordance with the Interim
Deposit Agreement.
Under the Interim Deposit Agreement, owners of Interim ADRs must make
payment of the Final Instalment with respect to the underlying Shares in U.S.
dollars at the Interim Depositary's Corporate Trust Office.
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Not later than 30 days prior to the due date of the Final Instalment of the
purchase price, the Interim Depositary will mail a notice to all registered
owners of Interim ADRs setting forth the estimated U.S. dollar equivalent of
the amount in NZ dollars of the Final Instalment, translated at a rate equal
to the higher of the applicable Spot Rate and the applicable 30-Day Rate (each
as defined below), in either case on the day before the mailing of such
notice.
If, but only if, an owner of Interim ADRs surrenders such Interim ADRs at
the Interim Depositary's Corporate Trust Office together with the estimated
U.S. dollar equivalent of such Final Instalment of the purchase price in
respect of the Shares underlying such Interim ADRs, no later than 5:00 p.m.
(New York time) on March 31, 1999, such instalment shall become payable by the
Interim Depositary, and the Interim Depositary will be liable to pay to an
account of the Selling Shareholder specified by the Selling Shareholder in
writing at the Federal Reserve Bank of New York on or before 5:00 p.m.,
Eastern Standard Time, on April 1, 1999, the U.S. dollar equivalent translated
at the applicable Spot Rate on March 30, 1999 of the Final Instalment of the
purchase price in respect of such underlying Shares (which NZ dollar amount
shall, to the extent such U.S. dollar equivalent is so paid, be deemed to be
duly paid in accordance with the Trust Deed).
Upon payment by holders of the Final Instalment, the Interim Depositary
shall obtain Shares from the Trustee pursuant to the Trust Deed, and the
Interim Depositary will deposit such Shares pursuant to the Deposit Agreement
and the Depositary shall mail ADRs to such holders.
For purposes of this section, the "Spot Rate" means the Trade Weighted Index
linked sovereign government spot rate set by the Reserve Bank of New Zealand
for the sales of NZ dollars for U.S. dollars for settlement in Wellington, and
"30-Day Rate" means the rate determined in such manner for 30-day settlement
in Wellington.
If the estimated U.S. dollar equivalent paid by an owner of Interim ADRs
equals or exceeds the actual U.S. dollar equivalent of the amounts in NZ
dollars payable by the Interim Depositary in respect of such Interim ADRs to
the Selling Shareholder, then, as soon as practicable after the receipt by the
Depositary of Shares, the Depositary will issue and mail to such owner an ADR
and the Interim Depositary shall mail to such owner a check payable to such
owner for any such excess amount. If the estimated U.S. dollar equivalent is
less than the actual U.S. dollar equivalent, translated at the Spot Rate on
March 30, 1999, the Interim Depositary will mail a bill for the amount due to
itself and will not cause the Depositary, unless otherwise instructed by the
Trustee, to mail an ADR until such bill has been paid. The Depositary will not
effect registration or transfer of any ADR or any transfer or withdrawal of
the Shares, as the case may be, underlying such ADR or any securities, cash or
other property held in respect or in lieu thereof until any such bill is paid,
and will withhold any cash dividends or other cash distributions in respect of
such ADR. The Interim Depositary may sell for the account of the holder of
such ADR any part or all of the Shares, securities or other property
underlying such ADR and may apply such cash or the proceeds of any such sale
in payment of such bill (and any taxes and expenses arising or incurred as a
result of effecting any such sale), the owner of such ADR remaining liable for
any deficiency.
Default in Respect of Payment of Final Instalments
Owners of Interim ADRs agree to pay the Final Instalment with respect to the
IRs underlying such Interim ADRs when due, failing which an owner's position
may be liquidated in whole or in part. The Interim Depositary will furnish to
the Selling Shareholder lists of names and addresses of holders of Interim
ADRs, if any, who have not paid the Final Instalment in full on time. In
addition, the Interim ADR owners will remain liable for the deficiency if such
liquidation is insufficient to satisfy the Final Instalment obligation (which
is a New Zealand-dollar denominated obligation, subject to the arrangements
referred to above for acceptance of U.S. dollars from non-defaulting Interim
ADR owners). Notwithstanding the foregoing, in the event (i) a registered
Interim ADR owner is an Intermediary and (ii) prior to 5:00 p.m. on the second
Business Day after the date the Final Instalment is due, such Intermediary
effects a transfer, on the Interim ADR Register of the Interim ADR to the
beneficial owner on whose behalf such Intermediary holds such Interim ADR,
then such beneficial owner shall be, and such Intermediary shall cease to be,
liable for the defaulted amount. See "Description of Instalment Receipts and
Trust Deed--Intermediaries."
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If any owner surrenders an Interim ADR together with a U.S. dollar amount
that is less than the estimated amount required to be paid for the Final
Instalment of the purchase price, the Interim Depositary shall apply the
amount received to the greatest number of underlying whole Shares possible in
accordance with the Interim Deposit Agreement, and shall pay the Final
Instalment due with respect to such Shares in accordance with the Interim
Deposit Agreement. With respect to any remaining Shares, such owner shall be
treated as a defaulting owner. Subject to the above, the Depositary shall mail
an ADR to such owner for the number of whole Shares in respect of which such
estimated U.S. dollar amount has been applied.
TRANSFERS OF INTERIM ADRS AND ADRS
Unless Telecom or the Depositary determines otherwise, transfers of Interim
ADRs or ADRs will not require certifications by transferors or transferees.
NO TRANSFER, COMBINATION OR SPLIT-UP OF INTERIM ADRs WILL BE EFFECTED AFTER
5:00 P.M. NEW ZEALAND TIME ON THE TENTH BUSINESS DAY PRIOR TO AND INCLUSIVE OF
THE FINAL INSTALMENT PAYMENT DATE (I.E., MARCH 18, 1999). THE REGISTERED
OWNERS OF INTERIM ADRs AT SUCH TIME ARE OBLIGED TO PAY THE FINAL INSTALMENT OF
THE PURCHASE PRICE (subject to the ability of certain Intermediaries to pass
on this obligation by transferring Interim ADRs to underlying beneficial
owners).
DEPOSITED SECURITIES
As used herein, "Deposited Securities" means (i) during the period prior to
full payment of the Final Instalment of the purchase price, IRs (or evidence
of rights to receive the same) held under the Interim Deposit Agreement, and
any cash, securities or other property received at any time by or on behalf of
the Interim Depositary in respect of or in lieu of either, and (ii) thereafter
Shares (or evidence of rights to receive the same) held under the Deposit
Agreement, and any cash, securities or other property received at any time by
or on behalf of the Depositary in respect of or in lieu of either; provided,
however, that if any owner of an Interim ADR has not paid in accordance with
the provisions of the Interim Deposit Agreement described above under "--
Interim ADRs" and the provisions of the Trust Deed described above under
"Description of Instalment Receipts and Trust Deed" the full amount of the
Final Instalment of the purchase price of any IR relating to such Interim ADR,
the term "Deposited Securities" in relation to such Interim ADR shall mean the
rights referred to under "--Interim ADRs" to receive the IRs, Shares, cash and
other distributions referred to therein.
DEPOSIT AND WITHDRAWAL OF SHARES
The Depositary has agreed that, upon deposit with the Custodian of Shares
(or evidence of rights to receive such Shares) accompanied by an appropriate
instrument or instruments of transfer or endorsement in form satisfactory to
the Custodian and any certifications as may be required by the Depositary or
the Custodian and subject to the terms of the Deposit Agreement, the
Depositary will execute and deliver at its Corporate Trust Office, upon
payment of the fees, charges and taxes provided in the Deposit Agreement, to
or upon the written order of the person or persons entitled thereto, an ADR
registered in the name of such person or persons for the number of ADSs
issuable in respect of such deposit.
Every person depositing Shares under the Deposit Agreement shall be deemed
to represent and warrant that such Shares and each certificate therefor are
validly issued, fully paid and not a holding or part of a holding in which a
person has a "relevant interest" in Shares in breach of Telecom's
Constitution, such person is duly authorized to make such deposit, and the
deposit of such Shares or sale of ADRs evidencing ADSs by that person is not
restricted under the relevant securities act.
Upon surrender of ADRs at the Corporate Trust Office of the Depositary, and
upon payment of the fees provided in the Deposit Agreement and subject to the
terms and conditions of the Deposit Agreement, ADR owners are entitled to
delivery to them or upon their order at the principal office of the Custodian
or at the Corporate Trust Office of the Depositary of certificates
representing the Shares and any other securities, property or cash that the
surrendered ADRs evidence the right to receive. Delivery to the Corporate
Trust Office of the Depositary shall be made at the risk and expense of the
ADR owner surrendering ADRs.
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The Depositary may execute and deliver ADRs prior to the receipt of Shares
("Pre-Release") and deliver Shares upon the receipt and cancellation of ADRs
which have been Pre-Released, whether or not such cancellation is prior to the
termination of such Pre-Release or the Depositary knows that such ADR has been
Pre-Released. The Depositary may receive ADRs in lieu of Shares in
satisfaction of a Pre-Release. Each Pre-Release will be (i) accompanied by a
written representation from the person to whom such ADRs or Shares are to be
delivered that such person or its customer owns the ADRs or Shares to be
remitted, (ii) at all times fully collateralized with cash or other collateral
deemed appropriate by the Depositary, (iii) terminable by the Depositary on
not more than five business days' notice and (iv) subject to such further
indemnities and credit regulations as are deemed appropriate by the
Depositary. The number of ADSs which are outstanding at any time as a result
of Pre-Releases will not normally exceed thirty percent (30%) of the Shares
deposited thereunder; provided, however, that the Depositary reserves the
right to change or disregard such limit from time to time as it deems
appropriate. The Depositary may retain for its own account any compensation
received by it in connection with the foregoing transactions.
Notwithstanding the terms of the Interim Deposit Agreement, the Interim
Depositary agrees that on and after March 1, 1999 it will cause there to be no
Pre-Released Interim ADRs outstanding under the Interim Deposit Agreement.
In addition, the Interim Depositary has agreed with the Selling Shareholder
that it will cause there to be no Pre-Released Interim ADRs outstanding under
the Interim Deposit Agreement (a) as promptly as practicable, but in any event
no more than 14 days, after receipt by the Depositary of a notice in writing
from the Trustee relating to the payment of Duties and Taxes (as defined in
the Trust Deed), and (b) as promptly as practicable after receipt by the
Depositary of a notice in writing from the Selling Shareholder requesting the
same.
DIVIDENDS, OTHER DISTRIBUTIONS AND RIGHTS
The Depositary is required to convert or cause to be converted into U.S.
dollars, to the extent that in its judgment it can do so on a reasonable basis
and can transfer the resulting U.S. dollars to the United States, all cash
dividends and other cash distributions denominated in NZ dollars (or any other
currency other than U.S. dollars) that it receives in respect of the deposited
Shares, and to distribute the amount received, subject to the terms of the
Deposit Agreement and net of any expenses incurred by the Depositary in
connection with conversion, to the owners of ADRs in proportion to the number
of ADSs that are evidenced by such ADRs. The amount distributed will be
reduced by any amounts to be withheld by Telecom under the Deposit Agreement
or by the Trustee under the Interim Deposit Agreement or the Depositary for
applicable taxes net of expenses of conversion into U.S. dollars. See
"Taxation." If the Depositary determines that in its reasonable judgment any
foreign currency received by it cannot be so converted on a reasonable basis
and transferred, or if any required approval or license of any government or
agency thereof is denied or not obtained within a reasonable period of time as
determined by the Depositary or not obtainable in the reasonable opinion of
the Depositary, the Depositary may distribute such foreign currency (or an
appropriate document evidencing their right to receive such foreign currency)
received by it or, in its discretion, hold such foreign currency uninvested
and without liability for interest thereon for the respective accounts of the
ADR owners entitled to receive the same. If any such conversion of foreign
currency, in whole or in part, cannot be effected for distribution to some of
the owners of ADRs entitled thereto, the Depositary may in its discretion make
such conversion and distribution in U.S. dollars to the extent permissible to
the owners of ADRs entitled thereto and may distribute the balance of the
foregoing currency received by the Depositary to, or hold such balance
uninvested and without liability for interest thereon for the respective
accounts of, the owners of ADRs entitled thereto.
If Telecom declares a dividend in, or free distribution of, additional
Shares, the Depositary may, with Telecom's approval, and shall, if Telecom so
requests, distribute to the owners of outstanding ADRs entitled thereto, in
proportion to the number of ADSs that are evidenced by such ADRs, additional
ADRs evidencing an aggregate number of ADSs that represent the number of
Shares received as such dividend or free distribution subject to the terms of
the Deposit Agreement. In lieu of delivering ADRs for fractional ADSs in the
event of any such distribution, the Depositary will sell the amount of Shares
represented by the aggregate of such fractions and will distribute the net
proceeds to owners of ADRs in accordance with the Deposit Agreement. If
additional
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ADRs are not so distributed, each ADS shall thereafter also represent the
additional Shares distributed together with the Shares represented by such ADS
prior to such distribution. If any distribution upon any deposited IRs
consists of a dividend in, or free distribution of, Shares, the Depositary may
distribute to the registered owners of outstanding IRs entitled thereto, in
proportion to the number of Interim ADSs representing such deposited IRs held
by them respectively, ADRs evidencing an aggregate number of ADSs representing
the amount of Shares received as such dividend or free distribution, and
deposited pursuant to the Deposit Agreement, subject to the terms and
conditions of the Deposit Agreement with respect to the deposit of Shares and
the issuance of ADSs evidenced by ADRs, including the withholding of any tax
or other governmental charge as provided in the Deposit Agreement. In lieu of
delivering ADRs for fractional ADSs in any such case, the Depositary acting
under the Deposit Agreement shall sell the amount of Shares represented by the
aggregate of such fractions and distribute the net proceeds, all in the manner
and subject to the conditions described in the Deposit Agreement. If
additional ADRs are not so distributed, each Interim ADS shall thenceforth
also represent the additional Shares distributed upon the deposited IRs
represented thereby.
If Telecom offers or causes to be offered to the owners of Shares or IRs, as
the case may be, any rights to subscribe for additional Shares (but not IRs)
or any rights of any other nature, the Depositary shall have discretion as to
the procedure to be followed in making such rights available to owners of ADRs
or in disposing of such rights for the benefit of such owners and making the
net proceeds available to such owners or, if the Depositary may neither make
such rights available nor dispose of such rights and make the net proceeds
available, allow the rights to lapse; provided, however, if at the time of the
offering of any rights the Depositary determines in its discretion that it is
lawful and feasible to make such rights available to all owners of ADRs or to
certain owners of ADRs but not to other owners of ADRs, the Depositary may, if
instructed by Telecom, distribute to any holder of ADRs to whom it determines
the distribution to be lawful and feasible, in proportion to the number of
ADSs held by such holder of ADRs, warrants or other instruments therefor in
such form as it deems appropriate. If the Depositary determines in its
discretion that it is not lawful and feasible to make such rights available to
certain owners of ADRs, it may sell the rights, warrants or other instruments
in proportion to the number of ADSs held by the holder of ADRs to whom it has
determined it may not lawfully or feasibly make such rights available, and
allocate the net proceeds of such sales (net of the fees of the Depositary and
all taxes and governmental charges and subject to the terms of the Deposit
Agreement) for the account of such owners of ADRs otherwise entitled to such
rights, warrants or other instruments, upon an averaged or other practical
basis without regard to any distinctions among such owners of ADRs because of
exchange restrictions or the date of delivery of any ADR or otherwise. The
Depositary shall not be responsible for any failure to determine that it may
be lawful and feasible to make such rights available to owners of ADRs in
general or any holder in particular.
If an owner of ADRs requests the distribution of warrants or other
instruments in order to exercise the rights allocable to the ADSs of such
owner, the Depositary will make such rights available to such owner upon
written notice from Telecom to the Depositary that Telecom has elected in its
sole discretion to permit such rights to be exercised and such owner has
executed such documents as Telecom has determined in its sole discretion are
reasonably required under applicable law. Upon instruction pursuant to such
warrants or other instruments to the Depositary from such owner to exercise
such rights, upon payment by such owner to the Depositary for the account of
such owner of an amount equal to the purchase price of the Shares (but not
IRs) to be received upon the exercise of the rights, and upon payment of the
fees of the Depositary (but not the Interim Depositary) as set forth in such
warrants or other instruments, the Depositary (but not the Interim Depositary)
shall, on behalf of such owner, exercise the rights and purchase the Shares
(but not IRs), and the Company shall cause the Shares (but not IRs) so
purchased to be delivered to the Depositary (but not the Interim Depositary)
on behalf of such owner. As agent for such owner, the Depositary will cause
the Shares so purchased to be deposited under the Deposit Agreement (but not
the Interim Deposit Agreement), and shall execute and deliver to such owner
legended ADRs (but not IRs), restricted as to transfer under applicable
securities laws.
In the case of the Interim Deposit Agreement, any Shares obtained through
the exercise of rights to subscribe made available or exercised as set forth
in the Interim Deposit Agreement will be deposited with the Depositary
pursuant to the Deposit Agreement and, subject to the terms of the Deposit
Agreement, ADRs
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evidencing ADSs representing the Shares so deposited will be distributed to
the relevant owners as reflected in the records of the Depositary.
If registration under the U.S. Securities Act of the securities to which any
rights relate is required in order for Telecom to offer such rights to holders
of ADRs and sell the securities upon the exercise of such rights to owners of
ADRs, the Depositary will not offer such rights to the owners of ADRs unless
and until such a registration statement is in effect, or unless the offering
and sale of such securities to the owners of such ADRs are exempt from
registration under the provisions of the U.S. Securities Act and an opinion of
counsel satisfactory to the Depositary and Telecom has been obtained.
If the Depositary determines that any distribution of property in respect of
the Shares (including Shares or rights to subscribe therefor) is subject to
any tax or other governmental charge that the Depositary is obligated to
withhold, the Depositary may, by public or private sale, dispose of all or a
portion of such property including Shares and rights to subscribe therefor in
such amounts and in such manner as the Depositary deems necessary and
practicable to pay any such taxes or charges, and the Depositary will
distribute the net proceeds of any such sale, after deduction of any taxes or
charges, to the ADR owners entitled thereto in proportion to the respective
number of ADSs held by them.
Subject to the terms of the Deposit Agreement, upon any split-up,
consolidation or any other reclassification of Shares, or upon any
recapitalization, reorganization, merger or consolidation or sale of assets
affecting Telecom in the case of ADSs or Telecom or the Trustee in the case of
Interim ADSs or to which Telecom or the Trustee, as applicable, is a party,
any securities that shall be received by the Depositary or the Custodian in
exchange for or in conversion of or in respect of Shares shall be treated as
newly deposited Shares under the Deposit Agreement, and ADSs shall thenceforth
represent the new Shares so received in respect to Shares, unless additional
ADRs are delivered or the Depositary calls for the surrender of outstanding
ADRs to be exchanged for new ADRs.
RECORD DATES
Whenever any cash dividend or other cash distribution shall become payable
or any distribution other than cash shall be made or rights shall be issued
with respect to the Shares, or whenever for any reason the Depositary causes a
change in the number of Shares that are represented by each ADS, or whenever
the Depositary shall receive notice of any meeting of owners of Shares, the
Depositary will fix a record date (i) for the determination of the owners of
ADRs who shall be entitled (a) to receive such dividend, distribution or
rights, or the net proceeds of the sale thereof, or (b) to give instructions
for the exercise of voting rights at such meeting or (ii) on or after which
each ADS will represent the changed number of Shares.
REPORTS AND OTHER COMMUNICATIONS
Telecom will furnish to the Depositary and the Custodian all notices of
shareholders' meetings and other reports and communications that are made
generally available to the holders of Shares. The Depositary will make such
notices, reports and communications available for inspection by ADR owners at
its Corporate Trust Office when furnished by Telecom pursuant to the Deposit
Agreement, or the Trustee or Telecom pursuant to the Interim Deposit
Agreement, and, upon written request by Telecom or the Trustee, will promptly
mail such notices, reports and communications to ADR holders. Upon notice that
Telecom pursuant to the Deposit Agreement has not furnished the Commission or
any stock exchange with any public reports, documents or other information
required by law or otherwise by the Exchange Act, the Depositary shall
promptly furnish to the Commission or such regulatory authority or stock
exchange copies of all annual or other periodic reports and other notices or
communications that the Depositary receives from Telecom and the Depositary is
authorized by Telecom to do so on its behalf.
VOTING OF THE UNDERLYING SHARES
Voting Under the Deposit Agreement
Telecom is required by its Constitution to make proxy forms available to
shareholders for purposes of voting at each meeting of shareholders. Upon
receipt of notice of any meeting of holders of Shares, the Depositary will, as
soon as practicable thereafter, mail to owners of ADRs a notice containing the
information included in the
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notice of meeting, and establishing a record date for voting and informing
owners of ADRs of their rights and the manner in which instructions may be
given to the Depositary and containing a statement that if a poll is called
and no instructions as to voting power are received by the Depositary from an
owner of ADRs on or before the date established in the Depositary Agreement
for such purpose then the Depositary will not vote the Shares underlying such
ADRs or cause such Shares to be voted. The owners of ADRs at the close of
business on the date specified by the Depositary in such notice are entitled
under the Deposit Agreement, subject to any applicable provisions of New
Zealand law and of the Company's Constitution, to instruct the Depositary as
to the exercise of the voting rights pertaining to the Shares represented by
the ADSs that are evidenced by the ADRs in the event a poll is called. The
Depositary has agreed that it will endeavor, insofar as practicable, to vote
the Shares so represented in accordance with such instructions pursuant to the
Deposit Agreement. The Depositary has agreed not to vote the Shares so
represented unless it has received instructions from the record owners of
ADRs. The Depositary will not, and the owners of ADRs are not entitled to,
vote by voice or on a show of hands. The Depositary will not demand a poll
unless specifically instructed (i) by at least five holders or owners of ADRs
evidencing ADSs or (ii) by owners of ADRs evidencing ADSs representing Shares
which represent not less than 10% of the total voting rights capable of being
cast at such meeting or which confer a right to vote at such meeting and on
which the sum paid to the Company represents not less than 10% of the total
sum paid to the Company on all Shares which confer a right to vote at such
meeting. The Deposit Agreement does not provide for holders of ADRs evidencing
ADSs the right to cause the Depositary to request a meeting of Shareholders.
Voting Under the Interim Deposit Agreement
Telecom is required by its Constitution to make proxy forms available to
shareholders for purposes of voting at each meeting of shareholders. Upon
receipt of notice of any meeting of holders of Shares represented by IRs or
other Interim Deposited Securities, the Interim Depositary will, as soon as
practicable thereafter, mail to owners of Interim ADRs a notice containing the
information included in the notice of meeting, establishing a record date for
voting and informing owners of Interim ADRs of their rights and the manner in
which instructions may be given to the Interim Depositary and containing a
statement that if a poll is called and no instructions as to voting are
received by the Interim Depositary from any owner of Interim ADRs with respect
to any such owners' Interim ADRs on or before the date established by the
Interim Depositary for such purpose, then neither the Interim Depositary nor
the Trustee will vote or cause such Shares to be voted. The owners of Interim
ADRs at the close of business on the date specified by the Interim Depositary
in such notice are entitled under the Interim Deposit Agreement, subject to
any applicable provisions of New Zealand law, the Company's Constitution or
the Trust Deed, to instruct the Interim Depositary, who in turn will instruct
the Trustee, as to the exercise of the voting rights pertaining to the Shares
represented by IRs that are represented by Interim ADSs that are evidenced by
the Interim ADRs in the event a poll is called. If the Trustee will not vote
in favor of a resolution relating to a merger or amalgamation, as provided
under certain circumstances by the Trust Deed, the Interim Depositary shall,
if instructed in writing to do so by the Trustee, notify owners of Interim
ADRs that the Trustee is not entitled to exercise voting rights in favor of
that resolution. The Trustee has agreed that it will endeavor, insofar as
practicable, to vote the Shares so represented in accordance with such
instructions. The Interim Depositary and Trustee have agreed not to vote the
Shares so represented unless they have received instructions from the record
owner of Interim ADRs. The Trustee will not, and the owners of Interim ADRs
are not entitled to, vote by voice or on a show of hands. The Interim
Depositary will not instruct the Trustee to demand a poll unless specifically
instructed (i) by at least five holders or owners of Interim ADRs evidencing
Interim ADSs or (ii) by owners of Interim ADRs evidencing Interim ADSs
representing Shares which represent not less than 10% of the total voting
rights capable of being cast at such meeting or which confer a right to vote
at such meeting and on which the sum paid to the Company represents not less
than 10% of the total sum paid to the Company on all Shares which confer a
right to vote at such meeting. The Interim Deposit Agreement does not provide
for holders of Interim ADRs evidencing Interim ADSs the right to cause the
Interim Depositary to request a meeting of shareholders.
The Trustee shall demand a poll if entitled to do so pursuant to the
Constitution and the laws of New Zealand, and if so instructed by the Interim
Depositary in accordance with the Interim Deposit Agreement.
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If the Trustee, pursuant to any provision of the Trust Deed seeks
instructions from the holders of IRs in respect of any matter not specifically
referred to in the Interim Deposit Agreement, the Interim Depositary shall, if
requested in writing by the Trustee, as soon as practicable thereafter, mail
to owners of Interim ADRs a notice which shall: (a) contain details of the
matter (a "Specified Matter") in respect of which the Trustee seeks
instructions; (b) advise that owners of Interim ADRs as of the close of
business on a specified record date, set by the Interim Depositary, may
instruct the Interim Depositary, who will in turn instruct the Trustee, in
respect of the Specified Matter; and (c) contain a statement that if no
instructions are received by the Interim Depositary from any owner of Interim
ADRs on or before the date established by the Interim Depositary for the
purpose, the Interim Depositary will give no instructions to the Trustee. The
Interim Depositary shall endeavor, in so far as practicable, to provide
instructions to the Trustee in accordance with instructions received from an
owner of Interim ADRs by the date referred to in clause (c).
LIMITATION ON SHAREHOLDINGS
No person may have a relevant interest in 10% or more of the Company's
voting shares without the prior written approvals of the Board and the holder
of the Kiwi Share. No person who is not a New Zealand National (as defined in
the Company's Constitution) may have a relevant interest in more than 49.9% of
the Company's voting shares without the prior written approval of the holder
of the Kiwi Share. The term "relevant interest" is broadly defined to include
beneficial ownership, the power to vote or control the vote of voting shares,
the power to acquire or dispose of or control the acquisition or disposition
of voting shares, and an interest pursuant to any agreement or arrangement
under which any of the foregoing rights arise, whether express, implied,
direct, indirect, actual, contingent, present, future, shared with others,
legally enforceable or not, which is held directly or by a related body
corporate. The term excludes certain limited interests arising from particular
financial, custodial, trading and similar relationships. If the Board (or the
holder of the Kiwi Share after consultation with the Board) determines that
there are reasonable grounds for believing that a person has a relevant
interest in voting shares in excess of the above limitations, the Board (or
the holder of the Kiwi Share if the Board fails to act in a manner that
remedies the determination) may, after following certain procedures, prohibit
the exercise of voting rights (in which case voting rights vest in the
chairperson) and may force the sale of Shares. The Board may also decline to
register a transfer of Shares if it reasonably believes that the transfer
would breach the above restrictions. See "Description of Shares--Limitation on
Shareholdings." The Board and/or the holder of the Kiwi Share may enforce
these provisions of the Company's Constitution against the Depositary or the
Custodian as holders of Shares.
Each owner and beneficial owner of ADRs must, on behalf of the Depositary or
the Custodian, provide information required by, and comply with requests to
provide information pursuant to, the Company's Constitution. This information
may include the capacity in which ADRs or Shares are held, the identity,
address and extent of interest of any other person having a relevant interest
in ADRs or Shares by virtue of the reporting person's relevant interest and
such other information as will or is likely to assist in identifying the
holders with relevant interests in Shares and the nature of the relevant
interests. Each owner or beneficial owner of ADRs who is requested to provide
such information must inform the Depositary of all relevant information and
the Depositary will forthwith pass on such information to the Board.
If the Depositary, the Custodian or their nominee receives a notice from the
Board or the holder of the Kiwi Share that it intends to declare that certain
Shares are held in breach of the limitations on shareholders contained in the
Company's Constitution (the "Affected Shares"), the Depositary will send a
copy of the notice to the beneficial owner of the Affected Shares, or if no
beneficial owner is specified, to each owner of ADRs. Any owner of ADRs
receiving such a notice may make representations for and on behalf of the
registered shareholders as to why such Shares should not be treated as
Affected Shares.
If the Depositary, the Custodian or their nominee receives a notice from the
Board or the holder of the Kiwi Share, or from the Trustee, in the case of the
Interim Deposit Agreement (as registered holder of the Shares to which the IRs
relate), declaring that any Shares are Affected Shares, the Depositary shall
give notice to each beneficial owner identified in such notice of the action
to be taken by the Depositary. With respect to any
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Affected Shares where a beneficial owner is specified, the Depositary must
deny the voting instruction rights attaching to any ADR representing Affected
Shares to the extent the Depositary, the Custodian, or the Trustee, in the
case of the Interim Deposit Agreement, or their nominee are denied voting
rights. If such notice does not state the number of Shares to which it
relates, then the total number of Shares represented by ADRs held by the
beneficial owner shall be deemed to be Affected Shares. In the event of a
beneficial owner receiving such a notice, the beneficial owner must
immediately take such steps as may be required to become the registered owner
of the ADRs represented in the Affected Shares on the books of the Depositary.
If such notice does not identify a specific beneficial owner, then the
Depositary shall notify all owners of ADRs and deny the voting instruction
rights attaching to Affected Shares pro rata among the owners based upon the
number of ADSs held by them. The Company's Constitution requires that the
holder of the Kiwi Share consult with the Board prior to determining that
Shares are Affected Shares and, therefore, prior to sending any notice that
does not identify a specific beneficial owner. The Company has agreed in the
Deposit Agreement to take all reasonable steps to identify the specific
beneficial owner of Affected Shares.
Under the Company's Constitution, the Board and the holder of the Kiwi Share
may sell Affected Shares for the account of the registered owner. If any
Affected Shares represented by ADRs are sold, the ADRs shall thereafter
represent only the right to receive any cash received by the Depositary in
respect thereof, less the fees of the Depositary for cancellation of the ADR
evidencing Affected Shares and any expenses incurred or paid by the Depositary
in distributing such cash and unsold Shares or other property, if any, to the
beneficial owner of the ADR. The Depositary will give notice to the beneficial
owner of an ADR of any sale effected forthwith upon receiving such notice from
the Board or the holder of the Kiwi Share in the case of the Deposit Agreement
or from the Trustee who will forward a copy of such notice to the Interim
Depositary upon receipt of such notice from the Board or the holder of the
Kiwi Share, in the case of the Interim Deposit Agreement. Upon receiving such
notice, such owner must surrender the ADR for cancellation, and, if
applicable, issuance of a new ADR.
The Board has agreed that it will not, and will use its reasonable efforts
to obtain the consent of the holder of the Kiwi Share not to, sell any
Affected Shares without delivering to the Depositary, in the case of the
Deposit Agreement, or the Trustee, who will then forward to the Interim
Depositary, in the case of the Interim Deposit Agreement, a notice specifying
the number of Affected Shares and the identity of the beneficial owner of the
ADRs representing Affected Shares. In the event that such notice is not given
to the Depositary, the Depositary will immediately (i) notify all owners of
ADRs on and after the date of such sale of Affected Shares that their ADRs
represent their pro rata share of the remaining deposited Shares, and (ii)
upon receipt of the cash proceeds of any such sale of Affected Shares,
distribute such cash proceeds pro rata to all owners of ADRs in accordance
with the terms of the Deposit Agreement. Thereafter, upon the surrender of any
ADR the Depositary will, subject to the terms of the Deposit Agreement,
deliver only the owner's pro rata share of the remaining deposited Shares.
Each ADR owner must take every reasonable step in accordance with any notice
given regarding any Affected Shares. Except to the extent provided in the
Company's Constitution, the Board and the holder of the Kiwi Share are under
no obligation to give, modify or withdraw any such notice. Any resolution or
determination of, or decision or exercise of any discretion or power by, the
Company, the Board, the holder of the Kiwi Share or the Depositary under or
pursuant to the Company's Constitution, and the Trust Deed, in the case of the
Interim Deposit Agreement, or the Deposit Agreement shall be final, conclusive
and binding on any ADR owner or other person affected thereby and shall not be
subject to challenge. Neither the Company, the Board, the owner of the Kiwi
Share, the Depositary, the Custodian, the Trustee in the case of the Interim
Deposit Agreement, or any registrar shall be liable to any person who fails to
act in accordance with such provisions or who is affected by any decision or
exercise of any discretion or power by the Company, the Board, the holder of
the Kiwi Share, the Depositary, the Custodian, the Trustee, in the case of the
Interim Deposit Agreement, or any registrar.
In addition, the provisions referred to under "Description of Shares--Prior
Notice to NZSE of Certain Transfers" and the provisions relating to
notification of relevant interests in voting securities of the Company and the
provisions of the Overseas Investment Regulations referred to under
"Description of Shares--Limitation on Ownership" will apply to owners of ADRs
or Interim ADRs because of the nature of their interest in the underlying
Shares.
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AMENDMENT AND TERMINATION OF THE DEPOSIT AGREEMENT
The form of the ADRs and the terms of the Deposit Agreement may at any time
be amended by agreement between Telecom and the Depositary. The form of the
Interim ADRs and the terms of the Interim Deposit Agreement may at any time be
amended by agreement among the Selling Shareholder, the Trustee, Telecom and
the Depositary. Any amendment that imposes or increases any fees or charges
(other than taxes or other governmental charges), or that otherwise prejudices
any substantial existing right of ADR owners, will not take effect as to
outstanding ADRs until the expiration of 30 days after notice of such
amendment has been given to the owners of outstanding ADRs. Every owner of an
ADR at the time such amendment becomes effective will be deemed, by continuing
to hold such ADR, to consent and agree to such amendment and to be bound by
the Deposit Agreement as amended thereby. In no event will any amendment
impair the right of any ADR owner to surrender the ADRs held by such owner and
receive therefor the underlying Shares and any other property represented
thereby, except in order to comply with mandatory provisions of applicable
law.
Whenever so directed by Telecom, the Depositary has agreed to terminate the
Deposit Agreement by mailing notice of such termination to the owners of all
ADRs then outstanding at least 30 days prior to the date fixed in such notice
for such termination. The Depositary may similarly terminate the Deposit
Agreement by mailing notice for such termination to Telecom and owners of all
ADRs then outstanding if at any time 90 days after the Depositary shall have
delivered to Telecom and the owners of all ADRs then outstanding a written
notice of its election to resign and a successor depositary shall not have
been appointed and accepted its appointment. On and after the date of
termination, an ADR owner, upon surrender of such ADR at the Corporate Trust
Office of the Depositary, upon payment of the fees of the Depositary, and upon
payment of any applicable tax or governmental charges, will be entitled to
delivery to him or upon his order of the amount of Shares and other property
represented by such ADR.
The Interim Depositary shall at any time at the direction of both the
Selling Shareholder and Telecom (which shall be confirmed in writing)
terminate the Interim Deposit Agreement by mailing notice of such termination
to the Owners of all Interim ADRs then outstanding at least 30 days prior to
the date fixed in such notice for such termination; provided that the Selling
Shareholder and Telecom agree that they will not terminate the Interim Deposit
Agreement on or prior to the Final Instalment Payment Date, except if, at any
time after the date of the Interim Deposit Agreement, (a) agreement to
terminate the appointment of the Interim Depositary shall have been reached by
the Depositary and the Trustee pursuant to the Interim Deposit Agreement or
(b) notice of termination shall have been given pursuant to the Interim
Deposit Agreement. If any ADRs or Interim ADRs, as the case may be, remain
outstanding after the date of termination, the Depositary or Interim
Depositary, as the case may be, thereafter will discontinue the registration
of transfers of ADRs or Interim ADRs, as the case may be, will suspend the
distribution of dividends to the owners thereof and will not give any further
notices or perform any further acts under the Deposit Agreement or the Interim
Deposit Agreement, as the case may be, except that the Depositary shall (i)
continue the collection of dividends and other distributions, (ii) sell rights
and other property and (iii) continue to deliver Shares, together with any
dividends or other distributions received with respect thereto and the net
proceeds of the sale of any rights or other property, in exchange for
surrendered ADRs or Interim ADRs, as the case may be, subject to the terms of
the Deposit Agreement or the Interim Deposit Agreement, as the case may be.
Upon any such termination of the Interim Deposit Agreement, the Depositary
shall, at the direction of the Selling Shareholder or the Trustee, continue to
carry out all actions required by the Interim Deposit Agreement relating to
the payment of the Final Instalment and the issuance of ADRs. At any time
after the expiration of one year from the date of termination, the Depositary
or the Interim Depositary, as the case may be, may sell the Shares or Interim
ADRs, as the case may be, and may thereafter hold uninvested the net proceeds
of any such sale, together with any cash then held by it under the Deposit
Agreement or the Interim Deposit Agreement, as the case may be, unsegregated
and without liability for interest, for the pro rata benefit of the owners of
ADRs or Interim ADRs, that have not theretofore been surrendered and such
owners shall become general creditors of the Depositary or the Interim
Depositary, as the case may be, with respect to such net proceeds. After
making such sale, the Depositary or the Interim Depositary, as the case may
be, shall be discharged from all obligations
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under the Deposit Agreement or the Interim Deposit Agreement, as the case may
be, except to account for net proceeds and other cash (after deducting certain
fees of the Depositary or the Interim Depositary, as the case may be) and
except for certain obligations for indemnification set forth in the Deposit
Agreement or the Interim Deposit Agreement, as the case may be. Upon the
termination of the Deposit Agreement or the Interim Deposit Agreement, as the
case may be, Telecom in the case of the Deposit Agreement and Telecom, the
Trustee and the Selling Shareholder in the case of the Interim Deposit
Agreement will also be discharged from all obligations thereunder, except for
certain obligations to the Depositary or the Interim Depositary, as the case
may be, relating to fees and indemnification.
ASSIGNMENT OF SELLING SHAREHOLDER'S RIGHTS AND OBLIGATIONS
Pursuant to the Interim Deposit Agreement, the Depositary shall consent to
an assignment and transfer of all of the Selling Shareholder's rights and
obligations to Ameritech or any wholly owned subsidiary of Ameritech (the
"Assignee") under and in respect of the Interim Deposit Agreement, if, but
only if, the Trustee under the Trust Deed has consented to an assignment and
transfer of all of the Selling Shareholder's rights and obligations under and
in respect of the Trust Deed and in respect of the IRs, pursuant to the
provisions of the Trust Deed, to the Assignee. The Selling Shareholder shall
then be deemed to have assigned and transferred all of the Selling
Shareholder's rights and obligations under this Interim Deposit Agreement to
the Assignee, and the parties to the Interim Deposit Agreement will be deemed
to have consented to such assignment and transfer.
CHARGES OF DEPOSITARY
Telecom will pay the fees, reasonable expenses and out-of-pocket charges of
the Depositary and those of any registrar only in accordance with agreements
in writing entered into between the Depositary and Telecom from time to time.
The following charges shall be incurred by any party depositing or withdrawing
Shares or by any party surrendering ADRs or to whom ADRs are issued
(including, without limitation, issuance pursuant to a stock dividend or stock
split declared by Telecom or an exchange of stock regarding the ADRs or
deposited Shares or a distribution of ADRs pursuant to the terms of the
Deposit Agreement): (i) any applicable taxes and other governmental charges,
(ii) any applicable transfer or registration fees, (iii) certain cable, telex
and facsimile transmission charges as provided in the Deposit Agreement, (iv)
any expenses incurred in the conversion of foreign currency, (v) a fee of
U.S.$5.00 or less per 100 ADSs (or portion thereof) for the delivery of ADRs
in connection with the deposit of Shares or distributions on Shares or the
surrender of ADRs, and (vi) a fee equal to the fee described in (v) above upon
the distribution of proceeds following the sale of rights by the Depositary in
accordance with the Deposit Agreement.
The Depositary, subject to the Deposit Agreement, may own and deal in any
class of securities of Telecom and its affiliates and in ADRs.
LIABILITY OF HOLDERS FOR TAXES, DUTIES OR OTHER CHARGES
Any tax or other governmental charge with respect to ADRs or any deposited
Shares represented by any ADR shall be payable by the owners of such ADR to
the Depositary. The Depositary may refuse to effect transfer of such ADR or
any withdrawal of deposited Shares represented by such ADR until such payment
is made, and may withhold any dividends or other distributions or may sell for
the account of the owners thereof any part or all of the deposited Shares
represented by such ADR and may apply such dividends or distributions or the
proceeds of any such sale in payment of any such tax or other governmental
charge and the holder of such ADR or such beneficial interest therein shall
remain liable for any deficiency.
TRANSFER OF AMERICAN DEPOSITARY RECEIPTS
The ADRs are transferable on the books of the Depositary, provided that the
delivery of ADRs against deposits of Shares generally or against deposits of
particular Shares may be suspended, or the transfer of ADRs in particular
instances may be refused, or the registration of transfer of outstanding ADRs
generally may be
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suspended, during any period when the transfer books of the Depositary in the
case of ADSs, or the transfer books of the Interim Depositary or the transfer
books relating to the IRs in the case of Interim ADSs, are closed, or if any
such action is deemed necessary or advisable by the Depositary or Telecom in
the case of ADSs or the Depositary or the Selling Shareholder and Telecom in
the case of Interim ADSs in good faith at any time or from time to time
because of any requirement of law or of any government or governmental body or
commission, or applicable stock exchange rules or the Constitution in the case
of Interim ADSs or under any provision of the Deposit Agreement, or the Trust
Deed in the case of Interim ADSs, or for any other reason, subject to the
terms of the Deposit Agreement. In the case of ADRs, the surrender of
outstanding ADRs and withdrawal of deposited Shares may not be suspended
subject only to (i) temporary delays caused by closing the transfer books of
the Depositary or Telecom, the deposit of Shares in connection with voting at
a shareholders' meeting or the payment of dividends, (ii) the payment of fees,
taxes and similar charges and (iii) compliance with any United States or
foreign laws or governmental regulations relating to the ADRs or to the
withdrawal of the deposited Shares. Without limitation of the foregoing, the
Depositary shall not knowingly accept for deposit under the Deposit Agreement
any Shares required to be registered under the provisions of the U.S.
Securities Act, unless a registration statement is in effect as to such
Shares. As a condition precedent to the execution and delivery, registration
of transfer, split-up, combination or surrender of any ADR or withdrawal of
Shares, the Depositary, the Custodian or the registrar may require payment
from the person presenting the ADR or the depositor of the Shares of a sum
sufficient to reimburse it for any tax or other governmental charge and any
stock transfer or registration fee with respect thereto, payment of any
applicable fees payable by the owners of ADRs and the production of proof
satisfactory to the Depositary as to the identity and genuineness of any
signature and may also require compliance with any regulations the Depositary
may establish consistent with the provisions of the Deposit Agreement and
applicable law. The Depositary may refuse to execute and deliver ADRs,
register the transfer of any ADR or make any distribution on, or related to,
Shares until it or the Custodian has received proof of citizenship or
residence, exchange control approval or other information as it may deem
necessary or proper. Owners of ADRs may inspect the transfer books of the
Depositary at any reasonable time, provided that such inspection shall not be
for the purpose of communicating with owners of ADRs in the interest of a
business or object other than the business of Telecom or a matter related to
the Deposit Agreement or ADRs.
GENERAL
Neither the Depositary nor Telecom nor any of their directors, officers,
employees, agents or affiliates in the case of the Deposit Agreement, or none
of the Depositary, the Selling Shareholder, the Trustee or the Company or any
of their directors, officers, employees, agents or affiliates, in the case of
the Interim Deposit Agreement, will be liable to the owners of ADRs or Interim
ADRs, as the case may be, if by reason of any present or future law or
regulation of the United States or any other country or of any governmental or
regulatory authority or any stock exchange, any provision, present or future,
of Telecom's Constitution or any circumstance beyond its control, the
Depositary or Telecom in the case of the Deposit Agreement or the Trustee,
Telecom, the Depositary or the Selling Shareholder in the case of the Interim
Deposit Agreement or any of their respective directors, officers, employees,
agents or affiliates is prevented or forbidden from performing its obligations
or exercising its discretion under the Deposit Agreement or the Interim
Deposit Agreement, as the case may be, or is subject to any civil or criminal
penalty on account of performing its obligations under the Deposit Agreement
or the Interim Deposit Agreement, as the case may be. The obligations of
Telecom in the case of the Deposit Agreement or the Trustee, Telecom or the
Selling Shareholder in the case of the Interim Deposit Agreement and the
Depositary under the Deposit Agreement or the Interim Deposit Agreement, as
the case may be, are expressly limited to using the best judgment and acting
in good faith in the performance of their respective duties specified therein.
So long as any ADRs or ADSs evidenced thereby are listed on one or more
stock exchanges in the United States, the Depositary will act as registrar or,
with the approval of Telecom in the case of ADSs, appoint a registrar or one
or more co-registrars, for registration of such ADRs, in accordance with any
requirements of such exchanges. Such registrar or co-registrars may be removed
and a substitute or substitutes appointed by the Depositary with the approval
of Telecom in the case of ADSs or Telecom and the Selling Shareholder in the
case of Interim ADSs.
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Under New Zealand law, persons who hold a relevant interest in 5% or more of
the voting securities of the Company (including persons who hold such an
interest through the holding of ADRs) are required to give written notice of
their interest and certain subsequent changes in their interest to the Company
and to the New Zealand Stock Exchange.
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TAXATION
The following summary is based on tax laws of the United States and New
Zealand as in effect on the date of this Prospectus, and is subject to changes
in United States or New Zealand law, including changes that could have
retroactive effect. The following summary does not take into account or
discuss the tax laws of any country other than the United States or New
Zealand.
This summary does not describe United States federal estate and gift tax
considerations, nor state and local tax considerations within the United
States, and is not a comprehensive description of all United States federal or
New Zealand tax considerations that may be relevant to a decision to purchase,
sell or hold ADSs or Shares. Furthermore, this summary does not address United
States federal income tax or New Zealand income tax considerations relevant to
holders of ADSs or Shares who are subject to taxing jurisdictions other than
or in addition to the United States and New Zealand, and does not address all
possible categories of United States holders, some of which (such as tax-
exempt entities, insurance companies, securities dealers, holders who hold
ADSs or Shares as part of a hedging, straddle or conversion transaction,
holders of 10% or more of the total combined voting power of the Shares of the
Company) may be subject to special rules.
This summary of certain United States federal and New Zealand tax matters is
based on the advice of Kirkland & Ellis of Chicago, Illinois, with respect to
United States federal tax matters, and on the advice of Chapman Tripp
Sheffield Young of Wellington, New Zealand, with respect to New Zealand tax
matters.
This summary contains a description of the principal United States federal
and New Zealand tax consequences of the purchase, ownership and disposition of
ADSs or Shares by a "United States holder" only (as separately defined in "--
United States Taxation" and "--New Zealand Taxation" below).
PERSONS CONSIDERING THE PURCHASE, OWNERSHIP OR DISPOSITION OF ADSs OR SHARES
SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE TAX CONSEQUENCES IN LIGHT
OF THEIR PARTICULAR SITUATIONS, INCLUDING ANY CONSEQUENCES ARISING UNDER THE
LAWS OF THEIR APPLICABLE TAXING JURISDICTION.
UNITED STATES TAXATION
As used in this section "--United States Taxation," the term "United States
holder" means a beneficial owner of ADSs or Shares that is (i) a citizen or
resident of the United States, (ii) a domestic corporation, (iii) an estate
the income of which is subject to United States federal income tax without
regard to its source or (iv) a trust if a United States court is able to
exercise primary supervision over administration of the trust and one or more
United States persons have authority to control all substantial decisions of
the trust. This discussion assumes that United States holders hold ADSs or
Shares as capital assets.
For United States federal income tax purposes, holders of ADSs will be
treated as owners of the underlying Shares represented by the ADSs.
Dividends
For United States federal income tax purposes, the gross amount of all
dividends paid (without reduction for New Zealand withholding tax) with
respect to ADSs or Shares (including dividend amounts applied to the Final
Instalment) out of current or accumulated earnings and profits as determined
under United States federal income tax principles ("E&P") to a United States
holder will be treated as foreign source ordinary income to such holder. See
"--New Zealand Taxation--Dividends." United States corporations that hold ADSs
or Shares will not be entitled to the dividends received deduction generally
available for dividends received from United States corporations (and certain
non-United States corporations). To the extent a distribution exceeds E&P, it
will be treated first as a return of the holder's basis to the extent thereof,
and then as gain from the sale of a capital asset.
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A distribution of Shares by the Company generally will not be treated as a
taxable dividend to United States holders.
For United States federal income tax purposes, the amount of any
distribution paid in NZ dollars will be the U.S. dollar value of the NZ
dollars at the exchange rate in effect on the date of receipt of the
distribution by the United States holder or by the Trustee and applied to the
Final Instalment, whether or not the NZ dollars are in fact converted into
U.S. dollars at that time. Gain or loss, if any, realized on the disposition
of NZ dollars generally will be United States source ordinary income or loss.
The withholding tax imposed by New Zealand is a creditable foreign tax for
United States federal income tax purposes in an amount generally equal to the
U.S. dollar equivalent of the withholding tax paid (i) for cash-basis
taxpayers, at the conversion rate in effect on the day the withholding tax is
paid, or (ii) for accrual-basis taxpayers, at the average exchange rate for
the taxable year to which the withholding tax relates. Therefore, the holder
will be entitled to treat the amount withheld as a foreign tax paid in
computing a foreign tax credit (or in computing a deduction for foreign income
taxes paid, if the holder does not elect to use the foreign tax credit
provisions of the Internal Revenue Code of 1986, as amended (the "Code")).
The Code imposes a number of limitations on the use of foreign tax credits.
In general, foreign tax credits are limited to the same proportion of the
United States tax against which such credit is taken which the taxpayer's net
taxable income from sources outside of the United States ("foreign source
income") bears to the taxpayer's entire net taxable income for the taxable
year. For this purpose, the taxpayer's interest expenses and certain other
expenses are allocated between foreign source and domestic source income based
on the tax basis (or value) of the taxpayers foreign assets as compared to the
tax basis (or value) of the taxpayer's total assets. The ADSs or Shares will
be foreign assets for purposes of allocating interest. Thus, United States
holders of ADSs or Shares will allocate more of their total interest expenses
to foreign source income than would be the case if they held United States
assets instead of the ADSs or Shares. In certain circumstances, this could
reduce the United States holder's ability to utilize foreign tax credits.
Other limitations on the use of foreign tax credits include the facts that the
foreign tax credit limitation described above must be computed separately for
specific classes of income, and that foreign tax credits may not reduce
alternative minimum tax by more than 90% of what it would be without foreign
tax credits.
Capital Gains and Losses
Gain or loss recognized by a United States holder on the sale or other
disposition of ADSs or Shares will be subject to United States federal income
taxation as capital gain or loss in an amount equal to the difference between
the holder's basis in the ADSs or Shares and the amount realized upon their
disposition. Capital losses are generally deductible only against capital
gains and not against ordinary income. The capital gain or loss will be long
term, "mid term," or short term depending on whether the holder has held the
ADSs or Shares for (i) more than eighteen months (which is subject to a
maximum rate of 20% for certain non-corporate taxpayers), (ii) more than one
year but not more than eighteen months (which is subject to a maximum rate of
28% for certain non-corporate taxpayers) or (iii) not more than one year
(which is subject to a maximum rate of 39.6% for certain non-corporate
taxpayers, respectively).
Capital gain recognized by a United States holder on the sale or other
disposition of ADSs or Shares will be United States source gain. Therefore,
such gain will not increase the holder's limitation on use of foreign tax
credits. The source of a loss attributable to the sale of ADSs or Shares is a
subject of debate at the present time. Under current regulations, the United
States Internal Revenue Service (the "IRS") will likely take the position that
any such loss is to be allocated to the same category of income as the
dividends received from the Company. This would generally reduce the holder's
ability to use foreign tax credits. Under the Code, the IRS has authority to
change or confirm the treatment of losses by regulation. Regulations have been
proposed that would continue the current treatment (i.e., presumably
allocating such loss to the same category of income as the dividends received
from the Company) for United States holders. Therefore, investors are
encouraged to consult their tax advisers regarding the proper treatment of
such losses.
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Exchanges, deposits and withdrawals of Shares for ADSs or ADSs for Shares by
a United States holder will not result in recognition of gain or loss for
United States federal income tax purposes.
Treatment of Instalment Payments
The following discussion of original issue discount ("OID") and foreign
currency gain or loss is based, in part, on Code provisions and U.S. Treasury
Department regulations which may be subject to varying interpretations.
Deduction of Interest. A United States holder's obligation to make the Final
Instalment payment will be treated for United States federal income tax
purposes as a debt obligation (the "Purchase Obligation"), which will bear OID
to the extent that the amount of the Final Instalment exceeds the difference
between the fair market value of a Share or ADS at the date of the issuance of
the IR or Interim ADR and the amount of the First Instalment, all calculated
in NZ dollars.
A United States holder, whether a cash-basis or accrual-basis taxpayer, will
be entitled to deduct as interest expense (subject to the limitations on the
deduction of "investment interest" by non-corporate taxpayers) the OID with
respect to each Purchase Obligation such United States holder has issued. In
the case of a cash-basis United States holder, such OID will be deductible at
the time the Final Instalment is paid or, if earlier, upon the sale of an ADS
or Share. An accrual-basis United States holder will deduct OID as interest
expense as it accrues over the life of the Purchase Obligation. While the
matter is not free from doubt, an accrual basis United States holder should be
permitted a deduction in respect of such OID on a ratable basis for each day
during the taxable year in which such United States holder holds an ADS or
Share. The holder might be required, however, to accrue interest expense on a
yield-to-maturity basis. Persons considering the purchase, ownership or
disposition of ADSs or Shares should consult their tax advisors concerning the
accrual of interest expense with respect to a Purchase Obligation.
In general, deductible OID measured in NZ dollars will be converted into
U.S. dollars at the exchange rate prevailing when the OID is deducted. In the
case of an accrual-basis taxpayer, OID accrued over the life of the Purchase
Obligation in NZ dollars would be converted into U.S. dollars using the
"average exchange rate" prevailing during the relevant accrual period or, if
the accrual period spans more than one taxable year, the average of the spot
NZ dollar/U.S. dollar exchange rate (the "Spot Rate") for each business day
during the accrual period (or portion thereof, as discussed in the preceding
paragraph) or another average exchange rate for such period reasonably derived
and consistently applied by the United States holder. A taxpayer may elect
under the spot accrual convention to determine OID using the Spot Rate on the
last day of the accrual period (and using, in the case of a partial accrual
period, the Spot Rate on the last day of the taxable year). If the last day of
the accrual period (or in the case of a partial accrual period, the last day
of the taxable year) is within five business days of the accrual payment date,
the taxpayer may use the Spot Rate on the payment date. This election to use
the spot accrual convention is made by filing a statement with the taxpayer's
first return in which the election is effective, clearly indicating that the
election has been made. The election once made must be applied consistently to
all debt instruments from year to year and may not be changed without the
consent of the IRS.
Unrelated Business Taxable Income. The Purchase Obligation constitutes
"acquisition indebtedness" as defined in section 514 of the Code. Accordingly,
dividends and gains, if any, on the sale of ADSs or Shares may, in the case of
certain United States holders exempt from U.S. federal income tax, e.g.,
Individual Retirement Accounts, Keogh plans and pension and other employee
benefit plans with tax exempt trusts, be taxed, in part, as unrelated business
taxable income to the extent the total unrelated business taxable income of
the holder for the taxable year exceeds US$1,000. The tax applies to a portion
of the dividends received during a taxable year during any part of which the
exempt holder was an obligor on the Purchase Obligation and to a portion of
the gains on the sale of ADSs or Shares if the exempt holder was an obligor on
the Purchase Obligation during any part of the twelve-month period preceding
the sale (although such holder would generally be permitted to deduct a
portion of the interest expense referred to above and the New Zealand
withholding tax on dividends, if any, would generally be creditable against
the U.S. tax liability).
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Foreign Currency Gain or Loss. Any foreign currency gain or loss realized in
respect of a Purchase Obligation would be recognized as ordinary gain or loss
in the earlier of the taxable year of the United States holder in which the
Final Instalment is paid or the taxable year of sale of the ADS or Share.
Foreign currency gain or loss of a United States holder on the accrual method
would be calculated separately in respect of the OID portion (if any) and the
principal portion of such instalment payment.
A United States holder's foreign currency gain or loss in respect of the
principal portion of such instalment payment would be based upon the
difference, if any, between the U.S. dollar amount of such principal portion
as translated at the Spot Rate in effect on the date of payment and the U.S.
dollar amount of such principal portion as translated at the Spot Rate in
effect on the date of purchase of ADSs or Shares. An accrual basis United
States holder's foreign currency gain or loss in respect of any accrued OID
portion for such instalment payment would equal the difference between the
U.S. dollar amount of such accrued OID as translated at the Spot Rate in
effect on the date of payment and the U.S. dollar amount of such accrued OID
as described above under "--Deduction of Interest." No foreign exchange or
gain or loss is realized with respect to interest expense of a United States
holder using the cash method.
Effect of Purchase Obligations upon Disposition of ADSs or Shares. For
purposes of calculating gain or loss on a disposition of ADSs or Shares, a
United States holder's tax basis in the ADSs or Shares will include, in
addition to the amount paid for the ADSs or Shares, the U.S. dollar equivalent
issue price of the Purchase Obligation, based upon the Spot Rate prevailing on
the date of purchase. The amount realized on the disposition of ADSs or Shares
will include, in addition to the other amounts received, the U.S. dollar
equivalent of the amount of any remaining Purchase Obligation assumed by the
transferee less the amount of unaccrued OID, if any, in respect of such
Purchase Obligation, as based upon the Spot Rate prevailing on such date.
Foreign currency gain or loss, if any, would be recognized by reason of the
assumption in the manner described above under "--Foreign Currency Gain or
Loss" as if the disposing United States holder had made an instalment payment
in an amount equal to the amount determined in the immediately preceding
sentence.
The amount realized by a defaulting United States holder on a sale of ADSs
or Shares by the Trustee pursuant to the procedure described above under
"Description of Instalment Receipts and Trust Deed" or "Description of Interim
American Depositary Receipts and American Depository Receipts--Interim ADRs"
would include the amount of the sale proceeds used by the Trustee to pay the
instalment and any amount paid to the defaulting United States holder. Foreign
currency gain or loss, if any, would be recognized upon such default. If the
sale proceeds are insufficient to pay in full the instalment payment, under
certain circumstances, the amount by which such instalment exceeds the sale
proceeds or the fair market value (i.e., if the fair market value of the ADSs
or Shares is less than the amount of the defaulted instalment payments) of the
ADSs or Shares, as the case may be, may constitute ordinary income.
Backup Withholding and Information Reporting. In general, information
reporting requirements may apply to dividend payments (or other taxable
distributions) in respect of ADSs or Shares made within the United States to a
non-corporate United States person, and "backup withholding" at the rate of
31% may apply to such payments if the holder or beneficial owner fails to
provide an accurate taxpayer identification number in the manner required by
United States law and applicable regulations, if there has been notification
from the IRS of a failure by the holder or beneficial owner to report all
interest or dividends required to be shown on its federal income tax return
or, in certain circumstances, if the holder or beneficial owner fails to
comply with applicable certification requirements. Certain corporations and
persons that are not United States persons may be required to establish their
exemption from information reporting and backup withholding by certifying
their status on Internal Revenue Service Forms W-8 or W-9.
Amounts withheld under the backup withholding rules may be credited against
a holder's tax liability, and a holder may obtain a refund of any excess
amounts withheld under the backup withholding rules by filing the appropriate
claim for refund with the IRS.
A United States holder that acquires (directly or indirectly) 5% or more of
the Shares (including by holding ADSs) is required to file an information
statement with the IRS for the year in which such United States holder's
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ownership percentage first equals or exceeds 5%. A further information
statement must be filed if such holder acquires an additional 5% or more of
the Shares, or reduces its ownership to less than 5% of the Shares, and in
certain other circumstances.
NEW ZEALAND TAXATION
As used in this section "--New Zealand Taxation," the term "United States
holder" means a beneficial owner of ADSs or Shares that (i) is resident in the
United States for tax purposes and is accepted as such by the New Zealand
Taxing authorities, (ii) is not also resident in New Zealand for tax purposes
and (iii) does not hold ADSs or Shares in connection with any permanent
establishment or fixed base in New Zealand.
Dividends
Pursuant to the tax treaty between New Zealand and the United States, United
States holders will be subject to a maximum New Zealand withholding tax of 15%
of the gross amount of all cash dividends paid by the Company.
New Zealand operates a full "imputation system" of corporate taxation. Under
the "imputation system," New Zealand tax paid by the Company gives rise to
credits (known as imputation credits) which can be "attached" to its dividends
and used by a shareholder which is treated as a resident for New Zealand tax
purposes to offset such holder's New Zealand income tax liability on those
dividends. A United States holder cannot directly credit these imputation
credits against such holder's withholding tax liability. However, the
financial impact of the New Zealand withholding tax on cash dividends can be
reduced under the New Zealand Foreign Investor Tax Credit ("FITC") regime.
Under the FITC regime, the Company can obtain a tax credit based on the
amount of imputation credits attached to dividends paid to non-New Zealand tax
residents. This tax credit reduces the Company's tax liability, providing it
with cash to make a "supplementary" dividend distribution to non-New Zealand
tax residents which is in addition to the ordinary dividend. Provided that the
cash dividend has imputation credits attached at the maximum rate allowed, the
overall effect is that a non-New Zealand tax resident generally receives an
after New Zealand tax cash dividend equating to the amount that would have
been received if the withholding tax had not been imposed. To the extent
imputation credits are attached at less than the maximum rate allowed, the
level of supplementary dividend is reduced and thus the level of cash dividend
is reduced.
In some cases, certain forms of non-New Zealand sourced income derived by
the Company and distributed to United States holders will be subject to total
New Zealand tax at an effective rate of 15%.
Stock dividends (also known as "bonus issues" for New Zealand tax purposes)
made by the Company will be categorized under New Zealand tax law as either
taxable bonus issues or non-taxable bonus issues. Broadly speaking, taxable
bonus issues arise where the Company allows a shareholder to choose between
the receipt of cash and the receipt of Shares (where the shareholder takes the
Shares) or when the Company issues Shares and elects to treat the issue as a
taxable bonus issue. In general, any distribution by the Company on or in
respect of its Shares, other than a non-taxable bonus issue, will be
considered a dividend for New Zealand tax purposes. Taxable bonus issues are
treated as non-cash dividends for New Zealand tax purposes. Taxable bonus
issues (as well as most other non-cash dividends) made to a United States
holder are not subject to New Zealand withholding tax to the extent that
imputation credits are attached at the maximum rate allowable. With respect to
any remaining portion, New Zealand withholding tax will be payable by the
Company. Non-taxable bonus issues are not treated for New Zealand tax purposes
as dividends and the New Zealand withholding tax does not apply to them. The
Company does not presently anticipate making any bonus issues.
Share repurchases and cancellations by the Company are subject to a regime
which treats the repurchase or cancellation amount as a dividend to the extent
that it exceeds the amount of subscribed capital in the Company. Subscribed
capital is essentially the amount paid to the Company in respect of the issue
of Shares, less amounts
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of subscribed capital already returned to shareholders. If the amount paid on
cancellation or redemption is less than the amount of the Company's subscribed
capital, the payment is generally not treated as a dividend. However, in cases
where Shares are repurchased or redeemed other than via a recognized exchange
and certain "dividend substitution or threshold" tests are not met, the entire
repurchase price will be treated as a dividend. Where the Company repurchases
shares via a recognized exchange, generally amounts received by shareholders
are not dividends in the shareholders' hands. However, to the extent the
payments exceed the available subscribed capital, tax is effectively required
to be paid by the Company on that excess amount.
Capital Gains
Under the tax treaty between New Zealand and the United States, a United
States holder who does not have, and has not had, a permanent establishment or
fixed base in New Zealand will not be subject to New Zealand tax on any gain
on a sale of ADSs or Shares. However, the convention does not prevent New
Zealand from taxing profits on sales of ADSs or Shares held by a United States
person where the profits or gains are attributable to a permanent
establishment or fixed base available or previously available to such person
in New Zealand. Although New Zealand does not have a capital gains tax as
such, certain profits on share sales are taxed under New Zealand income tax
rules (for example, where shares are acquired for the dominant purpose of
resale, or by a securities dealer).
Instalment Receipts
The New Zealand tax consequences described above for United States holders
of Shares or ADSs will apply to United States holders of IRs or Interim ADRs
in respect of the underlying Shares. No New Zealand tax consequences will
arise to United States holders from the deferred payment obligations under the
IRs.
Other Tax Matters
No stamp duty is payable in New Zealand on share transfers and no notice of
such transfers need be given by a shareholder to New Zealand fiscal
authorities. GST does not apply to share issues or transfers.
New Zealand gift duty will apply in respect of any gift by a United States
holder of ADSs or Shares where that gift and any other gift by the United
States holder of property situated in New Zealand within 12 months before or
after that first mentioned gift exceed in aggregate value NZ$27,000
(approximately US$15,668). For this purpose, ADSs and Shares are treated as
property situated in New Zealand. Certain limited exemptions and reliefs
exist. Gift duty applies at 5% on the excess amount of gifts over NZ$27,000
and rises on a graduated scale to a maximum rate of 25% on the excess amount
of gifts over NZ$72,000 (approximately US$41,782).
Imputation Credit Account
Companies pay New Zealand tax on a provisional basis in three instalments at
four month intervals during each income year. They may pay further tax or
receive a refund of tax depending on their final tax liability determined in
their tax return for that income year. Imputation credits arising from
payments of tax are recorded as credits in an account called an imputation
credit account at the time the tax is paid.
Continuity of Ownership Requirement
The Company must satisfy continuity of ownership requirements to retain its
imputation credits. To this end, it must maintain 66% of its ownership on a
continuous basis from the date it derives imputation credits (i.e., pays a tax
instalment) to the date it attaches the imputation credits to dividends (i.e.,
the date of the payment of the dividend). Accordingly, imputation credits in
the Company's imputation credit account will be lost upon the occurrence of a
more than 34% change in its ownership at any time between the derivation of
those credits and the attaching of those credits to dividends. See "Risk
Factors--Imputation Credits."
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Ownership is measured by reference either to shareholders' voting interests
or, in certain circumstances, to both voting interests and the market value of
interests held in a company. In some cases, an attribution rule can apply to
treat all less-than-10% non-associated shareholders in the Company as a
"single notional person." When this attribution rule applies, changes in the
individual holding of these shareholders can be disregarded for calculating
continuity of ownership.
Risk of Transactions Other Than in the Ordinary Course of Trading on a
Recognized Exchange
Transactions, other than in the ordinary course of trading on a recognized
exchange occurring between the time when the Company derives imputation
credits and the payment of dividends give rise to a significant risk that the
single notional person attribution rule cannot be relied on. This means that
the calculation of continuity for the period between deriving the imputation
credits and attaching them to dividends may have to include all changes in
ownership, including those among the less-than-10% shareholders. If, since
derivation of the imputation credits and before attachment to dividends,
changes in the ownership exceeds 34%, those imputation credits will be lost.
Effect of Transfer on Imputation Credits
Any transfer of the beneficial interest in the Shares by the Selling
Shareholder pursuant to the IRs or Interim ADRs is almost certainly a
transaction other than in the ordinary course of trading on a recognized
exchange as will be a delivery of Shares upon the exchange of the Exchangeable
Notes. If the single notional person attribution rule concession is lost,
there is a significant risk that at some point the continuity of ownership
requirement will not be satisfied. This is because changes in ownership among
the less-than-10% shareholders, when added to all other changes in ownership
(including transfers of the beneficial interest in the Shares pursuant to the
Global Offering or delivery of Shares upon the exchange of the Exchangeable
Notes), may amount to greater than 34%. The possible effects in this case are
that:
(a) All imputation credits accumulated up to the date of the breach which
have not already been attached to dividends would be lost and therefore not
available to be attached to subsequent dividend distributions.
(b) If, subsequent to the breach of continuity, imputation credits had
been attached to dividends, the Company would be required to remove the
resultant debit balance of the imputation credit account by way of a
payment of tax to the New Zealand Inland Revenue Department. Depending on
the timing of this payment in relation to the year-end for imputation
purposes (being March 31 of each year) and the due date for making such
payments, various penalties may also be imposed.
(c) To the extent imputation credits are attached to an early special
dividend paid after the imputation credits arise but before continuity is
breached,the imputation credits will pass to existing shareholders and thus
not be lost when the change in shareholder continuity occurs.
Other Credits
Telecom may from time to time have other tax credits that it is able to
attach to dividends. Considerations similar to those applying to imputation
credits will arise.
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UNDERWRITING
Subject to the terms and conditions of an underwriting agreement (the
"International Underwriting Agreement"), the Selling Shareholder has agreed to
sell to each of the U.S. Underwriters named below, and each of the U.S.
Underwriters, for whom Credit Suisse First Boston Corporation and Merrill
Lynch, Pierce, Fenner & Smith Incorporated are acting as representatives, have
severally agreed to purchase from the Selling Shareholder the respective
number of Shares set forth opposite its name below:
<TABLE>
<CAPTION>
U.S. UNDERWRITERS NUMBER OF SHARES
----------------- ----------------
<S> <C>
Credit Suisse First Boston Corporation...................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated............................................
SBC Warburg Dillon Read Inc..............................
----------
Total................................................ 87,400,000
==========
</TABLE>
The U.S. Underwriters may elect to purchase all or a portion of their
allotment in the form of ADSs.
The International Underwriting Agreement provides that the obligations of
the U.S. Underwriters are subject to certain conditions precedent and that the
U.S. Underwriters will be obligated to purchase all of the Shares offered
hereby if any are purchased. The International Underwriting Agreement provides
that, in the event of a default by a U.S. Underwriter, in certain
circumstances the purchase commitments of nondefaulting U.S. Underwriters may
be increased and the amount of Shares offered hereby may be decreased.
The U.S. Underwriters propose to offer the Shares to the public in the
United States and to institutional investors in Canada, in the form of Shares
or ADSs, at the public offering price set forth on the cover page of this
Prospectus and to certain dealers at such prices less a concession not in
excess of NZ$ per Share or US$ per ADS and the U.S. Underwriters may
allow, and such dealers may reallow, a discount not in excess of NZ$ per
Share or US$ per ADS on sales to certain other dealers. After the Shares
and ADSs are released for sale in the Global Offering, the offering price and
other selling terms may from time to time be varied by the representatives of
the Underwriters.
The Company and the Selling Shareholder have also entered into an
underwriting deed (the "New Zealand and Australian Underwriting Agreement")
with the New Zealand Underwriters for whom Credit Suisse First Boston NZ
Limited and Merrill Lynch (New Zealand) Limited are acting as representatives
providing for the concurrent New Zealand Offering. Subject to the terms and
conditions set forth in the New Zealand and Australian Underwriting Agreement,
the New Zealand Underwriters have severally agreed to procure subscribers for,
or failing which, to subscribe for themselves, that number of Shares, offered
for sale in New Zealand, but not paid for immediately prior to the closing of
the Global Offering, in aggregate not exceeding the 79,500,000 Shares to be
initially offered for sale in New Zealand.
The Company and the Selling Shareholder have also entered into the New
Zealand and Australian Underwriting Agreement with the Australian Underwriters
for whom Credit Suisse First Boston Australia Securities Limited and Merrill
Lynch International (Australia) Limited are acting as representatives
providing for the concurrent Australian Offering. Subject to the terms and
conditions set forth in the New Zealand and Australian Underwriting Agreement,
the Australian Underwriters have severally agreed to procure subscribers for,
or failing which, to subscribe for themselves, that number of Shares offered
for sale in Australia, but not paid for immediately prior to the closing of
the Global Offering, in aggregate not exceeding the 59,600,000 Shares to be
initially offered for sale in Australia.
The Company and the Selling Shareholder have also entered into the
International Underwriting Agreement with the Rest of the World Underwriters
for whom Credit Suisse First Boston (Europe) Limited and Merrill Lynch
International are acting as representatives providing for the concurrent Rest
of the World Offering. Subject to the terms and conditions set forth in the
International Underwriting Agreement, the Selling Shareholder has agreed to
sell to the Rest of the World Underwriters, and the Rest of the World
Underwriters have severally agreed to purchase, 170,846,064 Shares. The Rest
of the World Underwriters have also agreed, subject to the terms and
conditions set forth in the International Underwriting Agreement, to purchase
all of such Shares if any are purchased. The Rest of the World Underwriters
may elect to purchase all or a portion of their allotment in the form of ADSs.
The Selling Shareholder has granted to the International Underwriters an
option, exercisable for 30 days from the date of this Prospectus, to purchase
up to a maximum of 39,624,606 Shares (all or a portion of which the
International Underwriters may elect to purchase in the form of ADSs) at the
initial public offering price per
87
<PAGE>
Share less the underwriting discount, solely to cover over-allotments, if any.
All or some portion of the over-allotment option in either of the U.S. or Rest
of the World Offerings may be allocated to cover over-allotments in either of
the International Offerings. If the International Underwriters exercise the
over-allotment option, the U.S. Underwriters will have severally agreed,
subject to the foregoing and certain other conditions, to purchase
approximately the same percentages of the over-allotment option that the
number of Shares to be purchased by each of them as shown in the foregoing
table bears to the aggregate number of Shares in the International Offering.
The U.S., New Zealand, Australian and Rest of the World Offerings will be
conditioned on closing concurrently.
To provide for the coordination of their activities, the Underwriters have
entered into the Agreement among Syndicates that provides, among other things,
that sales may be made among the Underwriters of such number of Shares as may
be agreed with the Joint Global Coordinators. Thus, the actual number of
Shares or ADSs sold in the U.S., New Zealand, Australian and Rest of the World
Offerings may be different from the number of Shares or ADSs being
underwritten by the U.S., New Zealand, Australian or Rest of the World
Underwriters.
Pursuant to the Agreement among Syndicates, as part of the distribution of
the Shares and subject to certain exceptions (a) the U.S. Underwriters will
offer and sell Shares and ADSs, directly or indirectly, only to investors in
the United States and Canada; (b) the New Zealand Underwriters will procure
subscribers for, or failing which, subscribe for themselves, Shares only from
investors in New Zealand; (c) the Australian Underwriters will procure
subscribers for, or failing which, subscribe for themselves, Shares only from
investors in Australia; and (d) the Rest of the World Underwriters will offer
and sell Shares and ADSs, directly or indirectly, only to investors outside
the United States, Canada, New Zealand and Australia.
Each of the Company and the Selling Shareholder have agreed not to (i)
directly or indirectly, offer, sell, contract to sell, pledge, sell any option
or contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, or file with the Commission a registration statement
under the U.S. Securities Act relating to, any Shares (other than the Shares
to be sold in the Global Offering) or securities convertible into or
exchangeable or exercisable for Shares, or deposit any such securities in an
American depositary receipt facility, or publicly disclose the intention to
make any such offer, sale, pledge, disposal, filing or deposit, or (ii) enter
into any swap or any other agreement or any transaction that transfers in
whole, or in part, directly or indirectly, the economic consequence of
ownership of the Shares, whether any such swap or transaction described in
clause (i) and (ii) is to be settled by delivery of Shares or such other
securities in cash or otherwise, in each case without the prior written
consent of the Joint Global Coordinators, for a period of 60 days after the
date of this Prospectus except, in the case of the Company, issuances of
employee stock options or issuances of Shares upon the exercise of employee
stock options pursuant to the Company's existing plan and the issuance of
additional capital securities which are similar to those currently
outstanding.
The Shares are quoted on the NZSE and the ASX under the symbol "TEL," and
the ADSs are listed on the NYSE under the symbol "NZT." Application has been
made for the IRs to be approved for official quotation on the NZSE and the
ASX, conditional upon the Shares being transferred by the Selling Shareholder
to the Trustee. Application has been made to list the Interim ADSs on the
NYSE. Application has been made for the IRs and Interim ADSs to be eligible
for quotation and trading through SEAQ International.
Credit Suisse First Boston Corporation and Merrill Lynch, Pierce, Fenner &
Smith Incorporated and their affiliates, on behalf of the Underwriters, may
engage in over-allotments, stabilizing transactions, syndicate covering
transactions and penalty bids in accordance with Regulation M under the
Exchange Act. Over-allotment involves syndicate sales in excess of the
offering size, which creates a syndicate short position. Stabilizing
transactions permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the Shares or ADSs in the open market after
the distribution has been completed in order to cover syndicate short
positions. Syndicate short positions
88
<PAGE>
may also be covered by exercise of the over-allotment option granted to the
International Underwriters as described above. Penalty bids permit the Joint
Global Coordinators to reclaim a selling concession from a syndicate member
when the Shares or ADSs originally sold by such syndicate member are purchased
in a syndicate covering transaction to cover syndicate short positions. Such
stabilizing transactions, syndicate covering transactions and penalty bids may
cause the prices of the Shares or ADSs to be higher than they would otherwise
be in the absence of such transactions. These transactions may be effected on
the NZSE, ASX, NYSE or SEAQ and, if commenced, may be discontinued at any
time.
Certain of the Underwriters have from time to time performed services for
the Company and Ameritech and have banking relationships with the Company and
Ameritech in the ordinary course of their business.
The Selling Shareholder has agreed to indemnify the several Underwriters
against certain liabilities, including liabilities under the U.S. Securities
Act. Ameritech has agreed to guarantee the obligations of the Selling
Shareholder under the International Underwriting Agreement and the New Zealand
and Australian Underwriting Agreement.
89
<PAGE>
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the Shares or ADSs in Canada is being made only on a
private placement basis exempt from the requirement that the Company and the
Selling Shareholder prepare and file a Prospectus with the securities
regulatory authorities in each province where trades of Shares or ADSs are
effected. Accordingly, any resale of the Shares or ADSs in Canada must be made
in accordance with applicable securities laws which will vary depending on the
relevant jurisdiction, and which may require resales to be made in accordance
with available statutory exemptions or pursuant to a discretionary exemption
granted by the applicable Canadian securities regulatory authority. Purchasers
are advised to seek legal advice prior to any resale of the Shares or ADSs.
REPRESENTATIONS OF PURCHASERS
Each purchaser of Shares or ADSs in Canada who receives a purchase
confirmation will be deemed to represent to the Company, the Selling
Shareholder and the dealer from whom such purchase confirmation is received
that (i) such purchaser is entitled under applicable provincial securities
laws to purchase such Shares or ADSs without the benefit of a prospectus
qualified under such securities laws, (ii) where required by law, that such
purchaser is purchasing as principal and not as agent and (iii) such purchaser
has reviewed the text above under "--Resale Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available,
including common law rights of action for damages or rescission or rights of
action under the civil liability provisions of the U.S. federal securities
laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein and the Selling Shareholder may be located outside of Canada and, as a
result, it may not be possible for Canadian purchasers to effect service of
process within Canada upon the issuer or such persons. All or a substantial
portion of the assets of the issuer and such persons may be located outside of
Canada and, as a result, it may not be possible to satisfy a judgment against
the issuer or such persons in Canada or to enforce a judgment obtained in
Canadian courts against such issuer or persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of Shares or ADSs to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
Shares or ADSs acquired by such purchaser pursuant to this offering. Such
report must be in the form attached to British Columbia Securities Commission
Blanket Order BOR #95/17, a copy of which may be obtained from the Company.
Only one such report must be filed in respect of Shares or ADSs acquired on
the same date and under the same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of Shares or ADSs should consult their own legal and tax
advisors with respect to the tax consequence of an investment in the Shares or
ADSs in their particular circumstances and with respect to the eligibility of
the Shares or ADSs for investment by the purchaser under relevant Canadian
legislation.
90
<PAGE>
LEGAL MATTERS
Certain legal matters involving the Global Offering will be addressed for
the Company by Kirkland & Ellis, Chicago, Illinois and Chapman Tripp Sheffield
Young, Wellington, New Zealand. The validity of the ADSs will be passed upon
for the Underwriters by Shearman & Sterling, New York, New York.
EXPERTS
The financial statements of the Company as of March 31, 1996 and 1997 and
for each of the three years in the period ended March 31, 1997 included or
incorporated by reference in this Prospectus have been so included in reliance
on the report of Coopers & Lybrand, independent accountants, given on the
authority of said firm as experts in accounting and auditing.
91
<PAGE>
TELECOM CORPORATION OF NEW ZEALAND LIMITED
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 1996 AND 1997
AND FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED MARCH 31, 1997
Consolidated Statement of Financial Performance........................ F-3
Consolidated Statement of Financial Position........................... F-4
Consolidated Statement of Movements in Capital Funds................... F-5
Consolidated Statement of Cash Flows................................... F-6
Notes to the Financial Statements...................................... F-7
Report of the Auditors................................................. F-37
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996 AND
1997 AND FOR THE NINE MONTH PERIODS ENDED DECEMBER 31, 1996 AND 1997
Consolidated Statement of Financial Performance........................ F-40
Consolidated Statement of Financial Position........................... F-41
Consolidated Statement of Cash Flows................................... F-42
Consolidated Statement of Movements in Capital Funds................... F-43
Notes to the Financial Statements...................................... F-44
</TABLE>
F-1
<PAGE>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1996 AND 1997 AND
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED MARCH 31, 1997
<PAGE>
TELECOM CORPORATION OF NEW ZEALAND LIMITED AND SUBSIDIARIES
Consolidated Statement Of Financial
Performance
For the years ended 31 March
<TABLE>
--------------------------------
<CAPTION>
(Dollars in millions, except per
share amounts) notes 1995 1996 1997 1997
- --------------------------------------------------------------------------------
NZ$ NZ$ NZ$ US$
--------------------------------
<S> <C> <C> <C> <C> <C>
Operating revenues
Local service 784.2 826.7 829.3 481.2
National calls 488.1 542.4 545.3 316.5
International 466.1 469.0 485.0 281.5
Interconnection * * 65.7 38.1
Cellular and other mobile services 228.5 313.3 316.4 183.6
Enhanced network services 167.1 227.2 301.6 175.0
Other operating revenues 2 549.5 530.0 540.2 313.5
--------------------------------
2,683.5 2,908.6 3,083.5 1,789.4
--------------------------------
Operating expenses 3
Net personnel costs 298.6 317.9 346.9 201.3
Depreciation 490.1 493.7 544.4 315.9
Cost of sales 373.1 394.6 404.6 234.8
Maintenance 163.1 150.7 201.3 116.8
Other operating expenses 322.0 337.2 354.9 206.0
Abnormal costs 4 -- -- 151.5 87.9
--------------------------------
1,646.9 1,694.1 2,003.6 1,162.7
--------------------------------
Surplus from continuing operations 1,036.6 1,214.5 1,079.9 626.7
Investment income 5 27.9 32.9 27.0 15.6
Interest expense 5 (131.5) (125.0) (126.4) (73.3)
--------------------------------
Surplus from continuing operations
before income tax 933.0 1,122.4 980.5 569.0
Income tax 6 (308.3) (376.0) (311.3) (180.7)
--------------------------------
Surplus from continuing operations
after income tax 624.7 746.4 669.2 388.3
Discontinued operations: 7
Loss from operations of Pacific Star
Group after income tax (4.4) (29.6) (50.2) (29.1)
Provision for loss on disposal of
Pacific Star Group -- -- (37.4) (21.7)
--------------------------------
(4.4) (29.6) (87.6) (50.8)
--------------------------------
Earnings after income tax 620.3 716.8 581.6 337.5
Minority interest in profits of
subsidiaries (0.7) (0.6) (0.7) (0.4)
Share of profits of associate company
after income tax 0.6 0.6 0.5 0.3
--------------------------------
NET EARNINGS ATTRIBUTABLE TO
SHAREHOLDERS 620.2 716.8 581.4 337.4
--------------------------------
--------------------------------
EARNINGS PER SHARE FROM CONTINUING
OPERATIONS $0.331 $0.395 $0.355 $0.206
--------------------------------
--------------------------------
NET EARNINGS PER SHARE $0.328 $0.379 $0.308 $0.179
--------------------------------
--------------------------------
Weighted average number of ordinary
shares outstanding (in millions) 1,889.6 1,889.6 1,887.1 1,887.1
--------------------------------
--------------------------------
</TABLE>
*not disclosed due to confidentiality agreements
The accompanying notes form part of and are to be read in conjunction with
these financial statements.
F-3
<PAGE>
TELECOM CORPORATION OF NEW ZEALAND LIMITED AND SUBSIDIARIES
Consolidated Statement Of Financial
Position
As at 31 March
<TABLE>
-----------------
<CAPTION>
(Dollars in millions) notes 1996 1997 1997
- -------------------------------------------------------------------------
NZ$ NZ$ US$
-----------------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash 15.3 13.1 7.6
Short-term investments 8 27.7 23.2 13.4
Accounts receivable, net of allowance for
doubtful accounts of $18.3 (1996: $24.7) 355.5 407.9 236.7
Unbilled rentals and tolls 150.5 145.3 84.3
Inventories 9 67.1 66.5 38.6
Prepaid income tax 6 2.7 17.9 10.4
Prepaid expenses and other 91.0 87.3 50.7
Net assets of discontinued operations 7 28.1 -- --
-----------------
TOTAL CURRENT ASSETS 737.9 761.2 441.7
Future tax benefit 6 -- 23.8 13.8
Investments 10 64.2 57.3 33.3
Other assets 11 57.1 12.9 7.5
Fixed assets 12 3,632.4 3,763.1 2,183.7
-----------------
TOTAL ASSETS 4,491.6 4,618.3 2,680.0
-----------------
-----------------
LIABILITIES AND CAPITAL FUNDS
CURRENT LIABILITIES:
Bank overdraft 8.1 -- --
Debt due within one year 14 263.6 524.4 304.3
Amounts payable for share repurchases 16 -- 164.4 95.4
Trade accounts payable 253.5 309.3 179.5
Accrued personnel costs 72.5 72.7 42.2
Rentals billed in advance 42.3 47.6 27.6
Accrued interest 52.5 51.3 29.8
Other accrued expenses 103.4 100.7 58.4
Restructuring provision--current 13 17.7 40.8 23.7
Year 2000 provision--current 4 -- 47.9 27.8
Net liabilities of discontinued operations 7 -- 27.5 16.0
Provision for dividend 16 205.0 219.1 127.1
-----------------
TOTAL CURRENT LIABILITIES 1,018.6 1,605.7 931.8
Deferred taxation 6 20.6 -- --
Restructuring provision--non-current 13 16.5 46.8 27.2
Year 2000 provision--non-current 4 -- 38.0 22.0
Long-term debt 15 1,287.5 1,285.2 745.8
-----------------
TOTAL LIABILITIES 2,343.2 2,975.7 1,726.8
-----------------
Commitments and contingent liabilities 20,21
CAPITAL FUNDS: 16
Shareholders' funds 2,146.2 1,640.3 951.9
Minority interest 2.2 2.3 1.3
-----------------
TOTAL CAPITAL FUNDS 2,148.4 1,642.6 953.2
-----------------
TOTAL LIABILITIES AND CAPITAL FUNDS 4,491.6 4,618.3 2,680.0
-----------------
-----------------
</TABLE>
The accompanying notes form part of and are to be read in conjunction with
these financial statements.
On behalf of the Board
PETER SHIRTCLIFFE, Chairman RODERICK DEANE, Chief Executive and
Managing Director
Wellington, 8 May 1997
F-4
<PAGE>
TELECOM CORPORATION OF NEW ZEALAND LIMITED AND SUBSIDIARIES
Consolidated Statement Of Movements In
Capital Funds
For the years ended 31 March
<TABLE>
-------------------------------
<CAPTION>
(Dollars in millions) notes 1995 1996 1997 1997
- -------------------------------------------------------------------------------
NZ$ NZ$ NZ$ US$
-------------------------------
<S> <C> <C> <C> <C> <C>
Capital funds at the beginning of
the year 2,032.4 2,090.0 2,148.4 1,246.7
Net earnings attributable to
shareholders 620.2 716.8 581.4 337.4
Net foreign currency and minority
interest movement 1.7 (2.1) (0.5) (0.3)
-------------------------------
2,654.3 2,804.7 2,729.3 1,583.8
Dividends 16 (596.6) (726.9) (830.5) (481.9)
Tax credit on supplementary
dividends 16 29.7 65.4 100.4 58.3
Reduction in deferred compensation 2.6 5.2 -- --
Capital contributed 16 -- -- 0.9 0.5
Share repurchase 16 -- -- (357.5) (207.5)
-------------------------------
CAPITAL FUNDS AT THE END OF THE YEAR 2,090.0 2,148.4 1,642.6 953.2
-------------------------------
-------------------------------
Represented by:
Contributed capital 1,901.6 1,901.6 1,902.5 1,104.0
Foreign currency reserve and
minority interest 3.8 1.7 1.2 0.7
Deferred compensation--ESOP (5.2) -- -- --
Retained earnings 189.8 245.1 96.4 56.0
Share repurchase -- -- (357.5) (207.5)
-------------------------------
2,090.0 2,148.4 1,642.6 953.2
-------------------------------
-------------------------------
</TABLE>
The accompanying notes form part of and are to be read in conjunction with
these financial statements.
F-5
<PAGE>
TELECOM CORPORATION OF NEW ZEALAND LIMITED AND SUBSIDIARIES
Consolidated Statement Of Cash Flows
For the years ended 31 March
<TABLE>
----------------------------------
<CAPTION>
(Dollars in millions) 1995 1996 1997 1997
- --------------------------------------------------------------------------------
NZ$ NZ$ NZ$ US$
----------------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash was provided from/(applied to):
Cash received from customers 2,633.6 2,843.4 3,031.9 1,759.4
Interest income 17.0 31.7 35.6 20.7
Payments to suppliers and employees (1,126.4) (1,184.4) (1,249.1) (724.9)
Redundancy and restructuring payments (141.2) (34.3) (14.3) (8.3)
Income tax paid (223.3) (275.2) (268.9) (156.0)
Interest paid on debt (128.1) (119.8) (115.8) (67.2)
----------------------------------
Net cash flows from operating
activities 1,031.6 1,261.4 1,419.4 823.7
----------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash was provided from/(applied to):
Sale of fixed assets 39.1 45.5 17.1 9.9
(Purchase)/sale of investments, net (17.1) (1.8) 4.4 2.6
Purchase of fixed assets (405.2) (558.7) (683.3) (396.5)
Capitalised interest paid (2.7) (15.1) (14.0) (8.1)
Redemption of notes receivable 28.7 75.9 41.2 23.9
Overdraft acquired with subsidiary (0.1) -- -- --
Net advances to discontinued
operations (8.3) (50.2) (32.7) (19.0)
----------------------------------
Net cash flows used in investing
activities (365.6) (504.4) (667.3) (387.2)
----------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash was provided from/(applied to):
Proceeds from long-term debt 94.2 349.9 92.1 53.4
Repayment of long-term debt (152.0) (258.7) (135.3) (78.5)
(Repayment of)/proceeds from short-
term debt, net (35.5) 1.8 298.1 173.0
Capital contributed 3.1 0.7 0.9 0.5
Dividends paid to minority interest (1.0) (0.3) (0.2) (0.1)
Dividends paid (562.0) (850.2) (808.7) (469.3)
Share repurchase -- -- (193.1) (112.1)
----------------------------------
Net cash flows used in financing
activities (653.2) (756.8) (746.2) (433.1)
----------------------------------
Net cash flow 12.8 0.2 5.9 3.4
Opening cash position (including bank
overdrafts) (5.8) 7.0 7.2 4.2
----------------------------------
Closing cash position (including bank
overdrafts) 7.0 7.2 13.1 7.6
----------------------------------
----------------------------------
..........................SUPPLEMENTARY CASH FLOW DATA..........................
RECONCILIATION OF NET EARNINGS
ATTRIBUTABLE TO SHAREHOLDERS TO NET
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings attributable to
shareholders 620.2 716.8 581.4 337.4
Adjustments to reconcile net earnings
to cash flows from operating
activities:
Depreciation 490.1 493.7 544.4 315.9
Bad and doubtful accounts 14.2 24.7 30.7 17.8
Deferred income tax 12.7 29.3 (44.4) (25.8)
Minority interest 0.7 0.6 0.7 0.4
Share of profits of associate
companies (0.6) (0.6) (0.5) (0.3)
Other 6.4 (12.4) 14.2 8.3
Discontinued operations 4.4 29.6 87.6 50.8
Changes in assets and liabilities net
of effects of non-cash and investing
and financing activities:
Increase in accounts receivable and
related items (77.7) (70.5) (82.8) (48.1)
(Increase)/decrease in inventories (20.3) 9.4 (3.2) (1.9)
Increase in current taxation 72.3 71.5 86.6 50.3
(Decrease)/increase in restructuring
provision (141.2) (34.3) 53.4 31.0
Increase in Year 2000 provision -- -- 85.9 49.9
Increase in accounts payable and
related items 50.4 3.6 65.4 38.0
----------------------------------
Net cash flows from operating
activities 1,031.6 1,261.4 1,419.4 823.7
----------------------------------
----------------------------------
</TABLE>
................................................................................
The accompanying notes form part of and are to be read in conjunction with
these financial statements.
F-6
<PAGE>
Notes to the Financial Statements
NOTE 1 STATEMENT OF ACCOUNTING POLICIES
Accounting Entity
The financial statements are those of Telecom Corporation of New Zealand
Limited (the "Company" or the "Holding Company") and its subsidiaries
(the "Telecom Group" or "Telecom").
Accounting Convention
The financial statements have been prepared in accordance with the
Financial Reporting Act 1993 which requires compliance with accounting
practice generally accepted in New Zealand ("NZ GAAP"). These differ in
certain significant respects from accounting practice generally accepted
in the United States ("US GAAP"). For a description of the significant
differences and approximate related effect on these financial statements,
see Note 28.
The financial statements are expressed in New Zealand dollars. The
amounts pertaining to the most recent financial period are also expressed
in United States ("US") dollars, the latter being presented solely for
convenience and translated from New Zealand dollars, as a matter of
arithmetical computation only, at a rate on 31 December 1997 of NZ$1.00
to US$0.5803. The US dollar amounts should not be construed as
representations that the New Zealand dollars have been, could be, or
could in the future be converted into US dollars at this or any other
rate. References in these financial statements to "$" and "NZ$" are to
New Zealand dollars and references to "US$" are to US dollars.
Constitution
The Company was incorporated on 24 February 1987 and, pursuant to the
State Owned Enterprises Act 1986, commenced business on 1 April 1987.
With effect from 1 April 1987 the Company acquired under a Sale and
Purchase Agreement (the "Sale and Purchase Agreement") with the New
Zealand Government (the "Government") the telecommunications business of
the New Zealand Post Office. On 27 September 1996 the Company re-
registered under the Companies Act 1993.
Nature of Operations
Telecom provides local, national and international telephone services and
a wide range of other telecommunications services, including cellular,
enhanced network services, equipment sales and installation services,
leased services and directories. In addition, Telecom provides internet
and cable television services. Telecom also has offshore investments.
General Accounting Policies
The measurement basis adopted in the preparation of these financial
statements is historical cost, modified by the revaluation of certain
investments.
Specific Accounting Policies
Basis of Consolidation
The consolidated financial statements are prepared from the accounts of
the Company and its wholly and majority-owned subsidiaries using the
purchase method of consolidation. All significant intercompany accounts
and transactions are eliminated on consolidation. Discontinued operations
have been reclassified and prior year financial statements restated
accordingly.
Associate companies are reflected in the consolidated financial
statements using the equity method whereby Telecom's share of the results
of associates is included in consolidated net earnings attributable to
shareholders.
Revenue Recognition
Billings for telephone services are made on a monthly basis throughout
the month. Unbilled revenues from the billing cycle date to the end of
each month are recognised as revenue during the month the service is
provided. Revenue recognition is deferred in respect of that portion of
fixed monthly charges which have been billed in advance.
Local service revenue consists of business and residential line rentals,
local call charges (predominantly paid by business customers), local call
interconnection charges, the network value of local payphone calls and
the rental of customer premises equipment ("CPE").
National call revenue includes calls to a location outside the caller's
local calling area (including national call interconnection charges and
the network value of national payphone calls), calls to the cellular
network originating within the fixed line network and operator services
charges.
F-7
<PAGE>
Notes to the Financial Statements
continued
NOTE 1 STATEMENT OF ACCOUNTING POLICIES (CONTINUED)
International revenue includes outgoing international calls made in New
Zealand, collect, credit card and "New Zealand Direct" calls to New
Zealand, receipts from overseas telecommunications administrations and
companies for international calls to New Zealand that use Telecom's
facilities and calls from international switched traffic transiting
through Telecom's facilities. Revenue is also derived from international
leased services and private networks used by New Zealand business
customers.
Cellular and other mobile services revenue comprises access charges and
airtime charges for calls originating from Telecom's cellular network
(excluding international calls), together with revenue from paging and
mobile radio services.
Enhanced network services revenue includes such products as 0800, 0900,
the various smartphone services, Centrex, ISDN and VPN revenues and value
added services provided by Netway Communications Limited.
Other operating revenue consists principally of revenue from publishing
of directories, distribution and sale of CPE and mobile equipment and
leased services.
Cash and Cash Equivalents
For the purpose of the Statements of Cash Flows, cash and cash
equivalents are considered to be cash on hand and in banks, net of bank
overdrafts. In addition, cash flows from certain items are disclosed net,
due to the short-term maturities and volume of transactions involved.
Accounts Receivable
Accounts receivable are recorded at expected realisable value after
providing for bad and doubtful accounts expected to arise in subsequent
accounting periods.
Bad debts are written off against the provision for doubtful accounts in
the period in which it is determined that the debts are uncollectable.
Inventories
Inventories principally comprise materials for self-constructed network
assets, critical maintenance spares, CPE held for rental or sale and
mobile equipment held for sale. They are stated at the lower of cost and
net realisable value after due consideration for excess and obsolete
items. Cost is determined on a first-in first-out or weighted average
cost basis.
Pay Television Programme Rights
Programme rights acquired for television and film programme material used
for First Media Limited's pay television service are recorded at cost at
the date of the commencement of the licence period. They are amortised
evenly over the scheduled number of screenings during the licence period
or earlier if scheduled screenings are not expected to be utilised.
Externally compiled television channels contracted for on a fixed annual
basis are expensed evenly over the life of the contract.
Programme rights acquired on a variable per subscriber basis are expensed
in the period the variable costs are incurred.
Investments
The Company's investments in subsidiaries are stated at the lower of cost
and estimated realisable value.
Investments in associate companies are stated at the Company's share of
the fair value of the net tangible assets at acquisition plus the share
of post-acquisition increases in reserves.
Short-term investments are stated at market value with the resulting
gains or losses taken to earnings.
Term investments are valued at the lower of cost and estimated realisable
value.
Where, in the opinion of the Directors, there has been a permanent
diminution in the value of investments this is recognised in the current
period.
Fixed Assets
Fixed assets are valued as follows:
. The value of fixed assets purchased from the Government was determined
on the basis of depreciated replacement cost using estimated remaining
lives as at 1 April 1987.
F-8
<PAGE>
Notes to the Financial Statements
continued
NOTE 1 STATEMENT OF ACCOUNTING POLICIES (CONTINUED)
. Subsequent additions are valued at cost. The cost of additions to plant
and equipment constructed by Telecom consists of all appropriate costs
of development, construction and installation, comprising material,
labour, direct overheads and transport costs.
. For each fixed asset project having a cost in excess of $100,000 and a
construction period of not less than three months, interest costs
incurred during the period required to complete and prepare the fixed
asset for its intended use are capitalised as part of the total cost.
Telecommunications equipment includes that part of the network system up
to and including the network demarcation point, terminal equipment
installed within customers' premises and the cabling and wiring within
commercial buildings up to the network demarcation point.
Direct labour, materials and overhead costs associated with the
installation of network services to customers are capitalised. Costs
associated with the provision of network services to customers, together
with repairs and maintenance of the network (including minor renewals,
alterations, and minor value CPE items) are charged to earnings as
incurred.
The initial costs incurred in establishing the feasibility of new
computer systems (ie software pre-development activities), together with
post-implementation costs incurred in implementing new systems solutions
are expensed to earnings.
Depreciation
Depreciation is charged on a straight line basis to write down the cost
of the fixed assets to their estimated residual value over their
estimated economic lives, which are as follows:
<TABLE>
<S> <C>
Telecommunications equipment and plant:
Customer local loop 5-50 years
Junctions and trunk transmission systems 10-30 years
Switching equipment 5-15 years
Customer premises equipment 5 years
Other network equipment 5-25 years
Buildings 40-100 years
Motor vehicles 4-10 years
Furniture and fittings 5-10 years
Computer equipment 3-5 years
</TABLE>
Where the remaining useful lives or carrying values have diminished due
to technological change or market conditions, depreciation is accelerated
or the assets are written down.
When depreciable assets are retired or otherwise disposed of, the related
cost and accumulated depreciation are removed from the respective
accounts and any gains or losses on disposal are recognised in earnings.
Land and capital work in progress are not depreciated.
Goodwill
Goodwill represents the excess of purchase consideration over the fair
value of net assets acquired at the time of acquisition of a business or
shares in a subsidiary or associate. Goodwill is amortised on a
systematic basis over the period benefits are expected to arise, which
will generally be 10 to 20 years.
Leased Assets
Telecom is a lessor of CPE. Such leases are considered operating leases
because substantially all the benefits and risks of ownership remain with
Telecom. Rental income is taken to revenue on a monthly basis in
accordance with the lease term.
Telecom is a lessee of certain plant, equipment, land and buildings under
both operating and finance leases. Lease costs relating to operating
leases are charged against earnings as incurred. Finance leases, which
effectively transfer to Telecom substantially all the risks and benefits
of ownership of the leased assets, are capitalised at the present value
of the minimum lease payments and are amortised over the period the
entity is expected to benefit from their use.
Debt
Debt is stated at face value less unamortised discounts, premiums and
prepaid interest. Discounts, premiums and prepaid interest are amortised
to interest expense on a yield to maturity basis over the period of the
borrowing. Borrowing costs such as origination, commitment and
transaction fees are deferred and amortised over the period of the
borrowing.
Compensated Absences
The liability for employees' compensation for future absences, calculated
on an actuarial basis, is accrued in respect of employees' services
already rendered and where the obligation relates to rights which may
eventually vest.
F-9
<PAGE>
Notes to the Financial Statements
continued
NOTE 1 STATEMENT OF ACCOUNTING POLICIES (CONTINUED)
Pensions
Contributions are made into the Government Superannuation Fund (the
"Fund") in respect of Telecom employees who are members of the Fund, at a
rate specified under the Sale and Purchase Agreement with the Government.
Contributions to the Fund are charged against earnings.
Research and Development Costs
Research and development costs are charged to earnings as incurred,
except where, in the case of development costs, future benefits are
expected beyond any reasonable doubt to exceed these costs. Where
development costs are deferred they are amortised over future periods on
a basis related to the expected future benefit.
Taxation
The taxation expense charged to earnings includes both current and
deferred tax and is calculated after allowing for permanent differences.
Deferred taxation calculated using the liability method is accounted for
on timing differences between the earnings stated in the financial
statements and the assessable income computed for taxation purposes.
Deferred taxation is recognised only on those timing differences that are
expected to crystallise within the foreseeable future.
Foreign Currencies
Transactions denominated in a foreign currency are converted at the
exchange rate at the date of the transaction. Foreign currency
receivables and payables at balance date are translated at exchange rates
current at balance date. Unrealised and realised exchange gains and
losses are brought to account in determining the earnings for the year.
Exchange gains and losses and hedging costs arising on contracts entered
into as hedges of firm commitments are deferred until the date of such
transactions at which time they are included in the determination of
revenue and expenses.
Where capital project commitments are hedged against foreign currency
rate risk, the exchange difference on the hedging transaction up to the
date of purchase and all other costs associated with the hedging
transaction are capitalised.
Assets and liabilities of independent overseas subsidiaries are
translated at exchange rates existing at balance date and the exchange
gain or loss arising on translation is carried directly to a foreign
currency translation reserve.
Financial Instruments
Telecom has various financial instruments with off-balance sheet risk for
the primary purpose of reducing its exposure to fluctuations in foreign
currency exchange rates and interest rates. While these financial
instruments are subject to risk that market rates may change subsequent
to acquisition, such changes would generally be offset by opposite
effects on the items being hedged.
Transactions entered into for hedging purposes are accounted for in a
manner consistent with the accounting treatment of the hedged item. Gains
and losses on instruments that do not qualify or no longer qualify as
hedges are recognised as revenue or expense as they arise.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Earnings Per Share
Earnings per share are computed by dividing net earnings by the weighted
average number of ordinary shares outstanding during each period.
Reclassifications
Certain reclassifications of prior years' data have been made to conform
to current year classifications.
Changes in Accounting Policies
There have been no material changes in accounting policies during the
year.
All significant accounting policies have been applied on a basis
consistent with prior years.
F-10
<PAGE>
Notes to the Financial Statements
continued
NOTE 2 OTHER OPERATING REVENUES
Other operating revenues comprise:
<TABLE>
----------------
<CAPTION>
1995 1996 1997
-----------------------------
(Dollars in millions) NZ$ NZ$ NZ$
-----------------------------
<S> <C> <C> <C> <C>
Directories 108.2 119.8 135.6
Leased services 132.5 133.2 127.7
Equipment revenue 224.7 202.1 197.9
Miscellaneous other
services 84.1 74.9 79.0
----------------
549.5 530.0 540.2
----------------
----------------
NOTE 3 OPERATING EXPENSES
Personnel Costs
Labour costs directly related to the development, construction and
installation of plant and equipment and other fixed assets constructed by
Telecom are capitalised as part of the cost of such assets. Labour costs
directly related to the installation and maintenance of equipment sold or
leased to customers are reflected in cost of sales and those directly
related to the maintenance of plant and equipment are reflected in
maintenance costs.
----------------
<CAPTION>
1995 1996 1997
-----------------------------
(Dollars in millions) NZ$ NZ$ NZ$
-----------------------------
<S> <C> <C> <C> <C>
Gross personnel costs 496.1 508.1 521.8
Labour capitalised (41.7) (50.6) (48.7)
Other labour recoveries (155.8) (139.6) (126.2)
----------------
NET PERSONNEL COSTS 298.6 317.9 346.9
----------------
----------------
Included in net personnel costs are pension costs of $5 million (1996:
$5.6 million, 1995: $6.5 million)
Other Operating Expenses
Other operating expenses include (NZ$ millions):
Lease and rental costs 30.0 29.7 31.9
Research and development
costs 4.1 6.3 6.3
Foreign exchange gains (0.1) (5.5) (0.6)
Goodwill amortised 2.8 1.3 1.2
Bad debts written off 11.4 21.9 37.1
Increase/(decrease) in
provision for doubtful
accounts 2.8 2.8 (6.4)
Provision for inventory
obsolescence 3.6 5.4 3.9
Donations * 0.6 0.3
Auditors' remuneration:
Auditing services 1.0 1.1 0.8
Other services * 1.9 2.0
Directors' fees 0.6 0.6 0.6
</TABLE>
Donations
In addition to the donations expense, Telecom makes available
telecommunications services free of charge or at reduced rates to the
community, principally the 111 emergency service, and also provides
substantial sponsorship to educational and charitable organisations.
Comparatives
As provided for under Financial Reporting Standard No. 9, comparatives
are not shown where disclosures are made for the first time (*).
F-11
<PAGE>
Notes to the Financial Statements
continued
NOTE 4 ABNORMAL COSTS
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C> <C>
-------------------------------------
<CAPTION>
(Dollars in millions) NZ$ NZ$ NZ$
<S> <C> <C> <C> <C>
-------------------------------------
Restructuring costs -- -- 64.5
Year 2000 modification
costs -- -- 87.0
-- -- 151.5
</TABLE>
Restructuring
A strategic restructuring of the Design, Build and Maintenance division
aimed at improving service and reducing operating costs will be
implemented over the next three to four years. $1.8 million has been
incurred in the period to 31 March 1997.
In addition, a major project, Performance 2000, was announced in February
1997, aimed at substantially reducing Telecom's operating costs. As at 31
March 1997, restructuring costs, which will provide substantial future
benefits to Telecom, have been identified and provided for in the fourth
quarter. It is expected that further provisions will be accrued in the
following fiscal year as further initiatives are identified.
Year 2000 Modification
The majority of computer software worldwide is programmed to process
transactions using only two digits for the year of the transaction (e.g.
"97" for 1997) rather than four digits. Computer systems which process
year 2000 transactions with the year "00" will encounter significant
processing inaccuracies and even inoperability. Almost all of the
services which Telecom offers its customers are based on technology-
driven systems, including the exchanges and other components in Telecom's
fixed line, cellular and paging networks. The Year 2000 issue also
affects many of Telecom's traditional information technology
applications.
A project to identify business-critical platforms and applications which
are not year 2000 compliant and to scope the extent to which they need to
be modified was completed in March 1997.
The cost of making the modifications necessary to maintain existing
functionality into the year 2000 and beyond are estimated at $87 million.
It is anticipated that the majority of such costs will be incurred during
fiscal 1998 and 1999. Costs incurred in 1997 totalled $1.1 million.
NOTE 5 INVESTMENT INCOME/INTEREST EXPENSE
<TABLE>
-------
<CAPTION>
1995 1996 1997
--------------------
(Dollars in millions) NZ$ NZ$ NZ$
--------------------
<S> <C> <C> <C> <C>
Investment income:
Government securities 2.0 6.3 6.5
Other investments 25.9 26.6 20.5
-------
TOTAL INVESTMENT INCOME 27.9 32.9 27.0
-------
-------
Interest expense:
Fixed loans 109.9 115.1 111.8
Finance leases 8.3 8.9 7.4
Other interest 16.0 16.1 21.2
-------
134.2 140.1 140.4
Less interest capitalised (2.7) (15.1) (14.0)
-------
TOTAL INTEREST EXPENSE 131.5 125.0 126.4
-------
-------
</TABLE>
F-12
<PAGE>
Notes to the Financial Statements
continued
NOTE 6 INCOME TAX
The income tax expense/(credit) for the year is determined as follows:
<TABLE>
<S> <C> <C> <C> <C>
--------------------
<CAPTION>
1995 1996 1997
<S> <C> <C> <C> <C>
------------------------------------------
<CAPTION>
(Dollars in millions) NZ$ NZ$ NZ$
<S> <C> <C> <C> <C>
------------------------------------------
Surplus from continuing
operations before income
tax 933.0 1,122.4 980.5
====================
Tax at current rate of
33% 307.9 370.4 323.6
Adjustments to taxation
for:
Permanent differences 0.4 5.6 (12.3)
--------------------
TOTAL INCOME TAX EXPENSE 308.3 376.0 311.3
====================
The income tax expense is
represented by:
Current taxation 295.6 346.7 355.7
Deferred taxation 12.7 29.3 (44.4)
--------------------
308.3 376.0 311.3
====================
Deferred income tax
expense results from the
following:
Depreciation 1.4 3.8 4.0
Provisions and accruals (21.3) 9.1 (6.6)
Restructuring provision 32.6 16.4 (13.5)
Year 2000 provision -- -- (28.3)
--------------------
12.7 29.3 (44.4)
====================
</TABLE>
The balance sheet provisions are:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
------------------------------------
<CAPTION>
1996 1997
<S> <C> <C> <C>
------------------------------------
<CAPTION>
(Dollars in millions) NZ$ NZ$
<S> <C> <C> <C>
------------------------------------
Current taxation:
Balance at the beginning
of the year (3.7) 2.7
Total taxation in the
current year (346.7) (355.7)
Tax paid 275.2 268.9
Supplementary dividend
tax credit
--final 1995 16.5 --
--previous year fourth
quarter interim -- 25.8
--first, second and
third quarter
interims 39.9 74.0
Other -- 2.2
Transfer to deferred
taxation 21.5 --
--------------
TAXATION
(PAYABLE)/PREPAID 2.7 17.9
==============
Deferred taxation:
Balance at the beginning
of the year 19.5 (20.6)
Provided in the current
year (29.3) 44.4
Supplementary dividend
tax credit
--final 1995 (16.0) --
--previous year fourth
quarter interim -- (25.5)
--current year fourth
quarter interim 25.5 26.4
Other 1.2 (0.9)
Transfer from current
taxation (21.5) --
--------------
(DEFERRED
TAXATION)/FUTURE TAX
BENEFIT (20.6) 23.8
==============
Deferred taxation
balances consist of the
following:
Depreciation (65.9) (69.9)
Provisions, accruals and
other 2.5 8.2
Year 2000 provision -- 28.3
Restructuring provision 17.3 30.8
Fourth quarter
supplementary dividend
tax credit 25.5 26.4
--------------
(20.6) 23.8
==============
</TABLE>
F-13
<PAGE>
Notes to the Financial Statements
continued
NOTE 6 INCOME TAX (CONTINUED)
A deferred tax asset at 31 March 1996 and 1997 of $3.9 million and $7.8
million respectively in respect of timing differences relating to
depreciation on buildings has not been recognised.
In accordance with the Income Tax Act 1994, Telecom received tax credits
from the Inland Revenue Department equivalent to the supplementary
dividends for the 1996 fourth quarter and the 1997 first, second and
third quarters of $25.8 million, $26 million, $24.1 million and $23.9
million respectively. Included as a deferred tax asset is $26.4 million
representing a tax credit due on the payment of the supplementary
dividend that will be paid in conjunction with the fourth quarter
dividend.
Discontinued Operations
The tax effect of losses and outstanding timing differences from
discontinued operations not recognised in the deferred taxation balance
(based on the Australian corporation tax rate of 36%) amounts to $24.9
million (1996: $13.1 million) and is available to be carried forward and
offset against tax payable on any future assessable income within various
Pacific Star companies, subject to certain restrictions and Australian
taxation authority approval.
NOTE 7 DISCONTINUED OPERATIONS
Telecom announced on 22 July 1996 that it was reviewing the operations of
those of its Australian subsidiaries which currently form the Pacific
Star Group ("Pacific Star"). As part of this review, Telecom was seeking
suitable buyers for some or all of these businesses. A formal plan of
disposal or wind-down of the Pacific Star businesses was approved by the
Board.
Operating losses for 1997 amounted to $50.2 million and further losses
expected to arise from the sale or winding down of the businesses
(including estimated future operating losses relating to the servicing of
contractual obligations to the Queensland and West Australian State
Governments to the date of their expiration or transfer) amount to $37.4
million (before and after tax) and have been charged to the result for
the fourth quarter.
Pacific Star's remaining activities consist primarily of providing a
range of telecommunications services under its contractual obligations to
the Queensland and West Australian State Governments, which expire in
August 1997 and February 1998, respectively. The West Australian State
Government has the right to renew its contract in August 1997 for a
further period of between one and three years commencing at the
expiration date of the current contract. This progressive disposal of the
business has seen personnel numbers decrease from 578 at 31 March 1996 to
274 at 31 March 1997. Remaining personnel are expected to reduce to
approximately 100 by June 1997 and progressively thereafter.
The losses from operations of Pacific Star are summarised as follows:
<TABLE>
----------
<CAPTION>
1995 1996 1997
-----------------------
(Dollars in millions) NZ$ NZ$ NZ$
-----------------------
<S> <C> <C> <C> <C>
Operating revenues 148.6 262.2 277.3
----------
----------
Loss from operations
before tax (4.2) (29.6) (50.2)
Tax (0.2) -- --
----------
LOSS FROM OPERATIONS
AFTER TAX (4.4) (29.6) (50.2)
----------
----------
</TABLE>
Included in the Consolidated Statement of Financial Position are net
assets/(liabilities) of Pacific Star represented by:
<TABLE>
---
<CAPTION>
1996 1997
-----------------
(Dollars in millions) NZ$ NZ$
-----------------
<S> <C> <C> <C>
Current assets 82.9 132.8
Non-current assets 40.2 --
Current liabilities (93.5) (160.3)
Non-current liabilities (1.5) --
---
NET ASSETS/(LIABILITIES) OF
DISCONTINUED OPERATIONS 28.1 (27.5)
---
---
</TABLE>
F-14
<PAGE>
Notes to the Financial Statements
continued
NOTE 7 DISCONTINUED OPERATIONS (CONTINUED)
As at 31 March 1997 current assets comprised cash, accounts receivable,
fixed assets held for disposition and other miscellaneous assets after
providing for expected write-downs. As at 31 March 1997 current
liabilities comprised bank loans, accounts payable and provisions for
estimated costs of winding down the businesses, including future
operating losses incurred in servicing contracts to their date of
expiration or transfer.
NOTE 8 SHORT-TERM INVESTMENTS
<TABLE>
<CAPTION>
---------
1996 1997
--------------------- ---- ----
(Dollars in millions) NZ$ NZ$
--------------------- ---- ----
<S> <C> <C> <C>
On call (demand) and
short-term deposits 2.7 3.5
Government securities 17.3 11.9
Other money market
securities 7.7 7.8
<CAPTION>
---------
<S> <C> <C> <C>
27.7 23.2
<CAPTION>
=========
</TABLE>
As at 31 March 1997, the aggregate amount of cash, bank balances and on
call and short-term deposits was $16.6 million (1996: $18 million).
NOTE 9 INVENTORIES
<TABLE>
<CAPTION>
------------
1996 1997
--------------------- ----- -----
(Dollars in millions) NZ$ NZ$
--------------------- ----- -----
<S> <C> <C> <C>
Maintenance materials and
consumables 5.1 4.7
Goods held for resale 25.3 20.6
Revenue work in progress 12.7 11.3
Materials for self-
constructed assets 35.8 42.2
<CAPTION>
------------
<S> <C> <C> <C>
78.9 78.8
Less provision for
inventory obsolescence (11.8) (12.3)
<CAPTION>
------------
<S> <C> <C> <C>
67.1 66.5
<CAPTION>
============
</TABLE>
NOTE 10 INVESTMENTS
<TABLE>
<CAPTION>
----------
1996 1997
--------------------- ---- ----
(Dollars in millions) NZ$ NZ$
--------------------- ---- ----
<S> <C> <C> <C>
Term deposits 39.5 34.5
International telecommunications
investments 22.4 20.4
<CAPTION>
----------
<S> <C> <C> <C>
61.9 54.9
Associate company (see Note 24):
Shares 0.6 0.6
Share of net earnings 2.0 2.4
Dividends received (0.3) (0.6)
<CAPTION>
----------
<S> <C> <C> <C>
2.3 2.4
<CAPTION>
----------
<S> <C> <C> <C>
64.2 57.3
==========
</TABLE>
F-15
<PAGE>
Notes to the Financial Statements
continued
NOTE 11 OTHER ASSETS
<TABLE>
<CAPTION>
-------
1996 1997
----------------------
(Dollars in millions) NZ$ NZ$
----------------------
<S> <C> <C> <C>
Notes receivable 99.7 47.2
Less current portion included in
prepaid expenses and other current
assets (56.1) (47.2)
-------
43.6 --
Due from Trustee of the executive
share ownership plan (see Note 17) 6.2 5.1
Goodwill 7.2 6.0
Other 0.1 1.8
-------
57.1 12.9
-------
-------
</TABLE>
The notes receivable with a face value at 31 March 1997 of $49.9 million,
mature within one year. The discount, being the difference between the
face value and book value, is amortised to investment income over the
life of the notes at an effective yield of 8.29%.
NOTE 12 FIXED ASSETS
<TABLE>
<CAPTION>
-----------------------------------------------------------
Tele- Capital Other
communications work in Freehold fixed
equipment progress land Buildings assets TOTAL
-----------------------------------------------------------
(Dollars in millions) NZ$
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cost 5,767.1 254.9 116.3 503.0 927.3 7,568.6
Less accumulated
depreciation (2,979.1) -- -- (185.5) (640.9) (3,805.5)
<CAPTION>
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net book value at 31
March 1997 2,788.0 254.9 116.3 317.5 286.4 3,763.1
<CAPTION>
-----------------------------------------------------------
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cost 5,277.2 271.0 119.8 493.9 772.0 6,933.9
Less accumulated
depreciation (2,613.8) -- -- (163.2) (524.5) (3,301.5)
<CAPTION>
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net book value at 31
March 1996 2,663.4 271.0 119.8 330.7 247.5 3,632.4
<CAPTION>
-----------------------------------------------------------
-----------------------------------------------------------
</TABLE>
Other fixed assets include motor vehicles, furniture and fittings and
computer equipment.
Operating Leases
Included in telecommunications equipment at 31 March 1997 is equipment
(principally CPE) leased to customers under operating leases with a cost
of $243.5 million (1996: $240.1 million) together with accumulated
deprecation of $227.3 million (1996: $216.6 million).
Included in buildings at 31 March 1997 are buildings on leasehold land
with a cost of $8.6 million (1996: $10.9 million) together with
accumulated depreciation of $1.5 million (1996: $1.7 million).
Finance Leases
Included in telecommunications equipment at 31 March 1997 are assets
capitalised under finance leases with a cost of $317.7 million (1996:
$317.7 million) together with accumulated depreciation of $165.9 million
(1996: $147.5 million).
Values Ascribed to Land and Buildings
The values ascribed to land and buildings at the time of the Sale and
Purchase Agreement (see Note 1) were based on the latest Government
valuations (where available) or independent valuers' reports relating to
special purpose buildings.
Telecom's properties consist primarily of special purpose network
buildings and form an integral part of the telecommunications network.
The Directors estimate that the fair valuation of land and buildings
(excluding properties designated for disposal) is approximately
equivalent to their net book value as at 31 March 1997, taking into
account their integral value to the network.
The aggregate Government valuation of land and buildings as at 31 March
1997 was $269.6 million (1996: $264.3 million).
Included in land and buildings are properties held for sale at their
estimated realisable value of $14.1 million (1996: $11.9 million).
F-16
<PAGE>
Notes to the Financial Statements
continued
NOTE 12 FIXED ASSETS (CONTINUED)
Land Claims
Under the Treaty of Waitangi Act 1975, all interests in land included in
the assets purchased from the Government may be subject to claims to the
Waitangi Tribunal, which has the power to recommend in appropriate
circumstances, with binding effect, that the land be resumed by the
Government in order that it be returned to Maori claimants. In the event
that land is resumed by the Government, compensation will be paid to
Telecom under the provisions of the Public Works Act 1981. If this is
insufficient to cover the loss, certain additional compensation is
payable under the provisions of the Sale and Purchase Agreement between
the Company and the Government.
Under the State Owned Enterprises Act 1986, the Governor-General of New
Zealand, if satisfied that any land or interest in land held by Telecom
is Wahi Tapu (being land of special spiritual, cultural or historical
tribal significance), may declare by Order in Council that the land be
resumed by the Government, with compensation payable to Telecom under the
provisions of the Public Works Act 1981.
Telecom would expect to negotiate with the new Maori owners for continued
occupancy rights of any sites resumed by the Government.
NOTE 13 RESTRUCTURING PROVISION
A strategic restructuring of Telecom was announced towards the end of the
1993 financial year, aimed at rationalising the company structure,
substantially improving service quality and reducing operating costs. It
was estimated that the cost of implementing this restructuring, which
would take approximately four years, would be $450 million. This was
provided for in the fourth quarter earnings of the year ended 31 March
1993 as an abnormal restructuring cost. As at 31 March 1997, the balance
of this provision was $24.9 million, the majority of which relates to
future lease commitments of surplus leasehold property.
Following the reorganisation of Telecom's operations into its major
business areas of Network, Services and Design, Build and Maintenance
with effect from 1 April 1996, a strategic restructuring of the Design,
Build and Maintenance division, aimed at improving service and reducing
operating costs, was finalised in the fourth quarter of the 1997
financial year. In addition, restructuring costs arising out of the
Performance 2000 project, aimed at substantially reducing Telecom's
operating costs, had been identified as at 31 March 1997. All of these
restructuring costs, amounting to $64.5 million, were provided for in the
fourth quarter results, of which $1.8 million had been incurred in the
period to 31 March 1997.
NOTE 14 DEBT DUE WITHIN ONE YEAR
<TABLE>
<CAPTION>
--------------- ---------
1996 1997
(Dollars
in
millions) NZ$ NZ$
<S> <C> <C> <C> <C>
Long-term
debt
maturing
within one
year (see
Note 15) 130.1 85.3
Short-term
debt:
Commercial
paper -- 376.1
Promissory
notes 77.2 25.6
Other loans 56.3 37.4
133.5 439.1
263.6 524.4
</TABLE>
Interest rates (excluding the effect of hedging transactions) at 31 March
1997 ranged from 7.12% to 9.80% on commercial paper, 7.65% to 7.68% on
promissory notes and 7.47% to 7.55% on other loans.
F-17
<PAGE>
Notes to the Financial Statements
continued
NOTE 14 DEBT DUE WITHIN ONE YEAR (CONTINUED)
Through the use of interest rate swaps Telecom has effectively fixed the
interest rate on $80 million of short-term floating rate debt at 8.3%
until April 1997 and $30 million of projected short-term floating rate
debt at 8.83% between April 1997 and April 2000. Telecom has also used
interest rate options to form an interest rate "collar" whereby interest
rates on $100 million of projected short-term floating rate debt are
capped at 9.34% with a related floor at 8.38%. The options cover the
period to May 1998. (See Note 18).
Promissory notes are issued under a trust deed between the Company and
The New Zealand Guardian Trust Company Limited dated 25 October 1988,
pursuant to which the Company and certain of its subsidiaries (the
"Guaranteeing Group") have given a negative pledge that while any of the
stock issued under that trust deed remains outstanding they will not,
subject to certain exceptions, create or permit to exist any charge or
lien over any of their respective assets. Each member of the Guaranteeing
Group has guaranteed the payment of the promissory notes, including
interest.
Telecom has stand-by credit facilities of $22.5 million with the major
New Zealand trading banks and access of up to $216 million of committed
short-term funding through offshore facilities. There are no significant
commitment fees or material compensating balance requirements associated
with these facilities.
Commercial paper comprises amounts issued under Telecom's US$300 million
European Commercial Paper Programme and Telecom's $200 million Asian
Commercial Paper Programme. Issues outstanding at 31 March 1997 are
denominated in NZ dollars, US dollars and Swiss francs and are stated
inclusive of the effect of hedging transactions.
The underlying foreign currency liability with respect to outstanding
paper was US$198.7 million and CHF 39.6 million. Telecom has entered into
forward exchange contracts to hedge this short-term debt at rates ranging
from US$0.6777 to US$0.7007 and at CHF 0.9975 which are the rates at
which they will be settled.
NOTE 15 LONG-TERM DEBT
<TABLE>
<CAPTION>
----------------
1996 1997
(Dollars
in
millions) NZ$ NZ$
<S> <C> <C> <C>
TeleBonds 608.0 597.5
Eurobonds 621.9 621.9
Other loans 216.1 175.9
1,446.0 1,395.3
Less
unamortised
discount (28.4) (24.8)
1,417.6 1,370.5
Less long-
term debt
maturing
within one
year (see
Note 14) (130.1) (85.3)
1,287.5 1,285.2
Schedule of
Maturities
Due 1 to 2
years
(*9.14%) 85.9 166.6
Due 2 to 3
years
(*8.59%) 155.7 82.8
Due 3 to 4
years
(*8.18%) 58.8 204.8
Due 4 to 5
years
(*8.06%) 199.9 182.6
Due over 5
years
(*8.03%) 787.2 648.4
Total due
after one
year 1,287.5 1,285.2
</TABLE>
(*weighted average effective interest rate for Telecom Group--includes
the effect of hedging transactions, see Note 18)
TeleBonds
TCNZ Finance Limited, a subsidiary of the Company, offers bonds
("TeleBonds") to institutional and retail investors. These are issued as
income, compounding, or zero coupon bonds and are offered on a continuous
basis for a term of from one to twenty years as stipulated by the
investor. The interest or discount rate on offer, as the case may be, is
generally adjusted relative to Government debt securities and, upon issue
of the TeleBonds, is fixed for the period of the investment.
F-18
<PAGE>
Notes to the Financial Statements
continued
NOTE 15 LONG-TERM DEBT (CONTINUED)
TeleBonds are issued under a trust deed with The New Zealand Guardian
Trust Company Limited dated 25 October 1988, whereby the Company and
certain of its subsidiaries (the "Guaranteeing Group") have given a
negative pledge that while any of the stock issued under that trust deed
remains outstanding they will not, subject to certain exceptions, create
or permit to exist any charge or lien over any of their respective
assets. Each member of the Guaranteeing Group has guaranteed the payment
of the TeleBond debt, including interest.
TeleBonds have interest rates ranging from 5.6% to 13.5% and maturity
dates between April 1997 and July 2013.
Eurobonds
Eurobonds are issued by TCNZ Finance Limited under a trust deed with The
Law Debenture Trust Corporation p.l.c. dated 3 April 1992 and subsequent
supplemental trust deeds. The Company, TCNZ Finance Limited and certain
other subsidiaries have given a negative pledge and guarantee payment of
the Eurobonds and interest thereon.
Issues to date have been:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
-----------
<CAPTION>
1996 1997
<S> <C> <C> <C>
---------------------
<CAPTION>
(Dollars
in
millions) NZ$ NZ$
<S> <C> <C> <C>
---------------------
10% due 10
July 1998 67.0 67.0
9 1/2% due 3
April 2000 74.6 74.6
6 1/2% due 29
September
2000 69.4 69.4
6 1/2% due 11
October 2001 112.5 112.5
9 1/4% due 1
July 2002 66.0 66.0
7 1/2% due 14
July 2003 82.4 82.4
6 3/4% due 11
October 2005 150.0 150.0
-----------
621.9 621.9
===========
</TABLE>
Eurobonds issues with maturities of 11 October 2001 and 2005 are
denominated in US dollars. Cross currency and interest rate swaps have
been entered into to manage the currency and interest rate risk exposure.
The effective NZ dollar interest rates for these issues are 8.71% and
8.62% respectively. (See Note 18).
The underlying foreign currency liability with respect to the US$
denominated bonds is US$170 million. This liability is exactly offset by
the foreign currency receivable leg of the related cross currency swaps.
Both the bonds and the swap receivables are converted at the closing spot
rate being US$0.6948 (1996: US$0.6785). The amounts in the table above
are the net of the bonds and the swap receivables, therefore the
liabilities are stated at the rate they are expected to be settled at,
being US$0.6476 (1996:US$0.6476).
Other Loans
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
---------------
<CAPTION>
1996 1997
<S> <C> <C> <C> <C>
---------------------
<CAPTION>
(Dollars
in
millions) NZ$ NZ$
<S> <C> <C> <C> <C>
---------------------
Other loans
are
denominated
in the
following
currencies
NZ dollars 171.8 138.1
Japanese yen 44.3 37.8
-----------
216.1 175.9
===========
</TABLE>
Other loans including finance lease obligations (see below) have interest
rates ranging from 1.64% to 7.93% and maturity dates between May 1997 and
September 2002.
Included in investments (see Note 10) are Japanese yen deposits amounting
to $34.5 million (1996: $39.5 million) which effectively hedge a
substantial proportion of the other loans denominated in Japanese yen as
noted above. The deposits have the same maturities as the loans they are
hedging and interest rates which range from 3.68% to 4.61%.
Mandatory Convertible Notes which have been issued by a subsidiary, TCNZ
Finance Limited, will be exchanged for fully paid preference shares of $1
each to be issued by another subsidiary, TCNZ Financial Services Limited
on 27 March 1999. The net liability to parties external to Telecom at 31
March 1996 and 1997 of $69 million and $47.9 million, respectively, is
included in other loans.
F-19
<PAGE>
Notes to the Financial Statements
continued
NOTE 15 LONG-TERM DEBT (CONTINUED)
Finance Lease Obligations
Telecom has entered into the sale and leaseback of certain fixed assets.
At 31 March 1997 the outstanding lease liabilities (included in other
loans) were $128 million (1996: $147.1 million).
NOTE 16 CAPITAL FUNDS
Kiwi Share
A special rights convertible preference share (the "Kiwi Share") was
created on 11 September 1990 and is registered in the name of, and may
only be held by, the Minister of Finance on behalf of the Crown. The
consent of the holder of the Kiwi Share is required for the amendment,
removal or alteration of the effect of certain provisions of the
Company's Constitution which was adopted upon re-registration on 27
September 1996 under the Companies Act 1993.
The Company's Constitution also contains provisions that require Telecom
to observe certain principles relating to the provision of telephone
services and their prices.
The holder of the Kiwi Share is not entitled to vote at any meetings of
the Company's shareholders nor participate in the capital or profits of
the Company, except for repayment of $1 of capital upon a winding up. The
Kiwi Share may be converted to an ordinary share at any time by the
holder thereof, at which time all rights and powers attaching to the Kiwi
Share will cease to have any application.
Contributed Capital
At 1 April 1996 and at the time of adoption of the Company's
Constitution, the Company had $1,901.6 million contributed capital
comprising 1,889.6 million fully paid ordinary shares. Movements during
the year were as follows:
<TABLE>
<CAPTION>
Number
-------------
<S> <C>
At 1 April 1996 1,889,600,000
Issue of new shares upon exercise of options 204,937
Shares repurchased (54,735,582)
-------------
At 31 March 1997 1,835,069,355
=============
</TABLE>
Each of the ordinary shares confers on the holder the right to vote at
any general meeting of the Company except that the Company's Constitution
provides for certain restrictions on voting where a holder holds more
than 10% of the ordinary shares in breach of shareholding limitations.
Share Repurchase
In February 1997, Telecom began a flexible programme of share repurchases
subject to the detailed procedures and disclosure requirements of the
Companies Act 1993 and the requirements of the New Zealand Stock
Exchange.
The objectives of the repurchase are to reduce Telecom's average cost of
capital and further enhance value to shareholders. It is currently the
intention of the Company to repurchase shares to a market value of $1
billion over the course of approximately one year, although some
flexibility may be required in the timeframe given that such programmes
are new to the New Zealand equities market. As at 31 March 1997,
54,735,582 shares have been repurchased at a total cost of $357.5
million, of which $164.4 million was payable at balance date.
Repurchases on-market require the Company's major shareholders Ameritech
Holdings Limited ("Ameritech") and Bell Atlantic Holdings Limited ("Bell
Atlantic") to sell down shares to the Company off-market in order to
avoid violating Kiwi Share provisions which limit their holdings to a
maximum of 24.95% each. Of the 54,735,582 shares, 11,238,191 shares have
been repurchased from each of Ameritech and Bell Atlantic at a cost of
$72.9 million each.
F-20
<PAGE>
Notes to the Financial Statements
continued
NOTE 16 CAPITAL FUNDS (CONTINUED)
All shares repurchased from Ameritech and Bell Atlantic are required by
the Inland Revenue Department to be held as treasury stock for a minimum
of 90 days from the date of purchase at which point it is the Company's
intention to cancel these shares.
Capital Notes
Subsequent to 31 March 1997, TCNZ Finance Limited (the "Issuer"),
Telecom's main financing subsidiary, issued a prospectus for an issue of
long-term fixed interest unsecured subordinated capital notes
("TeleNotes"). It is Telecom's intention to issue these TeleNotes to
finance or refinance funding utilised by Telecom to effect some or all of
the $1 billion share repurchase programme.
The initial issue is for an aggregate principal amount of $275 million
and is made in the New Zealand market. The TeleNotes are issued for a
fixed term of approximately seven years and with a fixed coupon of 8.5%.
Subsequent issues may vary these terms and conditions. At the end of the
fixed term, investors are offered the option of continuing to hold the
TeleNotes at a new yield and for a term set by the Issuer. In the event
that the investors do not accept the new terms of the TeleNotes they may
elect to have their notes redeemed. The Issuer can, at its sole
discretion, redeem the TeleNotes including any unpaid interest for cash
or redeem the TeleNotes including any unpaid interest by subscribing for
and procuring the issue of ordinary shares in the Company to the
noteholders at a price equivalent to 90% of the average closing price of
Telecom shares in the 10 business days preceding the election date.
Options
The Company operates an executive share option scheme whereby certain key
executives are granted a number of options to purchase ordinary shares in
the Company. Each option will convert to one ordinary share on exercise
(provision is made for adjustment in certain circumstances). A
participant may exercise his or her options (subject to employment
conditions) any time during a five year period commencing at least one
year from the date on which the options are conferred. New ordinary
shares will be issued in accordance with the Constitution upon the
exercise of options. The price payable on exercise will be equivalent to
the average daily closing price of Telecom shares reported on the New
Zealand Stock Exchange for the 10 business days on which shares are
traded immediately preceding the date on which options are granted. The
options granted are determined by a committee of the Board of Directors
pursuant to the executive share option scheme. The disclosure in these
financial statements is made pursuant to a waiver from the New Zealand
Stock Exchange.
Information regarding options granted under the executive share option
scheme is as follows:
<TABLE>
<CAPTION>
Option Price *
$ Number of Options
------------------- -------------- -----------------
<S> <C> <C>
As at 1 April 1994 -- --
Granted 4.799 615,982
---------
As at 31 March 1995 4.799 615,982
Granted 5.758 482,871
---------
As at 31 March 1996 5.221 1,098,853
Granted 6.554 573,802
Exercised 4.596 (204,937)
---------
As at 31 March 1997 5.829 1,467,718
=========
* Weighted average
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Currently Exercisable
------------------------------- -------------------------------
Remaining *
Year Options Price * Life Shares Price *
Granted Outstanding $ (Years) Exercisable $
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1994-1995 411,045 4.900 3.6 411,045 4.900
1995-1996 482,871 5.758 6.2 110,456 5.935
1996-1997 573,802 6.554 5.3 -- --
--------- ---------------
1,467,718 521,501
--------- ---------------
*
Weighted
average
</TABLE>
F-21
<PAGE>
Notes to the Financial Statements
continued
NOTE 16 CAPITAL FUNDS (CONTINUED)
Dividends
Dividends declared and provided from the retained earnings of the Company
are as follows:
<TABLE>
------------------------------------
<CAPTION>
1995 1996 1997
-------------------------------------------------------------------------------------
(Dollars in millions, except per share amounts) NZ$ NZ$ NZ$
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interim dividend paid 255.1 -- --
Supplementary dividend 13.7 -- --
Final dividend provided 311.8 -- --
Supplementary dividend 16.0 -- --
First quarter dividend
paid -- 160.7 179.5
Supplementary dividend -- 8.6 26.0
Second quarter dividend
paid -- 160.7 179.5
Supplementary dividend -- 8.6 24.1
Third quarter dividend
paid -- 160.6 178.4
Supplementary dividend -- 22.7 23.9
Fourth quarter dividend
provided -- 179.5 192.7
Supplementary dividend -- 25.5 26.4
------------------------------------
Total dividend 596.6 726.9 830.5
------------------------------------
------------------------------------
Dividends per share
(excluding
supplementary
dividends) 30.0 cents 35.0 cents 39.0 cents
------------------------------------
------------------------------------
</TABLE>
A fourth quarter supplementary dividend of $26.4 million representing
approximately 1.85 cents per share has been provided for and will be paid
in conjunction with the fourth quarter dividend to shareholders who are
not resident in New Zealand. First, second and third quarter
supplementary dividends representing approximately 1.7 cents per share
were paid to shareholders who were not resident in New Zealand, for which
Telecom received an equivalent tax credit from the Inland Revenue
Department.
The supplementary dividend accrued may differ from the amount actually
paid but this has a neutral effect on retained earnings as the adjustment
to the supplementary dividend results in a corresponding adjustment to
the tax credit. The amount of this adjustment in respect of the 1996
fourth quarter supplementary dividend was $0.3 million (1995 final
dividend: $0.5 million).
NOTE 17 EXECUTIVE SHARE OWNERSHIP PLAN
On 30 July 1991, the Company issued 12 million ordinary shares
(approximately 0.5% of the then outstanding share capital) to the Trustee
of Telecom's executive share ownership plan (the "Executive Plan") at the
initial public offering price of $2 each. Shares granted pursuant to the
Executive Plan at no cost to participating employees vested over a three-
year period which began in July 1993, based on the achievement of
financial performance targets set by the Board of Directors. Further
shares granted vested during the year ended 31 March 1994 to a small
number of key executives who became entitled to receive shares under the
Executive Plan when the price of the Company's shares on the New Zealand
Stock Exchange reached certain target levels over a three-year period
ended September 1993.
By an agreement made on and with effect from 4 March 1993, the Trustee of
the Executive Plan distributed 700,000 shares (560,000 after the share
cancellation), in accordance with the terms of the Executive Plan, to a
second Trustee to hold solely for the Chief Executive. The Chief
Executive purchased these shares from the second Trustee at the market
price as at 4 March 1993 of $2.65 per share ($3.31 adjusted for the
effect of the share cancellation). The purchase price is to be paid in
January 1998 but there are provisions requiring the Chief Executive to
sell back shares in January 1998 at the original sale price if share
price targets set out in the agreement are not met. At 31 March 1997, all
share price targets had been met and consequently no shares are required
to be sold back to the Trustee in accordance with the agreement. The
Chief Executive has all the rights of ownership including voting rights
during the deferred settlement period except that dividends and other
payments on the shares are not received by the Chief Executive but are
used to reduce the amount of deferred settlement. The outstanding
obligation in respect of this deferred settlement at 31 March 1997 was $1
million and is included within amounts due from the Trustee of the
F-22
<PAGE>
Notes to the Financial Statements
continued
NOTE 17 EXECUTIVE SHARE OWNERSHIP PLAN (CONTINUED)
Executive Plan (see Note 11). This advance provides an indirect
beneficial interest to the Chief Executive, incurs no interest and
matures in January 1998. The Trustee holds the shares pending payment by
the Chief Executive of the purchase price.
The Executive Plan trusts are funded by a loan from a Telecom subsidiary
at interest rates determined by the lending company. The Executive Plan
trusts repay the loan in respect of shares held by the Executive Plan
with funds from contributions by Telecom subsidiary companies to the
trusts, as well as dividends received on unallocated and unvested shares
of the Company held by the trusts.
Movements in shares issued to the Executive Plan:
<TABLE>
---------------------------------------------------------
<CAPTION>
Allocated Unallocated Total shares
(No of shares in millions) shares shares issued
---------------------------------------------------------
<S> <C> <C> <C> <C>
Balance 31 March 1993 10.1 1.9 12.0
Shares vested July 1993 (4.8) -- (4.8)
Shares vested September
1993 (1.4) -- (1.4)
Share cancellation
March 1994 (0.8) (0.4) (1.2)
Transfers (0.3) 0.3 --
----------------------------------------
Balance 31 March 1994 2.8 1.8 4.6
Shares vested July 1994 (0.9) -- (0.9)
----------------------------------------
Balance 31 March 1995 1.9 1.8 3.7
Shares vested July 1995 (0.7) -- (0.7)
Transfers (0.1) 0.1 --
----------------------------------------
Balance 31 March 1996 1.1 1.9 3.0
Shares vested July 1996 (0.5) -- (0.5)
----------------------------------------
Balance 31 March 1997 0.6 1.9 2.5
----------------------------------------
----------------------------------------
</TABLE>
The balance of allocated shares represents the 560,000 shares held by the
Trustee on behalf of the Chief Executive. The balance of unallocated
shares represents shares never allocated together with previously
allocated shares resettled.
The shares held by the Executive Plan trusts are administered by a
Trustee, pursuant to a Trust Deed dated 30 July 1991. The Trustee, who
can be directed by the Company to act on certain limited matters
principally related to the allocation of shares, cannot be removed from
office by the Company, except in accordance with specified default
provisions. Voting rights attaching to the shares held by the Trustee are
to be exercised by the Trustee, in the case of a vote on a poll, in the
same proportion as all other shares in the Company are voted on any
particular resolution and in the case of a vote on a show of hands or by
voices, as the Trustee in its discretion thinks fit.
NOTE 18 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Interest Rate and Currency Risk
Telecom employs the use of derivative financial instruments for the
purpose of reducing its exposure to fluctuations in interest rates and
foreign exchange rates. Telecom does not currently hold or issue
derivative financial instruments for trading purposes. Any fluctuations
in the value of these hedging financial instruments are generally offset
by the value of the underlying exposures being hedged. Telecom
effectively monitors the use of derivative financial instruments through
the use of well-defined market and credit risk limits and timely reports
to senior management.
The notional amounts of the derivative financial instruments, with the
exception of forward exchange contracts and cross currency interest rate
swaps, do not necessarily represent amounts exchanged by the parties, and
therefore, are not a direct measure of the exposure of Telecom through
its use of derivative financial instruments. The amounts exchanged are
calculated on the basis of the notional principal amounts and the other
terms of the instruments, which relate to interest rates and exchange
rates.
F-23
<PAGE>
Notes to the Financial Statements
continued
NOTE 18 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED)
The notional principal or contract amounts outstanding at 31 March 1996
and 1997 are as follows (NZ$ millions):
<TABLE>
-------------------------------------------------------------
<CAPTION>
1996 1997 Maturities
-------------------------------------------------------------
<S> <C> <C> <C>
Cross currency interest rate swaps 262.5 262.5 2001-2005
Interest rate swaps 105.8 101.6 1997-2001
Forward exchange contracts
(hedging firm purchase commitments) 118.2 111.0 1997-1998
Forward exchange contracts
(hedging short-term debt) -- 352.6 1997
Interest rate options -- 100.0 1997-1998
Forward rate agreements -- 164.0 2006
</TABLE>
The majority of Telecom's long-term debt has been, and is currently,
subject to fixed interest rates. Telecom uses derivative products such as
interest rate swaps, forward rate agreements, interest rate options and
futures contracts to reduce the impact of changes in interest rates on
its floating rate short-term debt.
The interest differential exchanged under an interest rate swap is
recognised in interest expense over the life of the swap, thereby
adjusting the effective interest rate on the underlying debt. For
interest rate swaps, cash requirements are limited to interest payable,
which was $1.6 million at 31 March 1997 (1996: $0.7 million). Interest
rate swaps outstanding at 31 March 1997 are primarily hedging projected
short-term floating rate debt. The swaps have the effect of fixing the
interest rate on $80 million of short-term floating rate debt at 8.3%
until April 1997 and $30 million of projected short-term floating rate
debt at 8.83% between April 1997 and April 2000.
The receipts and payments made under forward rate agreements are
amortised to interest expense over the life of the underlying debt. For
interest rate options, the premiums paid or received are included in
prepaid expenses and other assets and are amortised to interest expense
over the life of the underlying debt. Gains or losses realised on the
options are recognised as yield adjustments over the life of the
underlying debt. Cash requirements for forward rate agreements and
interest rate options are limited to net interest payable/receivable on
the settlement/expiry date. Cash requirements for interest rate options
at date of settlement occur if such options are exercised. The forward
rate agreements outstanding at 31 March 1997, which totalled $164
million, were transacted to hedge the issuance yield on part of the
projected term debt that Telecom will issue during the next year to fund
the share repurchase programme. The outstanding forward rate agreements
are based on the November 2006 New Zealand Government bond and have
yields ranging from 7.31% to 7.39%. Interest rate options outstanding at
31 March 1997 are primarily hedging projected short-term floating rate
debt. The options form an interest rate "collar" whereby interest rates
on $100 million of projected short-term floating rate debt are capped at
9.34% with a related floor at 8.38%. The options cover the period to May
1998.
Futures contracts were not used during the current year.
The purpose of Telecom's foreign currency hedging activities is to
protect it from the risk that the eventual New Zealand dollar net cash
flows resulting from purchases from foreign suppliers and foreign
currency borrowings and expenditure will be adversely affected by changes
in exchange rates. As at 31 March 1997 Telecom's net unhedged foreign
exchange position was not significant.
Telecom uses cross currency interest rate swaps to convert foreign
currency borrowings into New Zealand dollar liabilities and to manage
interest rate and foreign exchange exposure. Cash requirements for the
cross currency interest rate swaps approximate the contract amounts and
interest payable of $10.7 million at 31 March 1997 (1996: $10.7 million).
Cross currency interest rate swaps outstanding as at 31 March 1997
effectively hedge Eurobond issues denominated in US dollars maturing on
11 October 2001 and 11 October 2005. The swaps fix the effective interest
rate on those issues at 8.71% and 8.62% respectively.
F-24
<PAGE>
Notes to the Financial Statements
continued
NOTE 18 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED)
Telecom enters into forward exchange contracts to hedge certain firm
purchase commitments denominated in foreign currencies (principally US
dollars, Australian dollars, British sterling and Japanese yen) and
short-term debt denominated in foreign currencies (principally US dollars
and Swiss francs). Telecom also purchases currency options to hedge
particular anticipated but not yet committed expenditure expected to be
denominated in foreign currencies. Cash requirements for forward exchange
contracts approximate the contract amount. For currency options, cash
requirements (which approximate the contract amount) occur only if such
options are exercised. There were no currency options outstanding as at
31 March 1997 or 31 March 1996.
Unrealised losses on outstanding forward exchange contracts which have
been deferred were $4.4 million as at 31 March 1997 (1996: $6 million).
These deferred losses primarily relate to the outstanding forward
exchange contracts which hedge firm capital project commitments
denominated in foreign currencies. The unrealised exchange loss on these
contracts as at 31 March 1997 and any additional gain or loss up to the
date of purchase will be included in the cost of the project.
Concentration Of Credit Risk
In the normal course of its business, Telecom incurs credit risk from
accounts receivable and transactions with financial institutions.
Telecom has a credit policy which is used to manage this exposure to
credit risk. As part of this policy, limits on exposures with
counterparties have been set and approved by the Board of Directors and
are monitored on a regular basis.
Telecom does not require collateral or other security to support
financial instruments with credit risk. While Telecom may be subject to
credit losses in the event of non-performance by its counterparties, it
does not expect such losses to occur.
Financial instruments which potentially subject Telecom to concentrations
of credit risk consist principally of cash, short-term investments, trade
and notes receivable and various off-balance sheet instruments. Telecom
places its cash, short-term investments and off-balance sheet hedging
instruments with high credit quality financial institutions and sovereign
bodies and limits the amount of credit exposure to any one financial
institution. Telecom has no concentrations of credit risk in respect of
any one financial institution. Concentrations of credit risk with respect
to accounts receivable are limited due to the large number of customers
included in Telecom's customer base.
Fair Values of Financial Instruments
The estimated fair values of Telecom's financial instruments, which may
differ from the carrying values, at 31 March 1996 and 1997 are as
follows:
<TABLE>
<CAPTION>
--------------------------------------------
1996 1997
--------------------------------------------
Carrying Fair Carrying Fair
value value value value
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Dollars in millions) NZ$ NZ$ NZ$ NZ$
---------------------------------------------------------
Applicable financial
instruments on the
balance sheet:
Non-current
investments--term
deposits 39.5 43.1 34.5 39.1
Non-current
investments--other 24.7 24.7 22.8 22.8
Notes receivable 99.7 98.8 47.2 47.2
Long-term debt (1,417.6) (1,399.5) (1,370.5) (1,361.9)
Financial instruments
with off-balance sheet
risk:
Interest rate swaps -- 1.7 (0.2) 0.8
Foreign currency
forward exchange
contracts (hedging
firm purchase
commitments) 1.0 (6.0) 1.9 (4.4)
Forward rate agreements -- -- -- 6.5
Interest rate options -- -- -- (0.5)
</TABLE>
F-25
<PAGE>
Notes to the Financial Statements
continued
NOTE 18 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED)
Telecom anticipates that long-term debt will be held to maturity and,
accordingly, settlement at the reported fair value of these financial
instruments is unlikely.
The following methods and assumptions were used to estimate the fair
value of each class of financial instrument:
Cash, Short-Term Investments, Bank Overdraft, Short-Term Debt, Accounts
Receivable and Accruals
The carrying amounts of these balances are equivalent to their fair value
and therefore they are excluded from the table shown above.
Non-Current Investments and Other Assets
It was not practicable to estimate fair values of other non-current
investments as there are no quoted market prices for these or similar
investments. Except for investments in associate companies, these
investments are carried at original cost and are redeemable for cash at
their carrying amount.
The fair value of notes receivable and term deposits is estimated on the
basis of current market interest rates available to Telecom for
investments of similar terms and maturities.
Long-Term Debt
The fair values of TeleBonds and Eurobonds are estimated on the basis of
the quoted market prices of Government debt securities of similar
maturities. The fair value of other long-term debt is based on current
market interest rates available to Telecom for debt of similar
maturities.
The fair value of long-term debt denominated in foreign currencies is
stated inclusive of the effect of hedging transactions.
Cross Currency Interest Rate Swaps, Interest Rate Swaps, Forward Exchange
Contracts, Option Agreements and Forward Rate Agreements
The fair values are estimated on the basis of the quoted market prices of
those instruments.
The fair values of cross currency interest rate swaps and forward
exchange contracts which hedge debt denominated in foreign currency are
included in the stated fair value of the underlying debt instruments
which they hedge.
NOTE 19 EMPLOYEE BENEFIT PLANS
Government Superannuation Fund
Approximately 1,050 Telecom employees formerly employed by the New
Zealand Post Office have elected to remain within the Government
Superannuation Fund (the "Fund") which provides defined benefits adjusted
for inflation. Telecom contributes to the Fund at a fixed rate (being a
percentage of members' salaries) specified under the Sale and Purchase
Agreement with the Government. In the event that Telecom's contributions
are insufficient to fund existing benefits or such benefits as may be
defined from time to time by the Government, Telecom shall pay such
additional amount as may be required pursuant to Section 95 of the
Government Superannuation Fund Act 1956. Under a deed dated 25 May 1990
the Government shall reimburse Telecom the amount contributed in excess
of the rate stipulated by the Sale and Purchase Agreement.
Retirement Savings Plan
Telecom provides the opportunity for all employees to join a
professionally managed retirement savings plan. Telecom's contribution is
to meet the initial joining fee and pay the continuing administration,
trustee and management costs. These costs are not material to the
financial results of Telecom. Telecom has no other liability, contingent
or otherwise, in respect of the retirement savings plan or the future
benefits due to employees under that plan.
F-26
<PAGE>
Notes to the Financial Statements
continued
NOTE 19 EMPLOYEE BENEFIT PLANS (CONTINUED)
Participatory Rights of Other Employees
Telecom has no obligation to provide pension benefits in respect of other
present employees who are not members of the Government Superannuation
Fund.
Other Post-Employment and Post-Retirement Benefits
Post-employment benefits, consisting principally of employee severance
payments, are accrued in accordance with existing accounting policies.
Telecom does not provide post-retirement benefits other than pensions.
NOTE 20 COMMITMENTS
Telecom Group
Operating Leases
Operating lease commitments are mainly in respect of leases of land,
buildings and other telecommunications facilities. Minimum rental
commitments for all non-cancellable operating leases (excluding amounts
provided for in respect of restructuring) are (NZ$ millions):
<TABLE>
-------------
<CAPTION>
1996 1997
-------------
<S> <C> <C>
Payable within 1 year 38.1 45.6
Payable within 1-2 years 36.0 43.4
Payable within 2-3 years 35.4 40.9
Payable within 3-4 years 35.0 38.2
Payable within 4-5 years 33.4 33.3
Payable thereafter 192.0 187.1
-------------
$369.9 $388.5
-------------
-------------
</TABLE>
Capital Commitments
At 31 March 1997 capital expenditure amounting to $73.2 million (1996:
$65.8 million), principally relating to telecommunications network and
international cable assets, had been committed under contractual
arrangements, with substantially all payments due within two years.
NOTE 21 CONTINGENT LIABILITIES
Lawsuits and Other Claims
In 1995, Clear Communications Limited ("Clear") and BellSouth New Zealand
Limited ("BellSouth") commenced proceedings under the Commerce Act 1986
against Telecom and other parties in relation to Telecom's proposed
acquisition of an interest in Sky Network Television Limited ("Sky") and
in relation to a proposed content agreement between Sky and Telecom. In
March 1996, Telecom decided not to pursue that acquisition or the content
agreement, although Telecom has proceeded with its cable television
service. As a consequence, Telecom agreed with BellSouth terms whereby
BellSouth's proceedings were stayed and Telecom applied to have Clear's
proceedings struck out or stayed. However, in July 1996 Clear amended its
proceedings to include an attack on Telecom's entitlement to offer cable
television and Internet services and allegations under the Fair Trading
Act 1986. Telecom's application to strike out or stay all of Clear's
claims was heard before the New Zealand High Court in December 1996 and
the Court reserved its decision.
F-27
<PAGE>
Notes to the Financial Statements
continued
NOTE 21 CONTINGENT LIABILITIES (CONTINUED)
Additionally, in late 1996 Clear commenced three further sets of
proceedings alleging breaches of the Commerce Act 1986 in relation to
Telecom's discounting practices, in relation to Telecom's use of
information Clear alleges to be confidential to Clear and in relation to
alleged unauthorised deactivations of non-code access to Clear. In
January 1997, BellSouth issued proceedings paralleling the Clear
proceedings which allege breach of the Commerce Act 1986 in relation to
Telecom's discounting practices.
On 27 March 1997, Telstra filed in the Supreme Court of Queensland a
statement of claim against two companies within Pacific Star totalling
AUD98.6 million, alleging non-payment of outstanding debts for
telecommunications services provided by Telstra, together with interest
from 27 March 1997 to the date of judgement. Telstra have commenced
similar proceedings against other telecommunications service providers in
Australia.
The dispute arises from Telstra's widespread and continuing failure to
provide the timely and accurate billing information required by Pacific
Star to on-bill its own customers. Pacific Star and Telstra continue to
meet in an effort to resolve these differences and reach a negotiated
settlement without recourse to litigation. If the matter proceeds to
litigation, Pacific Star will vigorously defend the proceedings.
Various other lawsuits, claims and investigations have been brought or
are pending against Telecom.
The Directors cannot reasonably estimate at this stage the adverse effect
(if any) of any of the above proceedings on Telecom's financial position,
however, they are currently not expected to have a material adverse
effect on Telecom's financial position.
Land Claims
As previously stated in Note 12, interests in land included in fixed
assets purchased from the Government may be subject to claims to the
Waitangi Tribunal or deemed to be Wahi Tapu and, in either case, may be
resumed by the Government. Certain claims have been brought or are
pending against the Government under the Treaty of Waitangi Act 1975.
Some of these claims may affect land transferred to the Company by the
Government and/or by the Company to its subsidiary companies. In the
event that land is resumed by the Government, there is provision for
compensation to Telecom.
Financial Instruments
Telecom has given bank guarantees in respect of overseas ventures
totalling $10.4 million.
In addition, there are contingent liabilities in respect of outstanding
contracts for the sale and purchase of foreign currencies, forward rate
agreements, interest rate options, cross currency interest rate swaps and
interest rate swaps. No losses are anticipated in respect of these
matters.
NOTE 22 RELATED PARTY TRANSACTIONS
Transactions with Principal Shareholders
Since acquiring their interest in Telecom, Ameritech and Bell Atlantic
have made their telecommunications expertise available to Telecom through
consulting and related services including personnel placements with
Telecom. Where charged, these services amounted to approximately $1
million for the year ended 31 March 1997 (1996: $2 million). Telecom has
charged Sky Network Television Limited, a company in which Ameritech and
Bell Atlantic have a combined 25.05% interest, for telecommunications
services, amounting to $5.2 million for the year ended 31 March 1997
(1996: $5.9 million).
F-28
<PAGE>
Notes to the Financial Statements
continued
NOTE 22 RELATED PARTY TRANSACTIONS (CONTINUED)
In accordance with the share repurchase programme (see Note 16),
11,238,191 shares have been repurchased from each of Ameritech and Bell
Atlantic at a cost of $72.9 million each. As at 31 March 1997, $40.9
million was outstanding to each of Ameritech and Bell Atlantic in respect
of 6,273,581 shares each repurchased but not yet settled.
As at 31 March 1997, Telecom has taken up an amount due from Bell
Atlantic in respect of Pacific Star Communications Pty Limited, in which
Bell Atlantic holds a 49% minority interest. Following the receipt of
this payment, Bell Atlantic will have no further financial interest in or
obligations in respect of Pacific Star Communications Pty Limited.
Interest of Directors in Certain Transactions
Mr David M Richwhite is a Director and Principal of Fay, Richwhite.
Subsidiaries of Fay, Richwhite act for Telecom from time to time in
connection with funding arrangements and consultancies. The expense for
1997 relating to these activities was $Nil (1996: $0.9 million). In
addition, a subsidiary company leases premises pursuant to an agreement
to lease dated 15 March 1988, for a term expiring on 31 January 2004,
from a company in which Mr Richwhite is a Director and indirectly holds a
material equity interest. Rent for each of the years ended 31 March 1996
and 1997 amounted to approximately $3.2 million. These various services
have been provided in the ordinary course of business. Mr Richwhite
became a Director of the Company on 12 September 1990.
Mr John King is a partner in the law firm Russell McVeagh McKenzie
Bartleet & Co, which has rendered various legal services to Telecom.
These services have been provided in the ordinary course of business.
Certain directors have relevant interests in a number of other companies
with which Telecom has transactions in the normal course of business.
NOTE 23 SET-OFFS
Telecom has agreements with its overseas telecommunications carriers
whereby receivable and payable balances with these carriers are subject
to the future right of set-off.
At 31 March 1997, the amount set-off within accounts receivable and trade
accounts payable, in accordance with the future right of set-off, was
$42.8 million (1996: $39.2 million).
F-29
<PAGE>
Notes to the Financial Statements
continued
NOTE24 SUBSIDIARY AND ASSOCIATE COMPANIES
At 31 March 1997, the principal operating companies of the Telecom Group
and their activities were as follows:
<TABLE>
<CAPTION>
Country of Percentage Nature of
Incorporation Holding Activities
---------------------------------------------------------------------------------------
<C> <C> <C> <S>
Subsidiary Companies
Telecom New Zealand Limited New Zealand 100% Provides local,
national and
international
telecommunications
services. Operates
and manages the
cellular telephone
network. Provides
cellular mobile
telephone,
dispatch radio and
paging services.
Telecom Directories Limited New Zealand 100% Publishes
telephone
directories.
Telecom Business Systems Limited New Zealand 100% Supplies and
supports complex
business CPE.
Netway Communications Limited New Zealand 100% Provides value-
added
telecommunications
services.
New Zealand Telecommunication Systems New Zealand 51% Writes software
Support Centre Limited and provides
related services
for NEAX-61
exchanges.
First Media Limited New Zealand 100% Provides cable
television
services.
Telecom Corporation of New Zealand Cayman Islands 100% A group finance
(Overseas Finance) Limited company.
TCNZ (UK) Investments Limited United Kingdom 100% A group finance
company.
TCNZ (United Kingdom) Securities Limited United Kingdom 100% A group finance
company.
TCNZ Finance Limited New Zealand 100% A group finance
company.
TCNZ Financial Services Limited New Zealand 100% A group finance
company.
Telecom Wellington Investments Limited New Zealand 100% A group finance
company.
TCNZ Equities Limited New Zealand 100% A group finance
company.
Teleco Insurance (NZ) Limited New Zealand 100% A group insurance
company.
Telecom Purchasing Limited New Zealand 100% A group purchasing
and procurement
company.
Birell Properties Limited New Zealand 100% A group property
company
Pacific Star Communications Pty Limited * Australia 51% Provides offshore
value-added
telecommunications
services.
Pacific Star Services Pty Limited * Australia 100% Provides offshore
value-added
telecommunications
services.
Pacific Star Mobile Pty Limited * Australia 100% Provides offshore
cellular services.
Digital Video Productions Pty Limited * Australia 100% Provides digital
media services.
Associate Company
Telecom Cook Islands Limited Cook Islands 40% Provides
telecommunications
services in the
Cook Islands.
</TABLE>
The financial year end of all subsidiaries is 31 March. The financial
year end of the associate company is 30 June.
* Discontinued operations
F-30
<PAGE>
Notes to the Financial Statements
continued
NOTE 25 SEGMENTAL REPORTING
Telecom essentially operates as a unitary business, providing an
integrated range of telecommunications products and services.
Accordingly, Telecom has not, to date, published separately the net
operating earnings for the various sources of operating revenues. In each
of the last three fiscal years, more than 90% of the Group's total
operating revenues, operating earnings and identifiable assets were
generated by operations in New Zealand. The majority of the Group's
overseas operating revenues, operating earnings and identifiable assets
relate to the activities of Pacific Star which have been discontinued
(see Note 7).
NOTE 26 IMPUTATION CREDIT ACCOUNT
Dividends paid by New Zealand resident companies may include imputation
credits representing the taxation already paid by the company on the
profits distributed. New Zealand resident shareholders may claim a tax
credit equal to the value of the imputation credit attached to dividends.
Overseas shareholders in general are not entitled to claim the benefit of
any imputation credit. Overseas shareholders may benefit from
supplementary dividends.
The movements in the Imputation Credit Accounts are detailed below:
<TABLE>
<CAPTION>
-----------
1996 1997
--------------------------
(Dollars in millions) NZ$ NZ$
--------------------------
<S> <C> <C> <C>
Balance (credit) at the beginning of
the year (140.2) (76.7)
New Zealand income tax paid (270.7) (270.8)
Imputation credits attached to
dividends received (0.3) (0.4)
Imputation credits attached to
dividends 334.5 252.7
-----------
Balance (credit) at the end of the
year (76.7) (95.2)
Minority interest 0.3 0.5
-----------
Net balance (credit) at the end of
the year (76.4) (94.7)
-----------
-----------
</TABLE>
NOTE 27 QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Surplus
from
Surplus continuing
from operations
Operating Abnormal continuing before Discontinued Net Earnings
revenues costs operations income tax operations earnings per share
---------------------------------------------------------------------------------------------------------
(NZ dollars in millions
except per share amounts)
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
30 June 1996 730.7 -- 302.9 279.6 (11.5) 177.1 0.094
30 September 1996 776.7 -- 309.6 284.2 (11.0) 183.8 0.097
31 December 1996 780.7 0.9 298.5 271.4 (17.3) 167.2 0.088
31 March 1997 795.4 150.6 168.9 145.3 (47.8) 53.3 0.029
----------------------------------------------------------------------------------------
Year ended 31 March 1997 3,083.5 151.5 1,079.9 980.5 (87.6) 581.4 0.308
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
Quarter ended:
30 June 1995 685.4 -- 266.9 241.1 (3.6) 159.3 0.084
30 September 1995 731.8 -- 299.1 273.9 (4.7) 178.7 0.095
31 December 1995 733.4 -- 307.1 283.4 (3.3) 182.2 0.096
31 March 1996 758.0 -- 341.4 324.0 (18.0) 196.6 0.104
----------------------------------------------------------------------------------------
Year ended 31 March 1996 2,908.6 -- 1,214.5 1,122.4 (29.6) 716.8 0.379
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
</TABLE>
F-31
<PAGE>
Notes to the Financial Statements
continued
NOTE 28 SIGNIFICANT DIFFERENCES BETWEEN NEW ZEALAND AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRACTICE
The consolidated financial statements are prepared in accordance with
generally accepted accounting practice ("GAAP") applicable in New Zealand
("NZ") which differs in certain significant respects from that applicable
in the United States ("US"). These differences and the approximate effect
of the adjustments necessary to restate earnings and capital funds are
detailed below.
EFFECT ON NET EARNINGS OF DIFFERENCES BETWEEN NZ GAAP AND US GAAP
<TABLE>
<CAPTION>
-------------------------
1995 1996 1997
--------------------- ------- ------- -------
(Dollars in millions,
except per share
amounts) NZ$ NZ$ NZ$
--------------------- ------- ------- -------
<S> <C> <C> <C> <C>
Net surplus from
continuing operations in
accordance with NZ GAAP 624.7 746.4 669.2
Approximate US GAAP
adjustments:
Capitalisation of
interest costs, net of
depreciation (b) (1.1) -- --
Depreciation of interest
costs capitalised in
prior years (b) -- (11.5) (9.3)
Termination of interest
rate swap (c) (6.8) (5.7) (0.3)
Accrual for compensated
absences (d) 2.3 16.6 --
Deferred taxation (e) 1.8 0.3 (45.9)
Executive share
ownership plan (h) (2.9) (1.5) 0.3
Provision for
restructuring (i) -- -- 62.7
Provision for Year 2000
(j) -- -- 85.9
------- ------- -------
Approximate net surplus
from continuing
operations in accordance
with US GAAP 618.0 744.6 762.6
Discontinued operations (4.4) (29.6) (87.6)
------- ------- -------
Approximate net earnings
in accordance with US
GAAP 613.6 715.0 675.0
======= ======= =======
Approximate earnings per
share from continuing
operations in accordance
with US GAAP $ 0.327 $ 0.394 $ 0.404
======= ======= =======
Approximate earnings per
share from discontinued
operations in accordance
with US GAAP $(0.002) $(0.016) $(0.046)
======= ======= =======
Approximate net earnings
per share in accordance
with US GAAP $ 0.325 $ 0.378 $ 0.358
======= ======= =======
Weighted average number
of ordinary shares
outstanding in
accordance with US GAAP
(in millions) 1,889 1,889 1,887
======= ======= =======
</TABLE>
CUMULATIVE EFFECT ON CAPITAL FUNDS OF DIFFERENCES BETWEEN NZ GAAP AND US
GAAP
<TABLE>
<CAPTION>
-------------------------
1995 1996 1997
-------------------- ------- -------
(Dollars in
millions) NZ$ NZ$ NZ$
-------------------- ------- -------
<S> <C> <C> <C> <C>
Capital funds in
accordance with NZ
GAAP 2,090.0 2,148.4 1,642.6
Capitalisation of
interest costs,
net of accumulated
depreciation (b) 79.4 67.9 58.6
Termination of
interest rate swap
(c) 6.0 0.3 --
Accrual for
compensated
absences (d) (16.6) -- --
Deferred taxation
(e) (28.4) (28.1) (74.0)
Executive share
ownership plan (h) (8.3) (9.9) (5.5)
Provision for
restructuring (i) -- -- 62.7
Provision for Year
2000 (j) -- -- 85.9
Provision for
dividend (f) 311.8 179.5 192.7
------- ------- -------
Approximate capital
funds in
accordance with US
GAAP 2,433.9 2,358.1 1,963.0
======= ======= =======
</TABLE>
F-32
<PAGE>
Notes to the Financial Statements
continued
NOTE 28 SIGNIFICANT DIFFERENCES BETWEEN NEW ZEALAND AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRACTICE (CONTINUED)
(a) Acquisition of the Telecommunications Business of the New Zealand
Post Office
The telecommunications business of the New Zealand Post Office was
acquired by Telecom with effect from 1 April 1987 pursuant to the Sale
and Purchase Agreement with the Government. Under NZ GAAP, the net assets
acquired were recorded by Telecom at the amounts contained within the
Sale and Purchase Agreement which were considered to be fair values.
Since both the New Zealand Post Office and Telecom were under the common
control of the Government at 1 April 1987, US GAAP would require Telecom
to record the net assets acquired at the historical book values recorded
by the New Zealand Post Office.
Prior to 1 April 1987, the New Zealand Post Office operated three
principal lines of business, namely banking, postal and
telecommunications. It did not maintain a separate fixed asset register
nor separate historical cost records of all fixed asset additions in
respect of the telecommunications division. Accordingly, the difference
arising as a result of ascribing fair values to fixed assets at 1 April
1987 as required under NZ GAAP rather than historical cost as required
under US GAAP cannot be quantified and consequently is not included as a
reconciling item in this note. If historical cost records had been
maintained, the effect of this difference may have impacted capital funds
by the difference between the fair value ascribed to fixed assets and
their historical cost. In addition, earnings may have been affected by a
difference in the depreciation charge.
Although both Telecom and the New Zealand Post Office were under the
common control of the Government, the Directors of Telecom are satisfied
that appropriate fair values have been assigned in respect of the
acquisition of the telecommunications business (based on the negotiations
which occurred to establish the value of the business contained in the
Sale and Purchase Agreement) and that fixed assets acquired have been
appropriately valued on the basis set out in the accounting policies.
(b)Capitalisation of Interest Costs Relating to the Construction of
Property, Plant and Equipment
Prior to 1 April 1989, Telecom did not capitalise interest costs incurred
in connection with the financing of expenditures for the construction of
telecommunications equipment and other fixed assets. In the year ended 31
March 1990, Telecom changed that policy such that, for each fixed asset
project having a cost in excess of $10 million and a construction period
of not less than 12 months, interest costs incurred during the period
that is required to complete and prepare the fixed asset for its intended
use are capitalised as part of the total cost. In the year ended 31 March
1996, Telecom changed that policy further such that, for each fixed asset
project having a cost in excess of $100,000 and a construction period of
not less than three months, interest costs incurred during the period
that is required to complete and prepare the fixed asset for its intended
use are capitalised as part of the total cost.
Under US GAAP, interest costs incurred in connection with the financing
of all expenditure for the construction of fixed assets are required to
be capitalised during the period required to prepare the fixed asset for
its intended use. For the purpose of compliance with US GAAP, the
estimated amount of interest that would have been capitalised on
construction costs incurred on capital projects not already capitalised
in accordance with Telecom's accounting policy has been determined and
depreciated over the lives of the related assets. As a result of the most
recent change in accounting policy which brings NZ GAAP accounting
treatment in respect of capitalised interest into alignment with US GAAP
in all material respects, the ongoing reconciling difference within net
earnings will comprise the depreciation charge on interest not
capitalised under NZ GAAP prior to 1 April 1995.
(c)Termination of Interest Rate Swap
In accordance with NZ GAAP, costs incurred in terminating debt and
hedging instruments are taken to earnings when these costs are incurred.
For the purpose of compliance with US GAAP, the costs of interest rate
swaps terminated during 1994 have been deferred and amortised over the
original remaining life of the terminated swap.
F-33
<PAGE>
Notes to the Financial Statements
continued
NOTE 28 SIGNIFICANT DIFFERENCES BETWEEN NEW ZEALAND AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRACTICE (CONTINUED)
(d)Compensated Absences
Prior to 1 April 1995, Telecom recognised a liability for compensation
for future absences where the obligation related to rights which had
already vested. In the year ended 31 March 1996, Telecom changed that
policy whereby a liability was recognised in respect of the total
estimated liability for compensated absences which relate to rights which
may eventually vest. Since this is in accordance with US GAAP there is no
longer a reconciling item.
(e)Deferred Taxation
Under NZ GAAP Telecom uses the partial liability method to account for
taxation whereby all items expected to reverse in the foreseeable future
are recognised, whereas under US GAAP the comprehensive liability method
is used.
The components of the US GAAP net deferred tax liability at 31 March 1996
and 31 March 1997, amounting to $48.7 million and $50.2 million
respectively, are as follows:
<TABLE>
<CAPTION>
Deferred Deferred
tax asset tax liability
------------ --------------
1996 1997 1996 1997
--------------------- ----- ----- ------ ------
(Dollars in millions) NZ$ NZ$ NZ$ NZ$
--------------------- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
Depreciation 19.3 19.6 (103.7) (101.0)
Restructuring provision 22.0 10.1 -- --
Provisions, accruals and
other 37.7 60.6 (45.6) (58.1)
Valuation allowance (3.9) (7.8) -- --
Fourth quarter
supplementary dividend
tax credit 25.5 26.4 -- --
--- ----- ----- ------ ------
100.6 108.9 (149.3) (159.1)
--- ===== ===== ====== ======
</TABLE>
Included in the net deferred tax liability at 31 March 1997 of $50.2
million is a net current asset of $74.2 million and a net non-current
liability of $124.4 million. The net deferred tax liability includes
$12.7 million payable in a foreign jurisdiction. The net deferred tax
liability at 31 March 1996 of $48.7 million includes a net current asset
of $53.1 million and a net non-current liability of $101.8 million.
(f)Provision for Dividend
Under NZ GAAP, dividends provided by the Board of Directors after the end
of an accounting period, but in respect of that period, are deducted in
arriving at retained earnings at the end of that accounting period. Under
US GAAP, such dividends are provided in the period in which they are
declared by the Board of Directors. The fourth quarter dividend included
for the purpose of the US GAAP reconciliation is net of the effect of the
supplementary dividend and associated tax credit.
(g)Statement of Cash Flows
Under both NZ GAAP and US GAAP, a Statement of Cash Flows, which
discloses cash flows from operating, investing and financing activities,
is required to be presented. Under US GAAP, bank overdrafts would be
reclassified as a financing activity rather than a component of cash
position. Accordingly, the closing cash position under US GAAP at 31
March 1995, 1996 and 1997 would be $10.5 million, $15.3 million and $13.1
million respectively.
(h)Executive Share Ownership Plan
Under NZ GAAP, compensation expense relating to the Executive Plan is
recognised systematically over the life of the plan based on the actual
cost of the shares of $2 each. Under US GAAP, the Executive Plan would be
treated as a variable stock award plan and, as such, the compensation
expense recognised over the life of the plan would be adjusted in each
accounting period for changes in the quoted market price of the Company's
shares. Additionally, under US GAAP, the shares issued under
F-34
<PAGE>
Notes to the Financial Statements
continued
NOTE 28 SIGNIFICANT DIFFERENCES BETWEEN NEW ZEALAND AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRACTICE (CONTINUED)
the plan would not be recognised as share capital until they vest and
would not all be recognised as outstanding for the purpose of determining
the weighted average number of shares for earnings per share
calculations. At 31 March 1997, 8.9 million shares had vested in
accordance with the Executive Plan.
Reconciliation of cumulative effect of the Executive Plan on capital
funds:
<TABLE>
<CAPTION>
1996 1997
--------------------- ---- ----
(Dollars in millions) NZ$ NZ$
--------------------- ---- ----
<S> <C> <C> <C>
Opening Balance (8.3) (9.9)
NZ GAAP compensation
expense 0.8 --
US GAAP additional
compensation expense (1.5) 0.3
Shares vested, net 3.1 3.3
Treasury stock (4.0) --
Dividends paid on
treasury stock -- 0.8
--- ---- ----
(9.9) (5.5)
--- ==== ====
</TABLE>
Treasury stock represents shares issued to the Executive Plan which
remain unallocated and have been recognised in capital funds under NZ
GAAP but which have not been included in capital funds for US GAAP
purposes.
(i)Provision for Restructuring
Under US GAAP, provisions for restructuring may only be accrued where a
detailed announcement describing the restructuring has been made prior to
balance date.
(j)Provision for Year 2000
Under US GAAP, the costs relating to Year 2000 modifications should be
expensed as incurred. Consequently, the accrual of such costs is not
permitted.
(k)Research and Development Expenditure
Under NZ GAAP, research and development costs are charged to expense as
incurred except, where, in the case of development costs, future benefits
are expected beyond any reasonable doubt to exceed these costs. Where
development costs are deferred, they are amortised over future periods on
a basis related to future benefit. For the purpose of compliance with US
GAAP, all research and development costs have been expensed as incurred.
As at 31 March 1997, there was no significant amount of deferred
development costs.
(l)Investments
Telecom records short-term investments at market values (where available)
with the resulting gains or losses taken to earnings. Term investments
are recorded at the lower of cost and net realisable value. Following the
adoption of FAS 115 ("Accounting for Certain Investments in Debt and
Equity Securities"), there is no significant difference between NZ and US
GAAP for the years ended 31 March 1996 and 31 March 1997.
(m)Share Repurchase
Under US GAAP, the share repurchase would have been accounted for
differently such that the amount of the share repurchase would have been
allocated amongst individual components of shareholders' funds.
(n)Share Options
During 1995, the Financial Accounting Standards Board issued SFAS 123
"Accounting for Stock-Based Compensation."
F-35
<PAGE>
Notes to the Financial Statements
continued
NOTE 28 SIGNIFICANT DIFFERENCES BETWEEN NEW ZEALAND AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
This pronouncement requires that Telecom calculate the value of stock
options at the date of grant using an option pricing model. Telecom has
elected the "pro-forma disclosure only" option permitted under SFAS 123
instead of recording a charge to operations, as shown below:
<TABLE>
<CAPTION>
-----------
1996 1997
-------------------------------------- ----- -----
(Dollars in millions, except per share
amounts) NZ$ NZ$
-----------------------------------------------------------------------
<S> <C> <C> <C>
Net earnings As reported 716.8 581.4
Pro-forma 716.6 580.8
Earnings per share As reported 0.379 0.308
Pro-forma 0.379 0.308
-----------------------------------------------------------------------
</TABLE>
Because the SFAS 123 method of accounting has not been applied to options
granted prior to 1 January 1995, the resulting pro-forma compensation
cost may not be representative of that to be expected in future years.
Telecom has determined the pro-forma amounts using the Black-Scholes
option pricing model based on the following weighted average assumptions:
<TABLE>
<CAPTION>
------------
1996 1997
-----------------------------------------------
<S> <C> <C>
Risk-free interest rate 8.0% 8.2%
Expected dividend yield 5.6% 6.0%
Expected option life (in years) 8.0 6.0
Expected stock price volatility 21.0% 16.0%
Expected forfeiture rate 0% 0%
-----------------------------------------------
</TABLE>
F-36
<PAGE>
LOGO
Report to the Shareholders of Telecom Corporation of New Zealand Limited
................................................................................
We have audited the financial statements on pages F-3 to F-31. The financial
statements provide information about the past financial performance and
financial position of the Telecom Group as at 31 March 1997 and 1996. This
information is stated in accordance with the accounting policies set out on
pages F-7 to F-10.
DIRECTORS' RESPONSIBILITIES
The Company's Directors are responsible for the preparation of the financial
statements which give a true and fair view of the financial position of the
Telecom Group as at 31 March 1997 and 1996 and the results of operations and
cash flows for each of the three years in the period ended 31 March 1997.
AUDITORS' RESPONSIBILITIES
It is our responsibility to express an independent opinion on the financial
statements presented by the Directors and report our opinion to you.
BASIS OF OPINION
An audit includes examining, on a test basis, evidence relevant to the amounts
and disclosures in the financial statements. It also includes assessing:
. the significant estimates and judgments made by the Directors in the
preparation of the financial statements; and
. whether the accounting policies are appropriate to the Telecom Group
circumstances, consistently applied and adequately disclosed.
We conducted our audit in accordance with generally accepted auditing standards
in New Zealand. We planned and performed our audit so as to obtain all the
information and explanations which we considered necessary to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatements, whether caused by error or fraud. In
forming our opinion we also evaluated the overall adequacy of the presentation
of information in the financial statements.
Our firm carries out other assignments on behalf of the Telecom Group in the
area of taxation compliance, accounting policy advice, special consultancy
assignments and advice on the implementation of information systems.
UNQUALIFIED OPINION
We have obtained all the information and explanations we have required.
In our opinion:
. proper accounting records have been kept by the Telecom Group as far as
appears from our examination of those records; and
. the financial statements on pages F-3 to F-31 expressed in New Zealand
dollars:
--comply with generally accepted accounting practice; and
--give a true and fair view of the financial position of the Telecom Group
as at 31 March 1997 and 1996 and the results of its operations and cash
flows for each of the three years in the period ended 31 March 1997.
COOPERS & LYBRAND IS A MEMBER OF COOPERS & LYBRAND INTERNATIONAL, A LIMITED
LIABILITY ASSOCIATION INCORPORATED IN SWITZERLAND
F-37
<PAGE>
We have also audited Note 28 to the financial statements set out on pages F-32
to F-36, which details the significant differences between New Zealand and
United States generally accepted accounting practice as they would apply to the
financial statements. In our opinion, the application of United States
generally accepted accounting practice would have affected the determination of
net earnings for each of the three years in the period ended 31 March 1997 and
capital funds as at 31 March 1997 and 1996 to the extent estimated in Note 28
to the financial statements, except that as described in Note 28, the fixed
assets acquired pursuant to the acquisition of the telecommunications business
from the New Zealand Post Office as of 1 April 1987 have been recorded at fair
values in accordance with accounting practice generally accepted in New Zealand
rather than at historical cost which is required by generally accepted
accounting practice in the United States. The Company has not been able to
quantify the effect of the difference in accounting treatment because prior to
1 April 1987 the New Zealand Post Office did not maintain separate historical
cost records of fixed assets in respect of the telecommunications business.
Our audit was completed on 8 May 1997 and our unqualified opinion is expressed
as at that date.
/s/ Coopers & Lybrand
Chartered Accountants
Wellington, New Zealand
F-38
<PAGE>
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1997 AND
FOR THE NINE MONTH PERIODS ENDED DECEMBER 31, 1996 AND 1997
F-39
<PAGE>
TELECOM CORPORATION OF NEW ZEALAND LIMITED AND SUBSIDIARIES
Consolidated Statement of Financial Performance
For the nine months ended 31 December (Unaudited)
<TABLE>
<CAPTION>
Year ended Nine months ended
31 March 31 December
---------- -------------------------
(Dollars in millions, except per
share amounts) notes 1997 1996 1997 1997
- --------------------------------------------------------------------------------
NZ$ NZ$ NZ$ US$
---------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Operating revenues
Local service 829.3 621.4 642.1 372.6
National calls 545.3 412.1 451.8 262.2
International 485.0 366.6 379.2 220.0
Interconnection 65.7 51.3 51.6 29.9
Cellular and other mobile services 316.4 236.4 312.1 181.1
Enhanced network services 301.6 220.1 274.3 159.2
Other operating revenues 540.2 380.2 412.2 239.3
------- ------- ------- -------
3,083.5 2,288.1 2,523.3 1,464.3
------- ------- ------- -------
Operating expenses
Net personnel costs 346.9 264.0 290.2 168.4
Depreciation 544.4 395.1 422.3 245.1
Cost of sales 404.6 304.1 383.9 222.8
Maintenance 201.3 153.3 136.9 79.4
Other operating expenses 2 354.9 259.7 285.5 165.7
Abnormal costs 3 151.5 0.9 -- --
------- ------- ------- -------
2,003.6 1,377.1 1,518.8 881.4
------- ------- ------- -------
Surplus from continuing operations 1,079.9 911.0 1,004.5 582.9
Investment income 27.0 17.8 15.7 9.1
Interest expense (126.4) (93.6) (114.5) (66.4)
------- ------- ------- -------
Surplus from continuing operations
before income tax 980.5 835.2 905.7 525.6
Income tax 4 (311.3) (267.3) (293.7) (170.5)
------- ------- ------- -------
Surplus from continuing operations
after income tax 669.2 567.9 612.0 355.1
Discontinued operations: 5
Loss from operations of Pacific
Star Group after income tax (50.2) (39.8) -- --
Provision for loss on disposal of
Pacific Star Group (37.4) -- -- --
------- ------- ------- -------
(87.6) (39.8) -- --
------- ------- ------- -------
Surplus after income tax 581.6 528.1 612.0 355.1
Minority interest in profits of
subsidiaries (0.7) (0.5) -- --
Share of profits of associate
company after income tax 0.5 0.5 0.1 0.1
------- ------- ------- -------
Net surplus 581.4 528.1 612.1 355.2
Distribution on capital note
coupons after income tax -- -- (14.1) (8.2)
------- ------- ------- -------
NET EARNINGS ATTRIBUTABLE TO
SHAREHOLDERS 581.4 528.1 598.0 347.0
------- ------- ------- -------
EARNINGS PER SHARE FROM CONTINUING
OPERATIONS $0.355 $0.301 $0.333 $0.193
------- ------- ------- -------
NET EARNINGS PER SHARE $0.308 $0.279 $0.333 $0.193
------- ------- ------- -------
Weighted average number of ordinary
shares outstanding (in millions) 1,887.1 1,889.6 1,797.8 1,797.8
------- ------- ------- -------
</TABLE>
The accompanying notes form part of and are to be read in conjunction with
these financial statements.
F-40
<PAGE>
TELECOM CORPORATION OF NEW ZEALAND LIMITED AND SUBSIDIARIES
Consolidated Statement of Financial Position
As at 31 December (Unaudited)
<TABLE>
<CAPTION>
31 March 31 December
-------- -----------------------
(Dollars in millions) notes 1997 1996 1997 1997
- ------------------------------------------------------------------------------
NZ$
-------- NZ$ NZ$ US$
-------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash 13.1 31.9 20.6 12.0
Short-term investments 6 23.2 96.2 108.7 63.1
Accounts receivable, net of allowance
for doubtful accounts of $20.8 407.9 384.8 457.6 265.5
Unbilled rentals and tolls 145.3 111.1 127.9 74.2
Inventories 7 66.5 75.2 57.4 33.3
Prepaid income tax 17.9 15.5 21.6 12.6
Prepaid expenses and other 87.3 108.4 36.3 21.1
Net assets of discontinued operations 5 -- 10.7 -- --
------- ------- ------- -------
TOTAL CURRENT ASSETS 761.2 833.8 830.1 481.8
Future tax benefit 23.8 -- -- --
Investments 57.3 58.7 61.0 35.4
Other assets 8 12.9 21.5 55.2 32.0
Fixed assets 9 3,763.1 3,713.7 3,791.7 2,200.3
------- ------- ------- -------
TOTAL ASSETS 4,618.3 4,627.7 4,738.0 2,749.5
======= ======= ======= =======
LIABILITIES AND CAPITAL FUNDS
CURRENT LIABILITIES:
Debt due within one year 11 524.4 401.5 896.9 520.5
Amounts payable for share repurchases 164.4 -- -- --
Trade accounts payable 309.3 251.2 305.2 177.1
Accrued personnel costs 72.7 67.4 75.8 44.0
Rentals billed in advance 47.6 48.4 54.1 31.4
Accrued interest 51.3 41.2 55.8 32.4
Other accrued expenses 100.7 111.6 172.0 99.8
Restructuring provisions--current 10 40.8 10.2 39.8 23.1
Year 2000 provision--current 47.9 -- 48.2 28.0
Net liabilities of discontinued
operations 5 27.5 -- 27.5 16.0
Provision for dividend 14 219.1 204.2 278.4 161.5
------- ------- ------- -------
TOTAL CURRENT LIABILITIES 1,605.7 1,135.7 1,953.7 1,133.8
Deferred taxation -- 38.3 4.7 2.7
Restructuring provisions--non-current 10 46.8 13.4 23.2 13.4
Year 2000 provision--non-current 38.0 -- 29.9 17.4
Long-term debt 12 1,285.2 1,301.7 1,303.3 756.3
------- ------- ------- -------
TOTAL LIABILITIES 2,975.7 2,489.1 3,314.8 1,923.6
------- ------- ------- -------
Commitments and contingent liabilities 15,16
CAPITAL FUNDS: 13
Shareholders' funds 1,640.3 2,136.3 980.1 568.8
Capital notes -- -- 436.9 253.5
Minority interest 2.3 2.3 6.2 3.6
------- ------- ------- -------
TOTAL CAPITAL FUNDS 1,642.6 2,138.6 1,423.2 825.9
------- ------- ------- -------
TOTAL LIABILITIES AND CAPITAL FUNDS 4,618.3 4,627.7 4,738.0 2,749.5
======= ======= ======= =======
</TABLE>
The accompanying notes form part of and are to be read in conjunction with
these financial statements.
F-41
<PAGE>
TELECOM CORPORATION OF NEW ZEALAND LIMITED AND SUBSIDIARIES
Consolidated Statement of Cash Flows
For the nine months ended 31 December (Unaudited)
<TABLE>
<CAPTION>
Year ended Nine months ended
31 March 31 December
---------- -------------------------
(Dollars in millions) 1997 1996 1997 1997
- --------------------------------------------------------------------------------
NZ$ NZ$ NZ$ US$
---------- ------- ------- -------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash was provided from/(applied to):
Cash received from customers 3,031.9 2,299.4 2,490.1 1,445.0
Interest income 35.6 21.3 10.4 6.0
Payments to suppliers and employees (1,249.1) (976.1) (980.3) (568.9)
Redundancy, restructuring and Year 2000
payments (14.3) (10.6) (37.1) (21.5)
Income tax paid (268.9) (186.6) (185.6) (107.7)
Interest paid on debt (115.8) (102.5) (122.3) (70.9)
-------- ------- ------- -------
Net cash flows from operating activities 1,419.4 1,044.9 1,175.2 682.0
-------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash was provided from/(applied to):
Sale of fixed assets 17.1 9.6 9.6 5.6
Sale/(purchase) of investments, net 4.4 (62.8) (147.7) (85.7)
Purchase of fixed assets (683.3) (481.9) (421.5) (244.6)
Capitalised interest paid (14.0) (11.1) (11.4) (6.6)
Redemption of notes receivable 41.2 20.8 46.2 26.8
Net funding of discontinued operations (32.7) (34.8) -- --
-------- ------- ------- -------
Net cash flows used in investing
activities (667.3) (560.2) (524.8) (304.5)
-------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash was provided from/(applied to):
Proceeds from long-term debt 92.1 93.2 262.9 152.6
Repayment of long-term debt (135.3) (122.4) (175.1) (101.6)
Proceeds from short-term debt, net 298.1 183.9 289.5 168.0
Capital contributed 0.9 0.4 0.9 0.5
Dividends paid to minority interest (0.2) -- -- --
Dividends paid (808.7) (615.1) (640.1) (371.4)
Capital note coupons paid -- -- (9.4) (5.5)
Share repurchase (193.1) -- (808.2) (469.0)
Proceeds from issue of capital notes -- -- 436.6 253.3
-------- ------- ------- -------
Net cash flows used in financing
activities (746.2) (460.0) (642.9) (373.1)
-------- ------- ------- -------
Net cash flow 5.9 24.7 7.5 4.4
Opening cash position (including bank
overdrafts) 7.2 7.2 13.1 7.6
-------- ------- ------- -------
Closing cash position (including bank
overdrafts) 13.1 31.9 20.6 12.0
======== ======= ======= =======
........................SUPPLEMENTARY CASH FLOW DATA........................
Reconciliation of net earnings
attributable to shareholders to net cash
flows from operating activities
Net earnings attributable to shareholders 581.4 528.1 598.0 347.0
Adjustments to reconcile net earnings to
cash flows from operating activities:
Depreciation 544.4 395.1 422.3 245.1
Bad and doubtful accounts 30.7 19.5 25.0 14.5
Deferred income tax (44.4) 18.1 28.5 16.5
Minority interest 0.7 0.5 -- --
Share of profit of associate companies (0.5) (0.5) (0.1) (0.1)
Distribution on capital note coupons -- -- 14.1 8.2
Other 14.2 4.2 (5.7) (3.3)
Discontinued operations 87.6 39.8 -- --
Changes in assets and liabilities net of
effects of non-cash and investing and
financing activities:
(Increase)/decrease in accounts
receivable and related items (82.8) (4.2) (32.9) (19.1)
(Increase)/decrease in inventories (3.2) (9.5) 8.1 4.7
Increase in current taxation 86.6 62.6 79.9 46.4
Increase/(decrease) in restructuring
provision 53.4 (10.6) (24.6) (14.3)
Increase/(decrease) in Year 2000
provision 85.9 -- (7.8) (4.5)
Increase in accounts payable and related
items 65.4 1.8 70.4 40.9
-------- ------- ------- -------
Net cash flows from operating activities 1,419.4 1,044.9 1,175.2 682.0
======== ======= ======= =======
</TABLE>
The accompanying notes form part of and are to be read in conjunction with
these financial statements.
F-42
<PAGE>
TELECOM CORPORATION OF NEW ZEALAND LIMITED AND SUBSIDIARIES
Consolidated Statement Of Movements In Capital Funds
For the nine months ended 31 December (Unaudited)
<TABLE>
<CAPTION>
Year ended Nine months ended
31 March 31 December
---------- --------------------------
(Dollars in millions) notes 1997 1996 1997 1997
- -------------------------------------------------------------------------------
NZ$ NZ$ NZ$ US$
---------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Capital funds at the beginning of
the period 2,148.4 2,148.4 1,642.6 953.2
Net earnings attributable to
shareholders 581.4 528.1 598.0 347.0
Net foreign currency and minority
interest movement (0.5) 0.2 4.3 2.5
------- ------- -------- -------
2,729.3 2,676.7 2,244.9 1,302.7
Dividends 14 (830.5) (613.9) (699.9) (406.1)
Tax credit on supplementary
dividends 14 100.4 75.4 83.5 48.5
Capital contributed 13 0.9 0.4 1.6 0.9
Issue of capital notes 13 -- -- 436.6 253.3
Discount on capital notes
amortised 13 -- -- 0.3 0.2
Share repurchase 13 (357.5) -- (643.8) (373.6)
------- ------- -------- -------
CAPITAL FUNDS AT THE END OF THE
PERIOD 1,642.6 2,138.6 1,423.2 825.9
======= ======= ======== =======
REPRESENTED BY:
Contributed capital 1,902.5 1,902.0 1,904.1 1,105.0
Foreign currency reserve and
minority interest 1.2 1.9 5.5 3.2
Retained earnings 96.4 234.7 78.0 45.3
Capital notes -- -- 436.9 253.5
Share repurchase (357.5) -- (1,001.3) (581.1)
------- ------- -------- -------
1,642.6 2,138.6 1,423.2 825.9
======= ======= ======== =======
</TABLE>
The accompanying notes form part of and are to be read in conjunction with
these financial statements.
F-43
<PAGE>
TELECOM CORPORATION OF NEW ZEALAND LIMITED AND SUBSIDIARIES
Notes to the Condensed Financial Statements
NOTE 1 FINANCIAL STATEMENTS
The condensed consolidated financial statements of Telecom Corporation of
New Zealand Limited (the "Company") together with its subsidiaries
("Telecom") have been prepared in accordance with generally accepted
accounting practice in New Zealand ("NZ GAAP").
The financial statements are expressed in New Zealand dollars. The
amounts pertaining to the most recent financial period are also expressed
in United States ("US") dollars, the latter being presented solely for
convenience and translated from New Zealand dollars, as a matter of
arithmetical computation only, at a rate on 31 December 1997 of NZ$1.00
to US$0.5803. The US dollar amounts should not be construed as
representations that the New Zealand dollars have been, could be, or
could in the future be converted into US dollars at this or any other
rate. References in these financial statements to "$" and "NZ$" are to
New Zealand dollars and references to "US$" are to US dollars.
The financial statements should be read in conjunction with the financial
statements and related notes included in the Company's 1997 Annual Report
on Form 20-F. The Company re-registered under the Companies Act 1993 on
27 September 1996.
The financial statements as of 31 December 1997 and 31 December 1996 and
for each of the nine-month periods then ended are unaudited. In the
opinion of management, however, they include all adjustments (consisting
of normal recurring accruals) necessary for a fair presentation thereof.
The financial information for the year ended 31 March 1997 has been
extracted from the audited financial statements of Telecom for that
period, but does not include all disclosures required by US GAAP. Certain
information in relation to the nine month period ended 31 December 1997
has been included pursuant to provisions contained in the New Zealand
Securities Regulations 1983 regarding matters required in a registered
prospectus for equity securities, for which comparatives are not
required.
Accounting Policies
Basis of Consolidation
The consolidated financial statements are prepared from the accounts of
the Company and its wholly and majority-owned subsidiaries using the
purchase method of consolidation. All significant intercompany accounts
and transactions are eliminated on consolidation. Discontinued operations
have been reclassified and prior year financial statements restated
accordingly.
Revenue Recognition
Billings for telephone services are made on a monthly basis throughout
the month. Unbilled revenues from the billing cycle date to the end of
each month are recognised as revenue during the month the service is
provided. Revenue recognition is deferred in respect of that portion of
fixed monthly charges which have been billed in advance.
Cash and Cash Equivalents
For the purpose of the Statements of Cash Flows, cash and cash
equivalents are considered to be cash on hand and in banks, net of bank
overdrafts. In addition, cash flows from certain items are disclosed net,
due to the short-term maturities and volume of transactions involved.
Accounts Receivable
Accounts receivable are recorded at expected realisable value after
providing for bad and doubtful accounts expected to arise in subsequent
accounting periods.
Bad debts are written off against the provision for doubtful accounts in
the period in which it is determined that the debts are uncollectable.
Inventories
Inventories principally comprise materials for self-constructed network
assets, critical maintenance spares, CPE held for rental or sale and
mobile equipment held for sale. They are stated at the lower of cost and
net realisable value after due consideration for excess and obsolete
items. Cost is determined on a first-in first-out or weighted average
cost basis.
F-44
<PAGE>
TELECOM CORPORATION OF NEW ZEALAND LIMITED AND SUBSIDIARIES
Notes to the Condensed Financial Statements
NOTE 1 FINANCIAL STATEMENTS (CONTINUED)
Investments
Short-term investments are stated at market value with the resulting
gains or losses taken to earnings.
Term investments are valued at the lower of cost and estimated realisable
value.
Where, in the opinion of the Directors, there has been a permanent
diminution in the value of investments this is recognised in the current
period.
Fixed Assets
Fixed assets are valued as follows:
. The value of fixed assets purchased from the Government was determined
on the basis of depreciated replacement cost using estimated remaining
lives as at 1 April 1987.
. Subsequent additions are valued at cost. The cost of additions to plant
and equipment constructed by Telecom consists of all appropriate costs
of development, construction and installation, comprising material,
labour, direct overheads and transport costs.
. For each fixed asset project having a cost in excess of $100,000 and a
construction period of not less than three months, interest costs
incurred during the period required to complete and prepare the fixed
asset for its intended use are capitalised as part of the total cost.
Telecommunications equipment includes that part of the network system up
to and including the network demarcation point, terminal equipment
installed within customers' premises and the cabling and wiring within
commercial buildings up to the network demarcation point.
Direct labour, materials and overhead costs associated with the
installation of network services to customers are capitalised. Costs
associated with the provision of network services to customers, together
with repairs and maintenance of the network (including minor renewals,
alterations, and minor value CPE items) are charged to earnings as
incurred.
The initial costs incurred in establishing the feasibility of new
computer systems (ie software pre-development activities), together with
post-implementation costs incurred in implementing new systems solutions
are expensed to earnings.
Depreciation
Depreciation is charged on a straight line basis to write down the cost
of the fixed assets to their estimated residual value over their
estimated economic lives, which are as follows:
Telecommunications equipment and plant:
<TABLE>
<S> <C>
Customer local loop 5-50 years
Junctions and trunk transmission systems 10-30 years
Switching equipment 5-15 years
Customer premises equipment 5 years
Other network equipment 5-25 years
Buildings 40-100 years
Motor vehicles 4-10 years
Furniture and fittings 5-10 years
Computer equipment 3-5 years
</TABLE>
Where the remaining useful lives or carrying values have diminished due
to technological change or market conditions, depreciation is accelerated
or the assets are written down.
F-45
<PAGE>
TELECOM CORPORATION OF NEW ZEALAND LIMITED AND SUBSIDIARIES
Notes to the Condensed Financial Statements
NOTE 1 FINANCIAL STATEMENTS (CONTINUED)
When depreciable assets are retired or otherwise disposed of, the related
cost and accumulated depreciation are removed from the respective
accounts and any gains or losses on disposal are recognised in earnings.
Land and capital work in progress are not depreciated.
Goodwill
Goodwill represents the excess of purchase consideration over the fair
value of net assets acquired at the time of acquisition of a business or
shares in a subsidiary or associate. Goodwill is amortised on a
systematic basis over the period benefits are expected to arise, which
will generally be 10 to 20 years.
Leased Assets
Telecom is a lessor of CPE. Such leases are considered operating leases
because substantially all the benefits and risks of ownership remain with
Telecom. Rental income is taken to revenue on a monthly basis in
accordance with the lease term.
Telecom is a lessee of certain plant, equipment, land and buildings under
both operating and finance leases. Lease costs relating to operating
leases are charged against earnings as incurred. Finance leases, which
effectively transfer to Telecom substantially all the risks and benefits
of ownership of the leased assets, are capitalised at the present value
of the minimum lease payments and are amortised over the period the
entity is expected to benefit from their use.
Debt
Debt is stated at face value less unamortised discounts, premiums and
prepaid interest. Discounts, premiums and prepaid interest are amortised
to interest expense on a yield to maturity basis over the period of the
borrowing. Borrowing costs such as origination, commitment and
transaction fees are deferred and amortised over the period of the
borrowing.
Compensated Absences
The liability for employees' compensation for future absences, calculated
on an actuarial basis, is accrued in respect of employees' services
already rendered and where the obligation relates to rights which may
eventually vest.
Taxation
The taxation expense charged to earnings includes both current and
deferred tax and is calculated after allowing for permanent differences.
Deferred taxation calculated using the liability method is accounted for
on timing differences between the earnings stated in the financial
statements and the assessable income computed for taxation purposes.
Deferred taxation is recognised only on those timing differences that are
expected to crystallise within the foreseeable future.
Foreign Currencies
Transactions denominated in a foreign currency are converted at the
exchange rate at the date of the transaction. Foreign currency
receivables and payables at balance date are translated at exchange rates
current at balance date. Unrealised and realised exchange gains and
losses are brought to account in determining the earnings for the year.
Exchange gains and losses and hedging costs arising on contracts entered
into as hedges of firm commitments are deferred until the date of such
transactions at which time they are included in the determination of
revenue and expenses.
F-46
<PAGE>
TELECOM CORPORATION OF NEW ZEALAND LIMITED AND SUBSIDIARIES
Notes to the Condensed Financial Statements
NOTE 1 FINANCIAL STATEMENTS (CONTINUED)
Where capital project commitments are hedged against foreign currency
rate risk, the exchange difference on the hedging transaction up to the
date of purchase and all other costs associated with the hedging
transaction are capitalised.
Assets and liabilities of independent overseas subsidiaries are
translated at exchange rates existing at balance date and the exchange
gain or loss arising on translation is carried directly to a foreign
currency translation reserve.
Financial Instruments
Telecom has various financial instruments with off-balance sheet risk for
the primary purpose of reducing its exposure to fluctuations in foreign
currency exchange rates and interest rates. While these financial
instruments are subject to risk that market rates may change subsequent
to acquisition, such changes would generally be offset by opposite
effects on the items being hedged.
Transactions entered into for hedging purposes are accounted for in a
manner consistent with the accounting treatment of the hedged item. Gains
and losses on instruments that do not qualify or no longer qualify as
hedges are recognised as revenue or expense as they arise.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Earnings Per Share
Earnings per share are computed by dividing net earnings by the weighted
average number of ordinary shares outstanding during each period.
Reclassifications
Certain reclassifications of prior years' data have been made to conform
to current year classifications.
Changes in Accounting Policies
There have been no material changes in accounting policies during the
period.
All significant accounting policies have been applied on a basis
consistent with prior periods.
F-47
<PAGE>
TELECOM CORPORATION OF NEW ZEALAND LIMITED AND SUBSIDIARIES
Notes to the Condensed Financial Statements
NOTE 2 OTHER OPERATING EXPENSES
Other operating expenses include:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
31 DECEMBER 1997
--------------------- -----------------
(Dollars in millions) NZ$
--------------------- -----------------
<S> <C> <C>
Lease and rental costs 27.0
Foreign exchange gain (1.6)
Bad debts written off 19.4
Increase in provision for
doubtful accounts 2.5
Provision for inventory
obsolescence 1.0
Audit fees 0.9
Directors' fees 0.6
</TABLE>
NOTE 3 ABNORMAL COSTS
During the year ended 31 March 1997, provisions for restructuring costs
and the costs of making modifications to computer systems necessary to
maintain existing functionality into the year 2000 and beyond were
charged against earnings.
NOTE 4 INCOME TAX
The income tax expense for the period is determined as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
31 DECEMBER 1997
--------------------- -----------------
(Dollars in millions) NZ$
--------------------- -----------------
<S> <C> <C>
Surplus from continuing
operations before income tax 905.7
-----
Tax at current rate of 33% 298.9
Adjustments to taxation for
Permanent differences (5.2)
-----
Total income tax expense 293.7
=====
</TABLE>
NOTE 5 DISCONTINUED OPERATIONS
During the year ended 31 March 1997, the Board approved a formal plan of
disposal or wind-down of the Pacific Star businesses. A provision for
losses expected to arise from the sale or winding down of the businesses,
including estimated future operating losses, amounting to $37.4 million
was charged against earnings.
During the nine months ended 31 December 1997, personnel numbers
decreased from 274 to 65. Remaining personnel numbers are expected to
reduce to approximately 20 by March 1998 and progressively thereafter.
As at 31 December 1997, net liabilities of discontinued operations
comprised current assets, net of provisions for expected write-downs, and
current liabilities including provisions for estimated costs of winding
down the businesses and for estimated future operating losses incurred in
servicing contractual obligations to their date of expiration or
transfer.
NOTE 6 SHORT-TERM INVESTMENTS
Included in short-term investments are on call and short-term deposits of
$14.7 million which, together with cash and bank balances, give an
aggregate amount as at 31 December 1997 of $35.3 million. Also included
are government securities amounting to $85.1 million.
F-48
<PAGE>
TELECOM CORPORATION OF NEW ZEALAND LIMITED AND SUBSIDIARIES
Notes to the Condensed Financial Statements
continued
NOTE 7 INVENTORIES
<TABLE>
<CAPTION>
As at 31 December
1997
--------------------- -----------------
(Dollars in millions) NZ$
--------------------- -----------------
<S> <C> <C>
Maintenance materials and
consumables 8.3
Goods held for resale 10.5
Revenue work in progress 14.7
Materials for self-constructed
assets 35.8
-------
69.3
Less provision for inventory
obsolescence (11.9)
-------
57.4
=======
</TABLE>
NOTE 8 OTHER ASSETS
Included in other assets is an aggregate amount of $49.1 million
comprising goodwill.
NOTE 9 FIXED ASSETS
<TABLE>
<CAPTION>
-----------------------------------------------------------
Tele- Capital Other
communications work in Freehold fixed
equipment progress land Buildings assets TOTAL
-----------------------------------------------------------
(Dollars in millions) NZ$
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cost 6,127.6 254.9 114.1 514.8 977.9 7,989.3
Less Accumulated
Depreciation (3,266.8) -- -- (202.1) (728.7) (4,197.6)
<CAPTION>
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net book value at 31
December 1997 2,860.8 254.9 114.1 312.7 249.2 3,791.7
<CAPTION>
-----------------------------------------------------------
-----------------------------------------------------------
</TABLE>
Included in buildings at 31 December 1997 are buildings on leasehold land
with at cost of $8.6 million together with accumulated depreciation of
$1.6 million. Other fixed assets include motor vehicles, furniture and
fittings and computer equipment.
The aggregate government valuation of land and buildings as at 31
December 1997 was $286.3 million.
NOTE 10 RESTRUCTURING PROVISION
Redundancy and other restructuring costs incurred during the nine months
ended 31 December 1997 of $24.6 million (1996 : $10.6 million) have been
charged against the restructuring provisions created in the fourth
quarter of the year ended 31 March 1993 and in the fourth quarter of the
year ended 31 March 1997.
NOTE 11 DEBT DUE WITHIN ONE YEAR
Included in debt due within one year is commercial paper issued under
Telecom's European Commercial Paper programme. Issues outstanding at 31
December 1997 are denominated in NZ dollars, US dollars, Swiss Francs
(CHF) and European Currency Units (XEU). The underlying foreign currency
liability with respect to outstanding paper was US$195.4 million, CHF
223.7 million and XEU 24.9 million. Telecom has entered into forward
exchange contracts to hedge this short-term debt at rates ranging from
US$0.5912 to US$0.6720, CHF0.8441 to CHF0.9301 and at XEU0.5897 which are
the rates at which they will be settled.
F-49
<PAGE>
Notes to the Financial Statements
continued
NOTE 12 LONG-TERM DEBT
<TABLE>
<CAPTION>
As at 31
December
1997
--------- --------
(Dollars
in
millions) NZ$
--------- --------
<S> <C> <C>
TeleBonds 451.1
Eurobonds 871.9
Other loans 167.4
-------
1,490.4
Less
unamortised
discount (18.3)
-------
1,472.1
Less long-
term debt
maturing
within one
year (168.8)
-------
1,303.3
=======
Schedule of
Maturities
Due 1 to 2
years
(*8.99%) 179.4
Due 2 to 3
years
(*7.90%) 205.4
Due 3 to 4
years
(*6.92%) 206.7
Due 4 to 5
years
(*7.94%) 162.7
Due over 5
years
(*7.90%) 549.1
-------
Total due
after one
year 1,303.3
=======
</TABLE>
(*weighted average effective interest rate for Telecom Group--includes
the effect of hedging transactions.)
TeleBonds
TCNZ Finance Limited, a subsidiary of the Company, offers bonds
("TeleBonds") to institutional and retail investors. These are issued as
income, compounding, or zero coupon bonds and are offered on a continuous
basis for a term of from one to twenty years as stipulated by the
investor. The interest or discount rate on offer, as the case may be, is
generally adjusted relative to Government debt securities and, upon issue
of the TeleBonds, is fixed for the period of the investment.
TeleBonds are issued under a trust deed with The New Zealand Guardian
Trust Company Limited dated 25 October 1988, whereby the Company and
certain of its subsidiaries (the "Guaranteeing Group") have given a
negative pledge that while any of the stock issued under that trust deed
remains outstanding they will not, subject to certain exceptions, create
or permit to exist any charge or lien over any of their respective
assets. Each member of the Guaranteeing Group has guaranteed the payment
of the TeleBond debt, including interest.
TeleBonds have interest rates ranging from 6.45% to 10.27% and maturity
dates between April 1998 and July 2013.
Eurobonds
Eurobonds are issued by TCNZ Finance Limited under a trust deed with The
Law Debenture Trust Corporation p.l.c. dated 3 April 1992 and subsequent
supplemental trust deeds. The Company, TCNZ Finance Limited and certain
other subsidiaries have given a negative pledge and guarantee payment of
the Eurobonds and interest thereon.
F-50
<PAGE>
TELECOM CORPORATION OF NEW ZEALAND LIMITED AND SUBSIDIARIES
Notes to the Condensed Financial Statements
continued
NOTE 12 LONG-TERM DEBT (CONTINUED)
Issues to date have been:
<TABLE>
<CAPTION>
As at 31
December
1997
<S> <C>
----------------------------------
(Dollars in millions) NZ$
----------------------------------
10% due 10 July 1998 67.0
7 1/2% due 19 September 1999 100.0
9 1/2% due 3 April 2000 74.6
6 1/2% due 29 September 2000 69.4
6 1/2% due 11 October 2001 112.5
9 1/4% due 1 July 2002 66.0
3 1/4% due 27 May 2003 150.0
7 1/2% due 14 July 2003 82.4
6 3/4% due 11 October 2005 150.0
-----
871.9
=====
</TABLE>
Eurobonds issues with maturities of 11 October 2001 and 2005 are
denominated in US dollars whilst maturities of 27 May 2003 are denominated
in Swiss Francs. Cross currency and interest rate swaps have been entered
into to manage the currency and interest rate risk exposure. The effective
NZ dollar interest rates for these issues are 8.71%, 8.62% and 7.05%
respectively.
The underlying foreign currency liabilities with respect to the US$ and
CHF denominated bonds are US$170 million and CHF 150 million respectively.
These liabilities are exactly offset by the foreign currency receivable
leg of the related cross currency swaps. Both the bonds and the swap
receivables are converted at the closing spot rate being US$0.5821 and CHF
0.8344 to NZ$1.00 for US$ and CHF respectively.
The amounts in the table above are the net of the bonds and the swap
receivables, therefore the liabilities are stated at the rate they are
expected to be settled at, being US$0.6476 and CHF 1.00.
Other Loans
<TABLE>
<CAPTION>
As at 31
December
1997
-------------------------------
(Dollars in millions) NZ$
<S> <C>
-------------------------------
Other loans are denominated in the following currencies
NZ dollars 123.6
Japanese yen 43.8
-----
167.4
=====
</TABLE>
Other loans including finance lease obligations (see below) have interest
rates ranging from 1.64% to 7.93% and maturity dates between April 1998
and September 2002.
Included in investments are Japanese yen deposits amounting to $40.4
million which effectively hedge a substantial proportion of the other
loans denominated in Japanese yen as noted above. The deposits have the
same maturities as the loans they are hedging and interest rates which
range from 3.68% to 4.61%. They have been translated into NZ dollars at
an exchange rate of Yen 75.45 to NZ$1.00.
Mandatory Convertible Notes which have been issued by a subsidiary, TCNZ
Finance Limited, will be exchanged for fully paid preference shares of $1
each to be issued by another subsidiary, TCNZ Financial Services Limited
on 27 March 1999. The net liability to parties external to Telecom at 31
December 1997 of $30.7 million is included in other loans.
F-51
<PAGE>
TELECOM CORPORATION OF NEW ZEALAND LIMITED AND SUBSIDIARIES
Notes to the Condensed Financial Statements
continued
Finance Lease Obligations
Telecom has entered into the sale and leaseback of certain fixed assets.
At 31 December 1997 the outstanding lease liabilities (included in other
loans) were $108 million.
NOTE 13 CAPITAL FUNDS
Contributed Capital
Movements in the Company's issued ordinary shares during the period were
as follows:
<TABLE>
<CAPTION>
Number
-------------
<S> <C>
At 1 April 1997 1,835,069,355
Issue of new shares upon exercise of options 236,973
Shares repurchased (83,358,278)
-------------
At 31 December 1997 1,751,948,050
=============
</TABLE>
Share Repurchase
In February 1997, Telecom began a flexible programme of share repurchases
subject to the detailed procedures and disclosure requirements of the
Companies Act 1993 and the requirements of the New Zealand Stock
Exchange. The repurchase programme was completed on 19 December 1997.
The objectives of the repurchase are to reduce Telecom's average cost of
capital and further enhance value to shareholders. During the nine months
to 31 December 1997, 83,358,278 shares have been repurchased at a total
cost of $643.8 million. As at 31 December 1997, a total of 138,093,860
shares had been repurchased under the programme at a total cost of
$1,001.3 million.
Repurchases on-market require the Company's major shareholders Ameritech
Holdings Limited ("Ameritech") and Bell Atlantic Holdings Limited ("Bell
Atlantic") to sell down shares to the Company off-market in order to
avoid violating Kiwi Share provisions which limit their holdings to a
maximum of 24.95% each. Of the 138,093,860 shares, 31,979,330 shares have
been repurchased from each of Ameritech and Bell Atlantic at a cost of
$232.7 million each.
Capital Notes
In April 1997, TCNZ Finance Limited ("the Issuer"), Telecom's main
financing subsidiary, issued a prospectus for an issue of long-term fixed
interest unsecured subordinated capital notes ("TeleNotes"). It is
Telecom's intention to use the funds from these TeleNotes to finance or
refinance funding utilised by Telecom to effect some or all of the $1
billion share repurchase programme.
An initial issue was commenced in May 1997 in the New Zealand market for
an aggregate principal amount of face value $275 million. The TeleNotes
were issued for an initial term of approximately seven years and with a
fixed coupon of 8.5%. A second issue to the institutional market was made
in August 1997 for an aggregate principal amount of face value $150
million for an initial term of approximately nine years and with a fixed
coupon of 7.5%. TeleNotes have also been offered to retail investors on
an ongoing basis and subsequent to the initial issue in May 1997 an
amount of approximately face value $19.1 million has been issued up to 31
December 1997. Subsequent issues may vary the terms and conditions. At
the end of the initial term, investors are offered the option of
continuing to hold the TeleNotes at a new yield and for a term set by the
Issuer. In the event that the investors do not accept the new terms of
the TeleNotes they may elect to have their notes redeemed. The Issuer
can, at its sole discretion, redeem the TeleNotes including any unpaid
interest for cash or redeem the TeleNotes including any unpaid interest
by subscribing for and procuring the issue of ordinary shares in the
Company to the noteholders at a price equivalent to 90% of the average
closing price of Telecom shares in the 10 business days preceding the
election date.
F-52
<PAGE>
TELECOM CORPORATION OF NEW ZEALAND LIMITED AND SUBSIDIARIES
Notes to the Condensed Financial Statements
continued
NOTE 13 CAPITAL FUNDS (CONTINUED)
In February 1998, Telecom New Zealand Finance Limited, a Telecom
financing subsidiary, issued to certain qualified institutional buyers in
the United States of America, under an Offering Memorandum pursuant to US
SEC Rule 144A, an aggregate principal amount of face value US$150 million
6.25% Restricted Capital Securities and US$150 million 6.5% Restricted
Capital Securities for an initial term of five and ten years
respectively. Telecom has entered into swaps to remove the exposure to
exchange rate fluctuations that would otherwise result from the issue of
US Capital Securities. The effective cost of the US Capital Securities
will reflect the results of these swaps and related New Zealand interest
rate swaps. The Restricted Capital Securities rank pari passu with the
TeleNotes issued in New Zealand and are similar in all material respects.
The proceeds of the issue will be used to repay short-term debt borrowed
to fund Telecom's share repurchase programme.
NOTE 14 DIVIDENDS
Total dividends for the nine months ended 31 December 1997 were $618.1
million, representing three quarterly dividends of 10.5 cents per share
together with a special dividend of 3.5 cents per share representing an
advance payment of part of the fourth quarter dividend. In addition, and
in accordance with the Income Tax Act 1994, supplementary dividends of
$25.9 million and $24.9 million were paid with the first and second
quarter dividends respectively to shareholders who are not resident in
New Zealand, for which Telecom received an equivalent tax credit from the
Inland Revenue Department. Supplementary dividends of $24 million and
$8.7 million have been provided for which will be payable with the third
quarter and special dividends respectively. Dividends and supplementary
dividends are provided for based on the number of shares outstanding as
at 31 December 1997.
The actual amount paid in June 1997 in respect of the fiscal 1997 fourth
quarter dividend differed from the amount accrued as at 31 March 1997 by
$1.7 million and in respect of the fiscal 1997 fourth quarter
supplementary dividend by $0.6 million. This difference arose since the
number of shares eligible for dividends at the record date in June 1997
was affected by the share repurchase programme. An adjustment was made to
dividends in June 1997. The supplementary dividend adjustment had a
neutral effect on retained earnings since there was a corresponding
adjustment to the tax credit.
NOTE 15 COMMITMENTS
Operating Leases
Operating lease commitments are mainly in respect of leases of land,
buildings and other telecommunications facilities. Minimum rental
commitments for all non-cancellable operating leases (excluding amounts
provided for in respect of restructuring) are (NZ$ millions):
<TABLE>
<CAPTION>
As at 31
December
1997
--------------------- --------
(Dollars in millions) NZ$
--------------------- --------
<S> <C> <C>
Payable within 1 year 40.7
Payable within 1-2 years 39.2
Payable within 2-3 years 37.8
Payable within 3-4 years 34.1
Payable within 4-5 years 29.7
Payable thereafter 142.0
--- ------
$323.5
=== ======
</TABLE>
Capital Commitments
At 31 December 1997 capital expenditure amounting to $78.7 million,
principally relating to telecommunications network and international
cable assets, had been committed under contractual arrangements, with
substantially all payments due within two years.
F-53
<PAGE>
TELECOM CORPORATION OF NEW ZEALAND LIMITED AND SUBSIDIARIES
Notes to the Condensed Financial Statements
continued
NOTE 16 CONTINGENT LIABILITIES
In 1995, Clear Communications Limited ("Clear") and BellSouth New Zealand
Limited ("BellSouth") commenced proceedings under the Commerce Act 1986
against Telecom and other parties in relation to Telecom's proposed
acquisition of an interest in Sky Network Television Limited ("Sky") and
in relation to a proposed content agreement between Sky and Telecom. In
March 1996 Telecom decided not to pursue that acquisition or the content
agreement, although Telecom has proceeded with its cable television
service. As a consequence, Telecom agreed with BellSouth terms whereby
BellSouth's proceedings were stayed and Telecom applied to have Clear's
proceedings struck out or stayed. However, in July 1996 Clear amended its
proceedings to include an attack on Telecom's entitlement to offer cable
television and internet services and allegations under The Fair Trading
Act 1986. Telecom's application to strike out or stay all of Clear's
claims was heard before the New Zealand High Court in December 1996. In a
judgement dated 1 August 1997, the High Court struck out Clear's claims.
Clear has filed an appeal in the Court of Appeal, however, hearing dates
have yet to be finalised.
Additionally, in late 1996 Clear commenced three further sets of
proceedings alleging breaches of the Commerce Act 1986 in relation to
Telecom's discounting practices, Telecom's use of information Clear
alleges to be confidential to Clear and alleged unauthorised
deactivations of non-code access to Clear. In January 1997 BellSouth
issued proceedings paralleling the Clear proceedings which allege breach
of the Commerce Act 1986 in relation to Telecom's discounting practices.
A group of former Telecom employees have issued proceedings claiming an
entitlement to certain telephone concessions. Telecom has filed a
defence, and the matter is proceeding.
On 27 March 1997, Telstra filed in the Supreme Court of Queensland a
statement of claim against two companies within Pacific Star totalling
AUD98.6 million, alleging non-payment of outstanding debts for
telecommunications services provided by Telstra, together with interest
from 27 March 1997 to the date of judgement. Telstra have commenced
similar proceedings against other telecommunications service providers in
Australia. The dispute arises from Telstra's widespread and continuing
failure to provide the timely and accurate billing information required
by Pacific Star to on-bill its own customers. Pacific Star is vigorously
defending the proceedings, and has commenced proceedings against Telstra
in the Federal Court of Australia. On 27 February 1998, Telstra and
Pacific Star announced that they had reached a commercial settlement of
their dispute over outstanding payments and cross claims. The successful
implementation and finalization of this commercial settlement is expected
to result in all legal actions being discontinued. The terms of the
commercial settlement are covered by a confidentiality agreement which
precludes disclosure of its terms except in specified circumstances.
In April 1997, Telecom commenced proceedings against Clear for
withholding certain payments for services supplied under its
interconnection agreement with Telecom. Clear has filed a defence and
counterclaim, and the matter is proceeding.
Various other lawsuits, claims and investigations have been brought or
are pending against Telecom.
The Directors cannot reasonably estimate at this stage the adverse effect
(if any) of any of the above proceedings on Telecom's financial position.
F-54
<PAGE>
TELECOM CORPORATION OF NEW ZEALAND LIMITED AND SUBSIDIARIES
Notes to the Condensed Financial Statements
continued
NOTE 17 QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Surplus
from
Surplus continuing
from operations
Operating Abnormal continuing after net Discontinued Net Earnings
revenues costs operations interest operations earnings per share
-------------------------- --------- -------- ---------- ---------- ------------ -------- ---------
(NZ dollars in millions
except per share amounts)
-------------------------- --------- -------- ---------- ---------- ------------ -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Quarter ended:
30 June 1997.................. 800.6 -- 310.4 280.4 -- 188.0 0.103
30 September 1997............. 865.1 -- 353.4 320.3 -- 210.8 0.117
31 December 1997.............. 857.6 -- 340.7 305.0 -- 199.2 0.113
------- ----- ------- ----- ----- ----- -----
Nine months ended 31 December
1997......................... 2,523.3 -- 1,004.5 905.7 -- 598.0 0.333
======= ===== ======= ===== ===== ===== =====
Quarter ended:
30 June 1996.................. 730.7 -- 302.9 279.6 (11.5) 177.1 0.094
30 September 1996............. 776.7 -- 309.6 284.2 (11.0) 183.8 0.097
31 December 1996.............. 780.7 0.9 298.5 271.4 (17.3) 167.2 0.088
31 March 1997................. 795.4 150.6 168.9 145.3 (47.8) 53.3 0.029
------- ----- ------- ----- ----- ----- -----
Year ended 31 March 1997...... 3,083.5 151.5 1,079.9 980.5 (87.6) 581.4 0.308
======= ===== ======= ===== ===== ===== =====
</TABLE>
F-55
<PAGE>
TELECOM CORPORATION OF NEW ZEALAND LIMITED AND SUBSIDIARIES
Notes to the Condensed Financial Statements
continued
NOTE 18 SIGNIFICANT DIFFERENCES BETWEEN NZ GAAP AND US GAAP NET EARNINGS AND
SHAREHOLDERS' FUNDS (UNAUDITED)
Effect on Net Earnings of Differences Between NZ GAAP and US GAAP
<TABLE>
<CAPTION>
Year ended Nine months ended
31 March 31 December
---------- -----------------------
(Dollars in millions, except per share
amounts) 1997 1996 1997 1997
- --------------------------------------------------------------------------------
NZ$ NZ$ NZ$ US$
---------- ------- ------ ------
<S> <C> <C> <C> <C>
Net earnings in accordance with NZ
GAAP 581.4 528.1 598.0 347.0
Add : Discontinued operations 87.6 39.8 -- --
------- ------- ------ ------
669.0 567.9 598.0 347.0
US GAAP adjustments:
Depreciation of interest costs
capitalised in prior periods (9.3) (7.0) (7.0) (4.1)
Termination of interest rate swap (0.3) (0.3) -- --
Deferred taxation (45.9) 2.4 25.6 14.9
Executive share ownership plan (a) 0.3 0.3 (0.3) (0.2)
Provision for restructuring (b) 62.7 -- (62.7) (36.4)
Provision for Year 2000 (c) 85.9 -- (7.8) (4.5)
------- ------- ------ ------
Net surplus from continuing operations
in accordance with US GAAP 762.4 563.3 545.8 316.7
Discontinued operations (87.6) (39.8) -- --
------- ------- ------ ------
Net earnings in accordance with US
GAAP 674.8 523.5 545.8 316.7
======= ======= ====== ======
Basic earnings per share from
continuing operations in accordance
with US GAAP (d) $ 0.404 $ 0.298 $0.304 $0.176
Basic earnings per share from
discontinued operations in accordance
with US GAAP (d) $(0.046) $(0.021) -- --
------- ------- ------ ------
Basic net earnings per share in
accordance with US GAAP (d) $ 0.358 $ 0.277 $0.304 $0.176
======= ======= ====== ======
Diluted earnings per share from
continuing operations in accordance
with US GAAP (d) $ 0.404 $ 0.298 $0.305 $0.177
======= ======= ====== ======
</TABLE>
Cumulative Effect on Shareholders' Funds of Differences Between NZ GAAP
and US GAAP
<TABLE>
<CAPTION>
As at As at
31 March 31 December
-------- -----------------------
(Dollars in millions) 1997 1996 1997 1997
- ------------------------------------------------------------------------------
NZ$ NZ$ NZ$ US$
-------- ------- ------- -----
<S> <C> <C> <C> <C>
Shareholders' funds in accordance with
NZ GAAP 1,640.3 2,136.3 980.1 568.8
Capitalisation of interest costs, net
of accumulated depreciation 58.6 60.9 51.6 29.9
Deferred taxation (74.0) (25.7) (48.4) (28.1)
Executive share ownership plan (a) (5.5) (5.8) (3.0) (1.7)
Provision for restructuring (b) 62.7 -- -- --
Provision for Year 2000 (c) 85.9 -- 78.1 45.3
Provision for dividend (e) 192.7 179.5 245.7 142.5
------- ------- ------- -----
Shareholders' funds in accordance with
US GAAP 1,960.7 2,345.2 1,304.1 756.7
======= ======= ======= =====
</TABLE>
(a) During the nine months ended 31 December 1997, a compensation expense
adjustment of $0.3 million was recognised. In addition, dividends of $0.7
million were paid on treasury stock which represents shares issued to the
executive share ownership plan which remain unallocated and have been
recognised in shareholders' funds under NZ GAAP but which have not been
included in shareholders' funds for US GAAP purposes. As at 31 December
1997, shares which had already vested under a trust within the plan became
fully paid thereby crystallising recognition of $2.1 million share premium
calculated under US GAAP.
F-56
<PAGE>
TELECOM CORPORATION OF NEW ZEALAND LIMITED AND SUBSIDIARIES
Notes to the Condensed Financial Statements
continued
NOTE 18 SIGNIFICANT DIFFERENCES BETWEEN NZ GAAP AND US GAAP NET EARNINGS AND
SHAREHOLDERS' FUNDS (UNAUDITED) (CONTINUED)
(b) Under US GAAP, provisions for restructuring may only be accrued where
a detailed announcement describing the restructuring has been made
prior to balance date.
(c) Under US GAAP, the costs relating to Year 2000 modifications should
be expensed as incurred. Consequently, the accrual of such costs is
not permitted.
(d) Changes in Accounting Policies--Earnings Per Share
In February 1997, the US Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No 128 "Earnings Per
Share", which requires companies to present basic earnings per share
and diluted earnings per share, instead of the primary and fully
diluted earnings per share which was required pursuant to APB Opinion
No. 15.
This statement is effective for financial statements for both interim
and annual periods ending after 15 December, 1997. In accordance with
the provisions of the statement, all prior period Earnings Per Share
data presented has been restated to conform with the provisions of this
Statement.
The numerators and the denominators used in the computation of basic
and diluted earnings per share pursuant to SFAS No. 128 are reconciled
below:
<TABLE>
<CAPTION>
Year ended Nine Months ended
31 March 31 December
---------- -----------------
(Dollars in millions, except per share
amounts) 1997 1996 1997
------------------------------------------ ---------- -------- --------
<S> <C> <C> <C>
BASIC EPS COMPUTATION
Numerator--net earnings from continuing
operations NZ$762.4 NZ$563.3 NZ$545.8
-------- -------- --------
Denominator--ordinary shares (in millions) 1,887.0 1,889.0 1,795.6
-------- -------- --------
Basic EPS--continuing operations NZ$0.404 NZ$0.298 NZ$0.304
-------- -------- --------
DILUTED EPS COMPUTATION
Numerator:
Net earnings from continuing operations NZ$762.4 NZ$563.3 NZ$545.8
Add: Distribution on capital notes -- -- NZ$ 14.1
-------- -------- --------
NZ$762.4 NZ$563.3 NZ$559.9
-------- -------- --------
Denominator (in millions):
Ordinary Shares 1,887.0 1,889.0 1,795.6
Options 0.2 0.1 0.4
Capital notes -- -- 41.1
-------- -------- --------
1,887.2 1,889.1 1,837.1
-------- -------- --------
Diluted EPS--continuing operations NZ$0.404 NZ$0.298 NZ$0.305
======== ======== ========
</TABLE>
(e) The provision for dividend included for the purpose of the US GAAP
reconciliation is net of the effect of the supplementary dividend and
associated tax credit.
F-57
<PAGE>
TELECOM CORPORATION OF NEW ZEALAND LIMITED
APPENDIX A
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE YEARS ENDED MARCH 31, 1997.................. A-2
MANAGEMENT COMMENTARY FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AND
1997.................................................................... A-19
</TABLE>
A-1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE YEARS ENDED MARCH 31, 1997
<PAGE>
TELECOM CORPORATION OF NEW ZEALAND LIMITED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
Overview Of Results
Telecom's reported earnings for the year ended 31 March 1997 ("1997") were
NZ$581.4 million compared with NZ$716.8 million for the year ended 31 March
1996 ("1996"). Reported earnings for 1997 reflect abnormal costs (see
"Restructuring" and "Year 2000" costs) of NZ$101.5 million (after tax) and the
losses of the discontinued operations of the Pacific Star Group ("Pacific
Star") amounting to NZ$87.6 million.
Normalised earnings (excluding the effect of abnormals and Pacific Star) were
NZ$770.5 million compared with NZ$746.4 million for 1996, an increase of
NZ$24.1 million, or 3.2%. For the purpose of comparison, Pacific Star's
results for 1996 and the year ended 31 March 1995 ("1995") have been
reclassified as losses from discontinued operations. 1996 normalised earnings
of NZ$746.4 million increased by NZ$121.8 million, or 19.5% compared with
NZ$624.6 million for 1995.
Net earnings for 1997 also reflected the start-up costs associated with
Telecom's strategic entry into its rapidly-growing internet access and value-
added services ("XTRA") and cable home-video and information services ("First
Media"). Excluding start-up costs associated with Telecom's entry into those
new business opportunities, normalised net earnings would have increased by
NZ$41.7 million, or 5.5%, for 1997.
Net cash flows from operating activities increased by NZ$158.0 million, or
12.5% due largely to higher receipts from customers partly offset by higher
payments to suppliers and employees.
Normalised earnings per share increased to NZ40.8 cents, compared with NZ39.5
cents in 1996 and NZ33.1 cents in 1995. On reported earnings, earnings per
share were NZ30.8 cents, NZ37.9 cents and NZ32.8 cents for 1997, 1996 and 1995
respectively.
Telecom has commenced a programme of share repurchases and in April 1997
issued the first tranche of Capital Notes ("TeleNotes") to refinance funding
used to effect the share repurchase programme. (See "Capital Resources").
Telecom's earnings per share will be favourably impacted by a reduced number
of shares, partially offset by the effect of the distribution of the fixed
coupon interest on the TeleNotes.
EARNINGS OVERVIEW
<TABLE>
<CAPTION>
YEAR ENDED 31 MARCH
-------------------------------------------------------
1995 1996 1997 CHANGE% CHANGE%
NZ$M NZ$M NZ$M 96:95 97:96
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating
revenues 2,683.5 2,908.6 3,083.5 8.4 6.0
Earnings from
continuing
operations
(excluding
abnormal costs) 1,036.6 1,214.5 1,231.4 17.2 1.4
Net earnings
(reported) 620.2 716.8 581.4 15.6 (18.9)
Abnormal costs -- -- 101.5 -- --
Discontinued
operations 4.4 29.6 87.6 -- --
Normalised earnings 624.6 746.4 770.5 19.5 3.2
Normalised earnings
per share (cents) 33.1 39.5 40.8 19.3 3.3
Dividends per share
(cents) 30.0 35.0 39.0 16.7 11.4
Weighted average
number of shares
outstanding
* (millions) 1,889.6 1,889.6 1,887.1 -- --
</TABLE>
*1,835.1 million shares outstanding at 31 March 1997
Calculated on reported earnings and capital funds, the return on average
capital funds was 30.7%, compared with 33.8% for 1996 and 30.1% for 1995.
Reported earnings for the fourth quarter were NZ$53.3 million while normalised
earnings were NZ$202 million, a decrease of NZ$12.6 million, or 5.8%, compared
with the same quarter last year excluding the effect of Pacific Star. The
result for the fourth quarter 1997 includes a one-off depreciation charge of
NZ$14.5 million and a further NZ$5 million adjustment to cellular revenue (See
"Depreciation" and "Cellular and Other Mobile Services"). Excluding these one-
off items and the abnormal costs, fourth quarter earnings would have
approximated fourth quarter earnings of last year.
Dividends
Telecom has declared a fourth quarter dividend of NZ10.5 cents per ordinary
share. The total dividends for the year of NZ39 cents, compare with NZ35 cents
for 1996, an increase of 11.4%. Total dividends for the year represented
approximately 94.8% of normalised earnings for 1997.
The dividend and supplementary dividend provided are based on the number of
shares outstanding at 31 March 1997. The amount
A-3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
to be paid will be less than the amount provided as further share repurchases
will be made before the fourth quarter dividend payment date.
DIVIDENDS
<TABLE>
<S> <C>
Q4 dividends
Ordinary shares NZ 10.5 cents
American Depositary Shares *US 58.51 cents
Supplementary dividend (to
non-resident holders)
Per ordinary share NZ 1.85 cents
Per American Depositary Share *US 10.33 cents
Books closing dates
NZ, Australia Stock Exchanges 6 June 1997
New York Stock Exchange 5 June 1997
Payment dates
NZ, Australia 18 June 1997
New York 25 June 1997
</TABLE>
*Based on an exchange rate at 31 March 1997 of NZ$1.00 to US$0.6965.
The Company reduced the ratio of ordinary shares per ADS from 16:1 to 8:1 on 1
April 1997.
The level of future dividend payouts will depend on cash flow performance and
investment opportunities, and will be subject to maintaining a net debt to net
debt plus capital funds ratio of between 40% and 45%. A high volume of share
repurchases in a short period may take the ratio above this band temporarily
until the corresponding issue of TeleNotes (see "Capital Resources").
Telecom's current policy is to distribute at least 70% of its net earnings in
respect of each fiscal year.
THE ECONOMY
New Zealand's economy has been operating at a subdued level for almost a year.
The uncertainty prevalent prior to the general election in October 1996
continued as the coalition process extended through to Christmas.
The New Zealand Institute of Economic Research consensus average of
forecasters expects gross domestic product ("GDP") growth to fall to 1.8
percent in the year to March 1997, half the level of just nine months earlier
and less than a third of the level of three years ago.
The Reserve Bank of New Zealand has succeeded in its efforts to reduce
inflation to what it considers to be more sustainable levels, achieving a rate
of 2 percent for the year to March 1997. GDP growth is forecast to rise to 3
percent in the year to March 1998, and inflation expected to fall to 1.3
percent, below the midpoint of the 0 to 3 percent inflation target.
More recent surveys show, however, that business confidence has declined
across all sectors, including those which in the previous survey had expected
the business situation to improve. Economic growth in the short-term was
expected to be more consumer than productivity-driven, and the Government's
recently announced postponement of the proposed July 1997 tax cuts appears to
have altered this expectation, suggesting a delay in the expected economic
upturn.
OUTLOOK
The 3.2% growth in normalised earnings in 1997, compared with 19.5% for 1996
reflected, among other things, the significant slow-down in the New Zealand
economy and was achieved in a year when many publicly-listed companies in New
Zealand have been reporting reduced earnings. Management nevertheless regards
Telecom's performance as disappointing and is undertaking a series of
initiatives having both short and long-term objectives. These are to contain
and reverse the unacceptable increase in 1997 operating costs, maintain
Telecom's competitiveness and margins against vigorous competition from an
increasing number of competitors, and to deliver financial performance which
meets shareholder expectations.
To these ends, Telecom will continue to utilise its strengths which include
the quality of its management, its technologically advanced networks and
infrastructures, the strategic value of its brands, the diverse and innovative
range of services offered, and the strength of its cash flows and balance
sheet. Telecom will use the opportunities offered by the convergence of
telephony, entertainment and data, in a market in which consumers continue to
demonstrate a keen appetite for new services. Telecom's earnings will continue
to be driven by volume growth coupled with improved operating efficiency.
Telecom will continue to align Management incentives and rewards with the
maximisation of shareholder value through an Economic Value Added remuneration
framework.
A series of specific initiatives to reduce costs and increase efficiency is
underway. At the same time, Management is drawing to a close Telecom's
involvement in Pacific Star.
Telecom's entry into Internet access and value-added services through XTRA,
and cable home-video and information services
A-4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
through First Media, and its further move towards the provision of personal
communications services ("PCS") sees Telecom well positioned to pursue the
unfolding opportunities offered by convergence.
Management recognises that the year 2000 brings significant business risk in
terms of the continuing functionality of computer software programmes and is
developing plans and timetables to modify as necessary all business-critical
systems by 31 December 1998.
Restructuring
Even after a major reorganisation to achieve significant efficiency
improvements, Management believe that substantial opportunity remains to
improve overall efficiency to world-class levels. Contestability principles
are expected to help drive this improvement.
Part of the new management structure implemented in April 1996 to improve
operating efficiency, involved the separation of the Design Build and
Maintenance ("DB&M") function into a new stand-alone business unit,
responsible for network technology and maintenance programmes. DB&M now
competes for Telecom work along with other industry contractors and can
compete for contract work outside Telecom.
The contestability principles applied to DB&M, and other divisions such as
Telecom Systems, represent the first phase of a comprehensive cost reduction
and efficiency improvement programme.
The second phase now underway has identified a series of working smarter
initiatives which are now being implemented to reduce overheads in corporate
support areas and to rationalise and eliminate duplication within the Services
and Network Groups.
The third phase, signalled at the third quarter announcement in February 1997,
is the Performance 2000 Project, a medium and longer-term project to
critically review how Telecom's business is managed, and to measure it against
the world's best practices and benchmarks. This involves setting targets for
world class cost performance in regard to both operating and capital
expenditure, establishing benchmarks that do not sacrifice quality and
achieving value from all parts of the business. It will involve a critical
review of Telecom's capital expenditure programmes and the competing claims of
alternative technologies within the context of Telecom's long-term strategic
objectives, with the view to minimising borrowing costs and depreciation.
A cross-functional team has been established and will submit recommendations
to the Board in July 1997. The team's scope is Company-wide and will involve
assistance from external sources, including Telecom's major shareholders Bell
Atlantic and Ameritech.
Telecom has provided NZ$64.5 million to cover the restructuring costs arising
from the changes to be implemented. Further provision for restructuring costs
may be necessary following the July 1997 recommendations to the Board.
Pacific Star
Major changes in the Australian regulatory and, in particular, the pricing
environment have seen volume discounts available to Pacific Star from its
principal carrier seriously eroded. The early promise shown by Pacific Star
has turned to a major drain upon Telecom's earnings. This has resulted in
operating losses of NZ$50.2 million for the year ended 31 March 1997,
following NZ$29.6 million for the previous year. A formal plan of disposal or
wind-down of the Pacific Star businesses has been approved by the Board and
implemented by Management. Further losses expected to arise from the sale or
winding down of the businesses amount to NZ$37.4 million and were fully
provided for in the fourth quarter.
On 27 March 1997, Telstra Corporation Limited ("Telstra") filed in the Supreme
Court of Queensland, a statement of claim against two companies within the
Pacific Star Group totalling AUD$98.6 million in respect of carrier services
allegedly provided by Telstra and unpaid by those companies, together with
interest from 27 March 1997 to the date of judgement. Management believe that
the level of provision carried by Pacific Star in relation to its liability to
Telstra together with the merit of its various counterclaims, which Management
will vigorously pursue, is adequately reflected in the provision made.
Pacific Star's remaining activities consist primarily of providing a range of
telecommunication services under its contractual obligations to the Queensland
and West Australian State Governments, which expire in August 1997 and
February 1998, respectively. This progressive disposal of the business has
seen personnel numbers decrease from 578 at 31 March 1996 to 274 at 31 March
1997. Remaining personnel are expected to reduce to approximately 100 by June
1997 and progressively thereafter.
In place of Pacific Star, Telecom has developed an Australian presence
designed to service the needs of corporate customers on
A-5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
both sides of the Tasman, recognising that these organisations increasingly
operate their businesses on an Australasian basis.
New Enterprises
In the very short time that it has been operating, XTRA has signed up
approximately 51,000 customers offering them a mix of local and international
content on the Web. Such swift growth has far exceeded Management's most
optimistic expectations and has challenged XTRA's ability to best serve its
customers. Telecom is working to better meet the needs of its customers and to
position XTRA for continued growth.
The enormous growth in the use of the Internet has underlined the demand for
rapid transmission of large amounts of information--data, graphics, video and
voice. Demand for broadband technology is expected to be more far-reaching
than providing entertainment, as telephony, television and computers converge.
This demand will involve employment of a range of technologies including
wireless, fibre and coax, as well as enhancement of our copper-wire network.
Telecom is well-positioned to respond to these opportunities.
The past year has seen the provision of broadband home entertainment with the
launch of First Media. Presently First Media offers 12 channels, including
"The Box" where customers can programme their own music selections.
Telecom has been developing PCS which brings together the benefits of fixed
and mobile technologies and applications. The first of these services, Mobile
Extension, was launched during November 1996. This service allows users to
dial internal fixed extension numbers from their mobile phones.
Telecom's PCS BusinessZone product will be launched during May. This service
will allow users to make calls within their offices for a fraction of the cost
of today's mobile phone. When taken offsite the phones will automatically link
into Telecom's mobile network coverage area.
Year 2000 Costs
The majority of computer software worldwide is programmed to process
transactions using only two digits for the year of the transaction (eg. "97"
for 1997) rather than four digits. Computer systems which process year 2000
transactions with the year "00" will encounter significant processing
inaccuracies and even inoperability.
Almost all of the services which Telecom offers its customers are based on
technology-driven systems, including the exchanges and other components in
Telecom's fixed line, cellular and paging networks. The Year 2000 issue
affects also many of Telecom's traditional information technology
applications.
Planning to address Year 2000 issues started in August 1996. The first phase
of the project, to identify those of Telecom's systems which are not Year 2000
compliant, has been completed. The development of detailed plans and
timetables to ensure that all of Telecom's business-critical systems are Year
2000 compliant by 31 December 1998 is underway for completion by May 1997, at
which time the identification of and search for the necessary resources will
commence.
The operating cost of making the modifications necessary to maintain existing
functionality into the year 2000 and beyond is estimated at NZ$87 million.
Competition and Interconnection
Telecom expects competition in New Zealand's telecommunications market to
continue to intensify, with the prospects of existing participants extending
their activities, and new market entrants.
During June 1996 Telecom concluded an interconnection agreement with Telstra
New Zealand Limited ("Telstra NZ") enabling Telstra NZ to offer national and
international calls and 0800 services. Telstra NZ has also stated its
intention to offer leased data services.
Clear Communications Limited ("Clear") has indicated it will offer local call
services to customers in the Auckland, Wellington and Christchurch central
business districts. Telecom anticipates significant competition in these areas
and in calls to its cellular network. Clear has stated it might also offer
local call services to some residential customers. The impact on Telecom's
revenues as Clear extends its services cannot be reliably assessed at this
time.
Saturn Communications Limited ("Saturn") also is seeking interconnection with
Telecom to provide local call services in addition to pay television services
it plans to roll-out in selected areas of Wellington and Auckland.
A-6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Negotiations are under way with BellSouth New Zealand Limited ("BellSouth")
which provides competing cellular services, on a broader interconnection
agreement than the one signed in March 1993.
Telecom is currently in negotiation with carriers in respect of number
portability, which allows a customer to retain a telephone number when
changing carriers.
Telecom's current offer to the other telecommunications carriers for provision
of number portability reflects the cost of providing the service.
Telecom anticipates that the necessary agreements can be reached and that
number portability can be implemented this year. The effect, if any, upon
Telecom's revenues cannot be measured at this time.
OVERVIEW OF EARNINGS FROM CONTINUING OPERATIONS
The tables which follow the "US GAAP Reconciliation" section show the major
components of Telecom's operating revenues and expenses for 1995, 1996 and
1997. Telecom has enhanced its revenue reporting through reclassifications of
certain revenue and cost items. The reclassifications are explained further in
the tables on page A-18. Reclassifications of prior periods' data have been
made for these revenue and cost items and the discontinued operations of
Pacific Star.
EARNINGS FROM CONTINUING OPERATIONS AS A PERCENTAGE OF REVENUE
<TABLE>
<CAPTION>
YEAR ENDED 31 MARCH
----------------------------------------------------------
1995 1996 1997
% % %
----------------------------------------------------------
<S> <C> <C> <C>
Excluding abnormal items 38.6 41.8 39.9
Excluding abnormal items,
XTRA and First Media 38.6 42.0 41.1
</TABLE>
Operating Revenues
<TABLE>
- -------------------------------------------------------------------------------------------------
<CAPTION>
VARIATION--
INCREASE/(DECREASE) NZ$ MILLIONS %
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
1997:1996 174.9 6.0
1996:1995 225.1 8.4
</TABLE>
- -------------------------------------------------------------------------------
The principal growth in 1997 was in international revenues, enhanced network
services and directories revenues. The rate of revenue growth for 1997 is
slower than in recent years for certain revenue lines due to significant
market driven price reductions and the slower growth of the New Zealand
economy. Allowing for the cellular revenue adjustments (see "Cellular and
Other Mobile Services"), revenue would have increased by NZ$186.9 million, or
6.4%.
Revenue for 1996 increased largely due to volume growth in cellular, line
rentals, local and national calls and enhanced network services.
Volume Growth
<TABLE>
<CAPTION>
AS AT AND FOR THE
YEAR ENDED CHANGE CHANGE
31 MARCH 96:95 97:96
-----------------------------------------
1995 1996 1997 % %
-----------------------------------------
<S> <C> <C> <C> <C> <C>
Access
Lines 1,658,000 1,719,000 1,782,000 3.7 3.7
Call minutes
(millions)
National calls 1,640.7 1,884.9 2,143.4 14.9 13.7
International
outward calls 199.6 238.6 265.6 19.5 11.3
International
inward calls
(excluding
transits) 200.5 240.6 279.2 20.0 16.0
Cellular
connections
Total at end
of period 229,200 339,500 422,800 48.1 24.5
Average during
period 182,600 293,440 382,370 60.7 30.3
</TABLE>
Local Service
Local service revenues consist of business and residential line rentals, local
call charges (predominantly paid by business customers) and local call
interconnection charges for 1995 and 1996.
Local Service (excl CPE Rentals)
<TABLE>
- -------------------------------------------------------------------------------------------------
<CAPTION>
VARIATION--
INCREASE/(DECREASE) NZ$ MILLIONS %
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
1997:1996 2.6 0.3
1996:1995 42.5 5.4
</TABLE>
- -------------------------------------------------------------------------------
Business and residential line rental revenue for 1997 increased by NZ$29.7
million, or 4.2%, due largely to a 3.7% growth in access lines accompanied by
a 3.5% increase in residential line rental
A-7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
charges from February 1996, consistent with the provisions of the Kiwi Share.
The growth in local service revenue for 1997 was adversely affected by the
transfer of local service interconnection revenue which is disclosed as part
of interconnection revenue in 1997.
The Kiwi Share limits increases in the standard residential telephone rental
charge, except in certain limited circumstances, to not more than New
Zealand's annual inflation rate as measured by the consumers' price index.
Telecom expects to continue to grow the value of local access through:
. adding choices tailored to the needs of particular customer groups;
. offers of free installation of additional lines for business customers and
dedicated lines for EFTPOS (Electronic Funds Transfer at Point of Sale)
transactions; and
. offers of free installation of second lines for residential customers to
meet their needs for data transmission, Internet access and fax machines,
thereby promoting the use of these services.
1996 business and residential line rental revenue increased $NZ27.9 million,
or 4.2%, as a result of a 3.7% growth in customer access lines and an increase
in residential line rental charges.
Revenue from local calls increased by NZ$3.1 million, or 3.3% for 1997 and
NZ$5.1 million, or 5.7%, for 1996 due to growth in call volumes in both years.
[CHART]
National Calls
National call revenue includes calls to a location outside the caller's local
calling area (including national interconnection call charges for 1995 and
1996), calls to the cellular network originating within the fixed line network
and operator services charges.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VARIATION--
INCREASE/(DECREASE) NZ $ MILLIONS %
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
1997:1996 2.9 0.5
1996:1995 54.3 11.1
- ------------------------------------------------------------------------------------------------
</TABLE>
With the expanding range of services offered by Telecom, national call volume
and revenue trends continued to reflect the migration of calls into Telecom's
cellular network, Virtual Private Networks ("VPN") and Home 0800. VPN and Home
0800 revenues can be regarded as direct substitutes for residential and
business tolls and if these revenues were included, national call revenue
would have increased by NZ$18.8 million or 3.4% for 1997.
National call revenue continued to show strong volume growth which has been
largely offset by market-led price reductions and other initiatives. The
slower growth of the New Zealand economy had some effect on volume growth
rates.
There was a lower rate of growth in revenue from calls to the cellular network
from the fixed line network, reflecting the effects of competition in the
cellular business and the slow-down in the economy. This area will be subject
to increasing competition. (See "Competition and Interconnection").
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NATIONAL CALL VOLUME CHANGE % CHANGE %
GROWTH * 96:95 97:96
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Call minutes (incl. calls to the
cellular network) 14.9 # 13.7
Call minutes (excl. calls to the
cellular network) 12.6 12.9
Call minutes to the cellular network 36.0 # 20.1
</TABLE>
* excluding interconnection calls
# Call minutes for calls to the cellular network for prior periods have been
restated to exclude interconnection calls.
- -------------------------------------------------------------------------------
The average per minute price of national calls, excluding those made to the
cellular network, reduced by approximately 13% compared with last year. During
1996 the average price declined by approximately 9%.
A-8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Telecom's expanding range of pricing and incentive plans for national calls
(excluding calls to the cellular network) currently includes the following:
. A maximum charge of NZ$5 for national calls made between 6pm Friday and
midnight Sunday, or on a weeknight between 6pm and 8am. These offers
currently apply until December 1997.
. A residential call plan offering a maximum charge of NZ29 cents per minute
for direct-dial off-peak residential national calls since October 1996.
. A Talking Points loyalty programme which rewards residential customers for
using Telecom's services, introduced in May 1996. Approximately 352,000
customers have joined the programme.
The increase in national call revenue for 1996 was driven by volume growth,
continued strong growth in Telecom's cellular business and growth in the
domestic economy.
International
International revenue includes outgoing international calls made in New
Zealand, collect, credit card and "New Zealand Direct" calls to New Zealand,
receipts from overseas telecommunications administrations and companies for
calls to New Zealand that use Telecom's facilities, and calls from
international switched traffic transiting Telecom's facilities. Revenue is
also derived from international leased services and private networks used by
New Zealand business customers.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VARIATION--
INCREASE/(DECREASE) NZ$ MILLIONS %
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
1997:1996 16.0 3.4
1996:1995 2.9 0.6
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL GROWTH CHANGE % CHANGE %
96:95 97:96
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Outward calls
-Revenue 1.7 3.2
-Call minutes 19.5 11.3
Inwards calls (excluding
transits)
-Revenue (6.0) (1.1)
-Call minutes 20.0 16.0
Transit call margin
-Margin 63.0 (5.5)
-Call minutes 120.0 3.9
</TABLE>
- -------------------------------------------------------------------------------
Growth in outward call minutes continued strongly on a higher base compared
with 1996, but reflected some effect from the slow-down in the domestic
economy. Revenue and volumes have also been affected by competitive pressures,
including the increased activity of call-back operators.
Average per minute charges for outward calls were approximately 7% lower
compared with 1996, reflecting the significant price reductions introduced in
July 1995, frequent weekend specials and the more extensive application of
residential call plans. Further price reductions were introduced in October
1996 with the launch of the "Worldwide Plan", which is designed to increase
call volumes by simplifying the pricing structure. International cellphone
call charges also have been reduced.
Inward call revenue reflected a lower average per minute charge, which
decreased by approximately 15% largely due to reductions in standard and
economy call rates agreed with foreign carriers and the strengthening New
Zealand dollar.
The decrease in the net revenue from transit calls for 1997 is the result of
an increase in volumes more than offset by a decrease in the average net
revenue per minute of approximately 10% reflecting changes in the geographic
profile of Telecom's transit business. The transiting of telephone calls from
one operator to another through Telecom's facilities is increasingly becoming
a large volume, low margin business.
Telecom has established a point of presence in the United States which became
fully operational in December 1996. This presence has improved Telecom's
competitiveness in the transit call business and is part of Telecom's
continual efforts to lower its costs for outward call minutes. Telecom is
expanding its presence in this dynamic market by interconnecting with an
increasing number of partner carriers in order to secure additional transit
business and further reduce costs.
Other international services revenue, which increased by NZ$8.3 million, or
29.2%, for 1997, is largely made up of revenue from leased services and the
net revenue received on transit calls for information services.
In 1996, volume growth in outward call minutes more than offset the impact of
significant price reductions. An increase in transit revenue more than offset
a decline in inwards call revenue which reflected reduced prices for incoming
calls following negotiations with overseas administrations, and higher call
volumes.
A-9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Cellular and Other Mobile Services
Cellular and other mobile services revenue comprises access and airtime
charges for calls originating from Telecom's cellular network (excluding
international calls), and revenue from paging and mobile radio services.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VARIATION--
INCREASE/(DECREASE) NZ$ MILLIONS %
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
1997:1996 3.1 1.0
1996:1995 84.8 37.1
- --------------------------------------------------------------------------------------------------
</TABLE>
Telecom undertakes 24 consecutive cellular billing cycles across a given month
with each cycle having a different cut-off date, necessitating the calculation
at month-end of revenues billed but unearned and earned but unbilled. During
the first quarter of 1997, the method by which these month-end adjustments are
determined in respect of each billing cycle was changed. As a result of this
change in accounting estimates, together with the effect of pricing changes to
service providers relating to earlier periods, cellular revenue for 1997 was
adversely affected by approximately NZ$12 million. Excluding these
adjustments, the increase in cellular and other mobile services revenue would
have been 4.8% for 1997.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CELLULAR GROWTH CHANGE % CHANGE %
96:95 97:96
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue 44.0 5.8*
Connections
-Total at end of period 48.1 24.5
-Average during the period 60.7 30.3
Call Minutes 48.9 17.3
</TABLE>
*excluding accounting and retrospective pricing adjustments
- -------------------------------------------------------------------------------
The lower rate of growth in revenue and the customer base reflected intensive
competitive pressures on both equipment prices and usage and the slow-down in
New Zealand's economic growth.
Growth in connections in the second half of the year reflected the "025 TO GO"
promotion launched in November 1996 which accounted for approximately 36,000
additional connections. "025 TO GO" supersedes the Independence Plan and is
aimed at making mobile communications more affordable for the consumer market.
Growth in connections was offset by a review of the customer database for non-
paying customers in the fourth quarter of 1997 resulting in the cancellation
of some connections. Telecom continues to review its customer base and some
further cancellations may occur.
The total number of connections, including those of the other cellular service
provider, currently represents approximately 14% of the New Zealand
population. This penetration level, when compared with other relevant
countries, suggests scope for continued expansion of this market.
The benefits to revenue of higher connections were partly offset by continuing
entry of lower-usage customers into the broadening market and the lower price
plans relating to these consumers. The revenue from higher-usage customers has
also been affected by competition.
Telecom has created new value-added revenue streams including Direct Connect
(introduced in August 1996), Voice Dial (introduced in October 1996) and
Caller Display for digital mobile phones (launched April 1997).
The increase for 1996 was due primarily to the continued growth in Telecom's
cellular customer base.
[CHART]
Directories
Directories revenue is derived largely from local advertising by businesses in
Telecom's White and Yellow Pages directories and various database services.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VARIATION--
INCREASE/(DECREASE) NZ$ MILLIONS %
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
1997:1996 15.8 13.2
1996:1995 11.6 10.7
</TABLE>
- -------------------------------------------------------------------------------
Revenue from regional directories increased by 12.4% in 1997 as a result of
both tariff and volume growth in both White Pages and Yellow Pages products
and reflects business customers taking up new options for directories listings
including bold presentation and logos. Revenues from specialised and local
directories increased by 24.4%.
A-10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
In 1996, revenue from regional directories increased by 10.6%, and from
specialised and local directories by 13.6%.
Leased Services
Leased services revenue includes charges for both analogue and digital leased
lines.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VARIATION--
INCREASE/(DECREASE) NZ$ MILLIONS %
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
1997:1996 (5.5) (4.1)
1996:1995 0.7 0.5
</TABLE>
- -------------------------------------------------------------------------------
The increase for 1997 reflects increased circuit ends and customers, partially
offset by price reductions.
Equipment Revenue
Equipment revenue includes equipment sales, customer premises equipment,
("CPE") rental, installation and maintenance revenue.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VARIATION--
INCREASE/(DECREASE) NZ$ MILLIONS %
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
1997:1996 (4.2) (2.1)
1996:1995 (22.6) (10.1)
</TABLE>
- -------------------------------------------------------------------------------
The decreases in equipment revenue for both 1997 and 1996 largely reflected
lower CPE rental as customers purchase in preference to renting equipment.
The decrease for 1997 also reflects lower cellular equipment revenue due to
both lower sales and prices offset partially by higher revenue from other
equipment sales.
Equipment revenue for 1996 also reflected strong growth in cellular equipment
sales due to the competitively priced promotional offers on cellular equipment
which more than offset the effect of the divestment of Telecom's less complex
business CPE operations to a major accredited dealer during the fourth quarter
of 1995.
Enhanced Network Services
Enhanced network services revenue includes such products as:
. 0800 and 0900 services;
. Smartphone services such as Call Waiting, Call Forward, Three Way Calls and
Caller Display Service;
. Centrex, ISDN, VPN and Voice Message Services such as Call Minder;
. Direct Dial and Customer Link; and
. Value added services provided by Netway Communications Limited ("Netway").
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VARIATION--
INCREASE/(DECREASE) NZ$ MILLIONS %
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
1997:1996 74.4 32.7
1996:1995 60.1 36.0
- --------------------------------------------------------------------------------------------------
</TABLE>
Demand continued to grow strongly for enhanced network services. The revenue
increase was largely due to the growth in 0800 revenues driven by price
reductions, the introduction of Home 0800, which contributed 13% of 0800
revenues, and the stimulation of market growth through competition.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ENHANCED NETWORK SERVICES CHANGE % CHANGE %
GROWTH 96:95 97:96
- --------------------------------------------------------------------------------------
<S> <C> <C>
0800 services (business and residential)
-Revenue 38.2 41.7
-Call minutes 77.2 64.0
Netway revenue 25.6 25.4
Other enhanced network services
-Centrex lines 34.7 27.9
-Call Minder mailboxes 72.6 45.9
- --------------------------------------------------------------------------------------
</TABLE>
Increased revenues also reflected growth in the value-added services provided
by Netway, voice messaging, and in the use of Centrex, VPN and ISDN services.
Centrex and VPN services provide individual business customers with voice and
data network capabilities to meet their specific needs, while ISDN services
enable high-speed, high-quality transmission of images and data. Combined
Centrex, VPN, ISDN and voice messaging revenues increased 52.5% in 1997.
Telecom launched a new product, Calltrack, in April 1997 which enables
customers' bills to be sorted by attaching a code to each chargeable call.
The increase for 1996 resulted from similar drivers.
Miscellaneous Other Services
Miscellaneous other services revenue is derived principally from payphones,
international consultancy, software development, broadcasting transmission
services, and XTRA which commenced contributing revenue during the second
quarter of 1997.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VARIATION--
INCREASE/(DECREASE) NZ$ MILLIONS %
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
1997:1996 4.1 5.5
1996:1995 (9.2) (10.9)
- -------------------------------------------------------------------------------------------------
</TABLE>
A-11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The increase arose largely from international consultancy work and the growth
of XTRA which had approximately 51,000 customers at 31 March 1997. 1997
revenue includes an amount billed for an outside plant project in Sri Lanka,
the margin on which is minor.
XTRA has started trials of an Internet-based voice service which will include
national and international calls. While its impact on Telecom's traditional
toll service is not expected to be immediately apparent, Internet telephony is
expected to be a strong growth area and will lead to some migration of toll
traffic.
The decrease in revenue for 1996 was due principally to lower revenue from
payphone card collector sets.
Operating Expenses (Excluding Abnormal Costs)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VARIATION--
INCREASE/(DECREASE) NZ$ MILLIONS %
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
1997:1996 158.0 9.3
1996:1995 47.2 2.9
</TABLE>
- -------------------------------------------------------------------------------
The increases in total operating expenses in 1997 and 1996 largely reflected
volume growth in Telecom's various markets. 1997 operating expenses included
the costs associated with the commencement of XTRA and First Media and a one-
off depreciation charge (see "Depreciation").
A change in the accounting policy in respect of compensated absences increased
operating expenses by NZ$17 million for 1996 (see "Personnel Costs").
Excluding the effect of this change, 1996 operating expenses increased by
1.8%.
Operating expenses as a percentage of revenue excluding abnormal costs and the
costs associated with the commencement of XTRA and First Media, were 61.4%,
58% and 58.9% for 1995, 1996 and 1997, respectively.
Personnel Costs
Gross Personnel Costs
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VARIATION--
INCREASE/(DECREASE) NZ$ MILLIONS %
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
1997:1996 13.7 2.7
1996:1995 12.0 2.4
- -------------------------------------------------------------------------------------------------
</TABLE>
Included in 1996 gross personnel costs is a charge of NZ$17 million due to a
change in accounting policy relating to the provision for employees'
compensation for future absences.
Excluding this additional charge from 1996, gross personnel costs for 1997
increased NZ$30.7 million, or 6.3%, which reflected increased personnel numbers
associated with the rapid growth in enhanced network services and the
introduction of XTRA and First Media, together with salary increases for
personnel on individual contracts.
Since 1993, the employment arrangements for Telecom employees progressively
has moved from being collectively to individually based, with more than 64% of
staff on individual contracts compared with 10% in 1993.
Three collective contracts expired in June 1996 and since that date Telecom
has been involved in negotiations with the Engineers Union. Approximately
2,500 employees are covered by these contracts and settlements have been
reached except 1,473 DB&M employees, for whom an agreement is subject to
employee ratification.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
PERSONNEL NUMBERS
-----------------------------------------------------------------------------------------------
Variation 97:96
-----------------------------------------------------------------------------------------------
1995 1996 1997 Number %
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operations 6,785 6,868 6,882 14 0.2
Other 1,523 1,658 1,828 170 10.3
-----------------------------------------------------------------------------------------------
8,308 8,526 8,710 184 2.2
-----------------------------------------------------------------------------------------------
</TABLE>
Productivity levels, as measured by access lines per operations employee, have
increased from 244 to 250 and 258 at March 1995, 1996 and 1997 respectively.
Net personnel costs, after capitalisation and other labour recoveries,
increased by NZ$29 million, or 9.1%.
Labour capitalised, which is the reallocation of personnel costs incurred in
capital projects to fixed assets, remained relatively stable in 1997.
Other labour recoveries consist of the reallocation of personnel costs
incurred in maintenance, network operations and installation activities to
maintenance costs, cost of sales and other operating costs. The 9.6% decrease
in other labour recoveries for 1997 reflected reduced employee numbers in
those areas of activity, and increased use of contractors. The effect of the
decrease on earnings is neutral.
Gross personnel costs for 1996 decreased by NZ$5 million or 1% if the charge
of NZ$17 million related to the change in accounting
A-12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
policy in 1996 is excluded. This decrease was largely due to lower average
staff levels partially offset by the 1.5% salary increase effective from June
1995 for operations personnel covered by collective contracts, as well as
salary increases for personnel on individual contracts.
Depreciation
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VARIATION--
INCREASE/(DECREASE) NZ$ MILLIONS %
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
1997:1996 50.7 10.3
1996:1995 3.6 0.7
</TABLE>
- -------------------------------------------------------------------------------
Depreciation expense for 1997 was affected by a change in useful lives of
certain information technology and network assets which increased depreciation
expense by NZ$14.5 million. Excluding this one-off charge, depreciation
expense increased by NZ$36.2 million, or 7.3%.
This increase reflected both the increasing fixed asset base resulting from
capital expenditure, and a higher proportion of expenditure on information
technology assets which have shorter depreciable lives compared with network
assets.
The average annualised depreciation rate on total fixed assets (excluding land
and capital work in progress) was 7.9% compared with 7.8% for 1996.
Cost of Sales
Cost of sales are costs directly attributable to revenue earned from
international outward calls, product sales and installations, cellular
services, directories and miscellaneous other services.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VARIATION--
INCREASE/(DECREASE) NZ$ MILLIONS %
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
1997:1996 10.0 2.5
1996:1995 21.5 5.8
</TABLE>
- -------------------------------------------------------------------------------
Cost of sales for 1997 included costs related to higher international
consultancy, (see "Miscellaneous Other Services"), excluding which, cost of
sales increased by NZ$0.4 million or 0.1%. This increase was attributable to
increased sales of directories, the cost of the Talking Points loyalty
programme and higher cost of equipment sales.
The strengthening New Zealand dollar and lower accounting rates (see
"International") offset the impact of a 11.7% increase in international
outward call minutes on international cost of sales, which declined by
approximately 9%.
The increase for 1996 was largely due to increased volumes of international
outward minutes and cellular and other mobile services. Higher cellular
equipment sales driven by increased cellular connections and special
promotions, also increased cost of sales.
Maintenance
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VARIATION--
INCREASE/(DECREASE) NZ$ MILLIONS %
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
1997:1996 50.6 33.6
1996:1995 (12.4) (7.6)
</TABLE>
- -------------------------------------------------------------------------------
The large increase in maintenance costs for 1997 is due primarily to a change
in classification whereby overhead recoveries are now charged to maintenance
activities, reducing other operating expenses and increasing maintenance costs
by NZ$34.3 million. Excluding this reclassification, maintenance costs
increased by 10.8% for 1997.
The remainder of the increase is largely attributable to net reclassifications
of approximately NZ$5 million from other cost lines, growth in the cellular
network, and maintenance of international cables.
Lower labour recoveries charged to maintenance and the divestment of a section
of Telecom's CPE business contributed to the reduction in 1996 maintenance
costs.
Other Operating Expenses
Other operating expenses include occupancy, advertising, computer, bad debts,
vehicle, postage, agency and stationery expenses, which together represented
70% of other operating expenses before capital and maintenance recoveries.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VARIATION--
INCREASE/(DECREASE) NZ$ MILLIONS %
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
1997:1996 17.7 5.2
1996:1995 15.2 4.7
</TABLE>
- -------------------------------------------------------------------------------
Excluding the effect of charging overhead recoveries to maintenance (see
"Maintenance") other operating expenses increased by NZ$52 million, or 15.4%
largely due to:
. higher sales related costs such as advertising and bad debts;
A-13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
. higher accommodation costs with the commencement of XTRA and First Media and
a catchup programme for maintenance on exchange buildings;
. increased computer costs, affected by the introduction of a new operating
system;
. redundancy costs, amounting to approximately NZ$5 million, largely related
to the business reorganisation at 1 April 1996.
The increase for 1996 was largely due to higher sales-related costs in
advertising and bad debts, along with increased computer costs.
Net Interest Expense
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VARIATION--
INCREASE/(DECREASE) NZ$ MILLIONS %
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
1997:1996
Interest expense 1.4 1.1
Investment income (5.9) (17.9)
-------------------------------------------------------------------------
Net interest expense 7.3 7.9
-------------------------------------------------------------------------
1996:1995
Interest expense (6.5) (4.9)
Investment income 5.0 17.9
-------------------------------------------------------------------------
Net interest expense (11.5) (11.1)
</TABLE>
- -------------------------------------------------------------------------------
Interest expense for 1997 did not vary significantly from 1996, reflecting a
relatively stable average level of debt and average interest rates. The
decrease in investment income reflected a lower level of investments. Interest
expense will increase in the next fiscal year as shares are repurchased and
refinanced with TeleNotes. (See "Capital Resources").
The decrease in interest expense for 1996 was due to a change in accounting
policy relating to capitalised interest whereby Telecom now capitalises
interest in respect of all material self-constructed assets. Excluding the
effect of this change, interest expense increased for 1996 by NZ$3 million, or
2.3%, largely due to an increase in the average interest rate of approximately
0.4 percentage points compared with the average rate for 1995.
The increase in investment income for 1996 was due to a higher average
interest rate and average short-term investments balance.
Earnings from continuing operations excluding abnormal costs covered net
interest (after investment income but before interest capitalised) 10.9 times,
compared with 11.3 times in 1996 and 9.7 times in 1995.
Taxation
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VARIATION--
INCREASE/(DECREASE) NZ$ MILLIONS %
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
1997:1996 (64.7) (17.2)
1996:1995 67.7 22.0
</TABLE>
- -------------------------------------------------------------------------------
Income tax expense for 1997 decreased due to lower before tax earnings, which
included the impact of abnormal restructuring charges. The effective tax rate
was 31.7% compared with 33.5% for 1996, 33% for 1995 and a statutory rate of
33%.
Income tax expense increased in 1996 largely due to an increase of NZ$189.4
million, or 20.3%, in earnings before tax.
A periodic review by the Inland Revenue Department is in progress, the likely
outcome of which is not known.
LIQUIDITY
Telecom believes it has adequate internal and external resources available,
including borrowing capacity, to finance its operating requirements,
restructuring costs, anticipated capital expenditure, dividends and
investments.
Cash Flows from Operating Activities
Net cash flows from operating activities were NZ$1,419.4 million for 1997, an
increase of NZ$158.0 million due principally to higher receipts from customers
and reduced tax, redundancy and restructuring payments, partly off-set by
higher payments to suppliers and employees.
The lower tax payments arose from the increase in tax credits from the Inland
Revenue Department equivalent to the quarterly supplementary dividends paid to
non-resident shareholders, due to the removal in the third quarter of 1996 of
the 10% holding threshold for non-resident shareholders.
The approximate after tax cash out flows in future years relating to current
restructuring and Year 2000 provisions are expected to be about NZ$120 million
with approximately 80% being spent in fiscal 1998 and 1999.
Net cash outflows related to the disposal of Pacific Star's remaining
operations are expected to be minimal.
A-14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Cash flows from operating activities were NZ$1,261.4 million in 1996 and
NZ$1,031.6 million in 1995.
[CHART]
Cash Flows from Investing Activities
Net cash flows used in investing activities amounted to NZ$667.3 million,
compared with NZ$504.4 million in 1996 and NZ$365.6 million in 1995. The
increase in 1997 was due to an increase in cash applied to the purchase of
fixed assets and a reduction in the amount received from the redemption of
notes receivable.
Cash Flows from Financing Activities
Net cash flows used in financing activities amounted to NZ$746.2 million,
compared with NZ$756.8 million in 1996 and NZ$653.2 million in 1995. 1997 cash
flows reflect cash applied to the repurchase of shares, lower long-term debt
proceeds and repayments, increased proceeds from short-term debt and lower
dividend payments. The dividends paid are lower due to the change in timing of
quarterly dividend payments whereby 1996 dividends paid included the 1995
final dividend of 16.5 cents per share.
Telecom has declared a fully imputed fourth interim dividend for 1997 of
NZ10.5 cents per share, a total of NZ$192.7 million, to be paid in June 1997.
A supplementary dividend of NZ$26.4 million will be paid to shareholders who
are non-resident in New Zealand. Telecom receives an equivalent tax credit
from the Inland Revenue Department for this amount.
CAPITAL RESOURCES
Cash and Short-term Investments
Telecom had cash and short-term investments of NZ$36.3 million at 31 March
1997, a decrease of NZ$6.7 million, and had available unutilised committed
facilities of NZ$238.5 million, as well as substantial uncommitted other
borrowing capacity.
Debt
Total interest-bearing long-term and short-term liabilities amounted to
NZ$1,809.6 million, compared with NZ$1,559.2 million at 31 March 1996 and
NZ$1,458.3 million at 31 March 1995.
The net debt to net debt plus capital funds ratio was 51.4% at 31 March 1997
compared with 40.7% at 31 March 1996. Once the short-term funding used to 31
March 1997 for share repurchases of approximately NZ$357.5 million has been
refinanced with TeleNotes, the ratio is expected to fall to within the 40% to
45% range. A high volume of share repurchases in a short period may take the
ratio above this band temporarily until the corresponding issue of TeleNotes
or similar securities. If debt and capital funds are adjusted for the proposed
issue of TeleNotes based on share repurchases to date, the ratio is 43.6%. In
calculating this ratio, net debt is deemed to consist of total long and short-
term debt, net of cash and short-term investments, and a term deposit of
NZ$34.5 million, while capital funds include shareholders funds, capital notes
and minority interests.
The estimated fair value of Telecom's long-term debt at 31 March 1997 was
NZ$1,361.9 million compared with its carrying amount of $1,370.5 million
(stated inclusive of the effect of hedging transactions). The estimated fair
value of long-term debt, at 31 March 1996 was NZ$1,399.5 million compared with
its carrying amount of NZ$1,417.6 million. The differences between the fair
values and the carrying amounts were due to Telecom's lower fixed rates of
interest on debt in comparison to the prevailing market rates in effect at 31
March 1997 and 1996 for instruments of a similar maturity.
Share Repurchase
Telecom commenced its programme of share repurchases in February 1997. As at
31 March 1997, the Company had acquired a total of 54.7 million shares for an
aggregate cost of NZ$357.5 million. Of this total, 32.3 million shares were
acquired on the New Zealand Stock Exchange for NZ$211.7 million. The balance
of 22.4 million shares was acquired for NZ$145.8 million through Ameritech and
Bell Atlantic selling down shares directly to Telecom in order to avoid
violating Kiwi Share provisions which limit their holdings to a maximum of
24.95% each.
A-15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
As stated previously, the objectives of the repurchase are to reduce Telecom's
average cost of capital and further enhance value to shareholders. It is
currently the intention of the Company to repurchase shares to a market value
of NZ$1 billion (including those repurchased to date) over the course of
approximately one year, although some flexibility may be required in the
timeframe given that such programmes are new to the New Zealand equities
market.
TeleNotes
TCNZ Finance Limited (the "Issuer"), Telecom's main financing subsidiary,
issued a prospectus for an issue of TeleNotes. It is Telecom's intention to
issue TeleNotes to finance or refinance funding utilised to effect some or all
of the NZ$1 billion share repurchase programme.
TeleNotes are an unsecured subordinated issue which pay a fixed interest rate
for the holder between election dates. On election date, holders may elect to
retain some or all of their TeleNotes for a further period on terms specified
by the Issuer or require redemption. The Issuer has the option to redeem the
TeleNotes including any unpaid interest for cash and/or by procuring the issue
of Telecom shares (valued at 90% of the then-current market share price) to
the holders of the TeleNotes.
The initial issue of TeleNotes was for an aggregate principal amount of NZ$275
million and was made in the New Zealand market. They were issued for a fixed
term of seven years, with a fixed coupon of 8.5%. Subsequent issues may vary
these terms and conditions.
Derivatives
Telecom uses derivative financial instruments to reduce its exposure to
fluctuations in interest rates and foreign exchange rates. Telecom does not
hold or issue financial instruments for trading purposes. Any gains or losses
on these hedging financial instruments are generally off-set by gains or
losses on the underlying exposures being hedged. Telecom monitors the use of
derivative financial instruments through the use of well-defined market and
credit risk limits and timely reports to senior management.
As at 31 March 1997, Telecom had hedged approximately NZ$130 million of
projected short-term debt over the next year and beyond, through the use of an
interest rate swap and an interest rate option "collar". Forward rate
agreements, based on the New Zealand Government bond maturing in 2006
totalling NZ$164 million, have been used to hedge the issue yield on part of
the TeleNotes that Telecom plans to issue over the next year to finance the
share repurchase programme.
As at 31 March 1997, Telecom had used cross currency interest rate swaps with
a contract value of NZ$262.5 million to hedge long-term debt denominated in US
dollars. Telecom has also used forward exchange contracts with a contract
value of NZ$463.6 million to hedge short-term debt, principally denominated in
US dollars, and firm purchase commitments, mainly denominated in US dollars
and Japanese yen. Telecom's net unhedged foreign exchange exposure at 31 March
1997 is not significant.
Capital Expenditure
Capital expenditure amounted to NZ$695.7 million, an increase of NZ$126.6
million, or 22.2%, compared to 1996, where capital expenditure increased
NZ$134.2 million, or 30.9%, compared to 1995. Cash applied to capital
expenditure amounted to NZ$683.3 million, an increase of NZ$124.6 million, or
22.3%.
Included in 1997 capital expenditure was NZ$469 million for renewal and growth
of the fixed network (including the international and mobile networks),
NZ$121.4 million for service growth (including Telecom's strategic investment
in broadband services) and NZ$75.4 million for operating support systems and
business process improvements.
Telecom currently expects to spend approximately NZ$800 million on capital
equipment in fiscal 1998.
This amount will be subject to review under Performance 2000. Significant
expenditure will be incurred to accommodate the expected volume growth in
existing lines of business. The two largest individual projects planned are in
the strategic areas of entertainment and information services and PCS.
US GAAP RECONCILIATION
The consolidated financial statements are prepared in accordance with NZ GAAP
which differ in certain significant respects from US GAAP. These differences,
and the approximate effect of the adjustments necessary to restate net
earnings and capital funds, are detailed in Note 28 to the consolidated
financial statements.
A-16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
As a result of these differences, Telecom's US GAAP net earnings were higher
than its NZ GAAP net earnings by approximately NZ$93.6 million (16.1%) for
1997 and lower by NZ$1.8 million (0.3%) and NZ$6.6 million (1.1%) for 1996 and
1995 respectively.
US GAAP earnings are higher due largely to the add back for US GAAP purposes
of the provision for restructuring and Year 2000 costs, partially offset by
the depreciation charge on interest previously capitalised for US GAAP
reporting purposes.
Total capital funds at the end of each year were greater under US GAAP by
approximately NZ$320.4 million (19.5%), NZ$209.7 million (9.8%) and NZ$343.9
million (16.5%) for 1997, 1996 and 1995 respectively, due to the accumulated
effects of the differences referred to above and the fact that, under NZ GAAP,
dividends paid in respect of, but after, a fiscal year are deducted in
computing retained earnings for such year, whereas they are not so deducted
under US GAAP.
NEW ACCOUNTING STANDARDS
The future impact of recent US accounting standards issued by the Financial
Accounting Standards Board ("FASB") applicable to Telecom's financial
statements is discussed below.
In February 1997, the FASB issued Statement of Financial Accounting Standards
No. 128, Earnings Per Share ("SFAS 128") and this statement will be adopted by
Telecom effective 31 March 1998. SFAS 128 simplifies the computation of
earnings per share ("EPS") by replacing primary and fully diluted
presentations with the new basic and diluted disclosures. Assuming the company
had adopted the provisions of SFAS 128, the calculations of primary and fully
diluted EPS would have been substantially the same as the reported EPS for the
last three fiscal years.
In February 1997, the FASB issued Statement of Financial Accounting Standards
No. 129, Disclosure of Information about Capital Structure ("SFAS 129") and
this statement will be adopted by Telecom effective 31 March 1998. SFAS 129
establishes standards for disclosing information about an entity's capital
structure. Telecom has not determined the impact of this pronouncement on its
financial statements.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income ("SFAS 130"), and Statement of Financial
Accounting Standards No. 131, Disclosure about Segments of an Enterprise,
("SFAS 131"). SFAS 130 establishes standards for reporting and displaying
comprehensive income and its components and is effective for fiscal years
beginning after 15 December 1997. SFAS 131 establishes standards for the way
that public business enterprises report information about operating segments
in annual and interim financial statements. This statement also establishes
standards for related disclosures about products and services, geographic
areas and major customers and is effective for fiscal years beginning after 15
December 1997. Telecom has not determined the impact of these pronouncements
on its financial statements.
A-17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW OF EARNINGS FROM CONTINUING OPERATIONS
<TABLE>
<CAPTION>
VARIATION
YEARS ENDED 31 MARCH 97:96
- -----------------------------------------------------------------------------------------------------
(in NZ$ millions, except percentages) 1995 % 1996 % 1997 % $ %
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING REVE-
NUES
Local service 784.2 29.2 826.7 28.4 829.3 26.9 2.6 0.3
National calls 488.1 18.2 542.4 18.7 545.3 17.7 2.9 0.5
International 466.1 17.4 469.0 16.1 485.0 15.7 16.0 3.4
Interconnection * -- * -- 65.7 2.1 65.7 --
Cellular and
other mobile
services 228.5 8.5 313.3 10.8 316.4 10.3 3.1 1.0
Enhanced network
services 167.1 6.2 227.2 7.8 301.6 9.8 74.4 32.7
OTHER OPERATING
REVENUES
Directories 108.2 4.0 119.8 4.1 135.6 4.4 15.8 13.2
Leased services 132.5 4.9 133.2 4.6 127.7 4.1 (5.5) (4.1)
Equipment reve-
nue 224.7 8.5 202.1 6.9 197.9 6.4 (4.2) (2.1)
Miscellaneous
other services 84.1 3.1 74.9 2.6 79.0 2.6 4.1 5.5
-------------------------------------------------------------
549.5 20.5 530.0 18.2 540.2 17.5 10.2 1.9
-------------------------------------------------------------
TOTAL OPERATING
REVENUES 2,683.5 100.0 2,908.6 100.0 3,083.5 100.0 174.9 6.0
-------------------------------------------------------------
OPERATING EX-
PENSES
Gross personnel
costs 496.1 18.5 508.1 17.4 521.8 16.9 13.7 2.7
Labour
capitalised (41.7) (1.6) (50.6) (1.7) (48.7) (1.6) 1.9 3.8
Labour recovered (155.8) (5.8) (139.6) (4.8) (126.2) (4.0) 13.4 9.6
-------------------------------------------------------------
Net personnel
costs 298.6 11.1 317.9 10.9 346.9 11.3 29.0 9.1
Depreciation 490.1 18.3 493.7 17.0 544.4 17.7 50.7 10.3
Cost of sales 373.1 13.9 394.6 13.5 404.6 13.1 10.0 2.5
Maintenance 163.1 6.1 150.7 5.2 201.3 6.5 50.6 33.6
Other operating
expenses 322.0 12.0 337.2 11.6 354.9 11.5 17.7 5.2
-------------------------------------------------------------
1,646.9 61.4 1,694.1 58.2 1,852.1 60.1 158.0 9.3
Abnormal costs -- -- -- -- 151.5 4.9 151.5 --
-------------------------------------------------------------
TOTAL OPERATING
EXPENSES 1,646.9 61.4 1,694.1 58.2 2,003.6 65.0 309.5 18.3
-------------------------------------------------------------
SURPLUS FROM
CONTINUING
OPERATIONS 1,036.6 38.6 1,214.5 41.8 1,079.9 35.0 (134.6) (11.1)
-------------------------------------------------------------
</TABLE>
* not disclosed due to legal confidentiality agreements
Certain reclassifications of prior periods' data have been made to conform to
current period classifications as follows:
. Interconnect revenue is now separately reported rather than allocated to
local service, national calls, international and leased services revenue.
. The basis for allocating account considerations and call plans has been
changed to more accurately reflect the revenue streams to which the account
considerations and call plans relate.
. Equipment revenue now includes customer premises equipment rental,
(previously included as local service revenue) and maintenance (previously
included as miscellaneous other services revenue).
. International transit revenue is now reported net of the international
outpayment. Previously the outpayment was included in cost of sales.
. PayPhone revenue is now all included under miscellaneous other services
revenue. Previously the network value of local, national and international
calls was reclassified to local service, national call and international
revenue respectively.
A-18
<PAGE>
MANAGEMENT COMMENTARY FOR THE
NINE MONTHS ENDED DECEMBER 31, 1996 AND 1997
<PAGE>
TELECOM CORPORATION OF NEW ZEALAND LIMITED AND SUBSIDIARIES
MANAGEMENT COMMENTARY
Telecom's reported net earnings of NZ$598 million for the nine months ended 31
December 1997 increased NZ$69.9 million, or 13.2%, from NZ$528.1 million for
the same period last year. Reported net earnings for the third quarter ended
31 December 1997 ("Q3 1997-98") of NZ$199.2 million represented an increase of
NZ$32 million, or 19.1%, compared with the same quarter last year.
Telecom will pay a fully imputed third quarter dividend of NZ10.5 cents per
ordinary share in March 1998. In addition, a special fully imputed dividend of
NZ3.5 cents per ordinary share has been declared. The special dividend will
have the effect of allowing the usage of imputation credits that might
otherwise be cancelled following the Ameritech sale of Telecom's shares. The
amount of the fourth fiscal quarter dividend is expected to be reduced by the
level of the special dividend.
Reported net earnings per share ("EPS") for the nine months rose 19.4% from
NZ27.9 cents to NZ33.3 cents per share and 28.4% from NZ8.8 cents to NZ11.3
cents for Q3 1997-98. EPS growth is greater than reported net earnings growth
because Telecom's share repurchase programme which was completed in December
1997 has reduced the number of shares on issue. The effect on EPS of a lower
number of shares is partly offset by additional funding costs of the shares
repurchased.
Net earnings from continuing operations (excluding the losses from
discontinued operations from the comparative periods last year) increased
NZ$30.1 million, or 5.3%, for the nine months and NZ$14.7 million, or 8%, for
the third quarter. EPS from continuing operations increased 10.6% for the nine
months and 15.3% for the third quarter.
EARNINGS OVERVIEW
<TABLE>
<CAPTION>
NINE MONTHS ENDED 31 DECEMBER
--------------------------------------
1996 1997 CHANGE
NZ$M NZ$M %
--------------------------------------
<S> <C> <C> <C>
Reported operating revenues 2,288.1 2,523.3 10.3
Reported operating expenses 1,377.1 1,518.8 10.3
Reported net earnings 528.1 598.0 13.2
Loss from discontinued operations 39.8 - -
Net earnings from continuing operations 567.9 598.0 5.3
Reported EPS (cents) 27.9 33.3 19.4
EPS from continuing operations (cents) 30.1 33.3 10.6
Dividend per share (cents) 28.5 31.5 10.5
Special dividend per share (cents) -- 3.5 --
</TABLE>
EARNINGS OVERVIEW
<TABLE>
<CAPTION>
QUARTER ENDED
31 DECEMBER
--------------------------------------
1996 1997 CHANGE
NZ$M NZ$ M %
--------------------------------------
<S> <C> <C> <C>
Reported operating revenues 780.7 857.6 9.9
Reported operating expenses 482.2 516.9 7.2
Reported net earnings 167.2 199.2 19.1
Loss from discontinued operations 17.3 -- --
Net earnings from continuing operations 184.5 199.2 8.0
Reported EPS (cents) 8.8 11.3 28.4
EPS from continuing operations (cents) 9.8 11.3 15.3
Dividend per share (cents) 9.5 10.5 10.5
Special dividend per share (cents) -- 3.5 --
</TABLE>
Reported net earnings compared to the same periods last year have been
adversely affected by the distribution on capital note coupons ("TeleNotes")
along with other interest costs incurred on funding used to effect the share
repurchase programme. (Approximately NZ$25 million and NZ$11 million after tax
for the nine months and third quarter respectively).
Telecom's result for the nine months and third quarter reflects its strategic
focus on growing its core business while developing value added services and
cost containment.
Revenue rose by 8.4% in the nine months to 31 December 1997 (8.3% in Q3 1997-
98) after allowing for the cellular revenue adjustments last year and prior to
the impact of a change in the method of accounting for national call revenue
following the implementation of new terms between Telecom and BellSouth New
Zealand Limited ("BellSouth"). This change increased national call revenue and
cost of sales respectively, as these revenues and costs were previously shown
net rather than gross.
Significant price reductions have taken place in the nine months ended 31
December 1997 affecting national call and international revenues. Further
reductions have been announced which took effect from January and February
1998. The effect on revenue of reduced prices is expected to be at least
partially offset by volume growth. However, the overall impact on revenue and
earnings is uncertain given the extent of competition.
A-20
<PAGE>
MANAGEMENT COMMENTARY
The rate of increase in operating expenses, excluding the impact of changes in
the method of accounting for cost of sales ("refer above"), was 7.9% for the
nine months and 4.7% for Q3 1997-98. Expense growth has slowed during the
second and third quarters as the benefits of the Performance 2000 project have
continued to be felt. (See "Other Matters.")
Net cash flows from operating activities increased by NZ$130.3 million, or
12.5%, for the nine months. (See "Liquidity and Capital Resources").
DIVIDENDS
The quarterly dividend of NZ10.5 cents per share represents a distribution of
approximately 92.3% of third quarter reported net earnings.
A special dividend of NZ3.5 cents per share has been declared. The dividend
will have the effect of utilising imputation credits. The amount of the fourth
fiscal quarter dividend is expected to be reduced by the level of the special
dividend.
Due to seasonality and other factors, Telecom's earnings are not distributed
evenly throughout the year. The dividend payout percentage for the third
quarter, therefore, is not necessarily indicative of distribution levels for
the remainder of the year or for subsequent periods.
<TABLE>
<CAPTION>
QUARTER 3 SPECIAL
-----------------------------------------------
<S> <C> <C>
Dividends
Per ordinary share NZ10.5 cents NZ3.5 cents
Per American Depositary
Share US48.75 cents * US16.25 cents *
Supplementary dividend
(to non-resident holders)
Per ordinary share NZ1.85 cents NZ0.62 cents
Per American Depositary
Share US8.59 cents * US2.88 cents *
Books closing dates
New Zealand,
Australia Stock
Exchanges 6 March 1998 6 March 1998
New York Stock Exchange 5 March 1998 5 March 1998
Payment dates
New Zealand, Australia 18 March 1998 1 April 1998 #
New York 25 March 1998 8 April 1998 #
</TABLE>
* Based on an exchange rate at 31 December 1997 of NZ$1.00 to US$0.5803.
# Anticipated date (subject to change).
THE NEW ZEALAND ECONOMY
The New Zealand Government reported increased economic activity in the three
months to the end of September 1997, with seasonally adjusted Gross Domestic
Product up 0.5% over the three months and 2.5% higher than it was a year
before.
Inflation in the December quarter, as measured by the Consumer Price Index
(CPI) and reported by Statistics New Zealand, was 0.6% resulting in a 0.8%
increase for the year to December 1997.
At the end of Q3 1997-98, the International Monetary Fund ("IMF") revised its
1998 calendar economic growth forecast for New Zealand from 3.9 percent to 3.6
percent. The Treasurer has said the government's economic outlook is in line
with the IMF's forecasts but New Zealand based private sector economists have
forecast a slower growth rate of 2.2--2.8 percent. The seasonally adjusted
unemployment rate was 6.7 percent in the December 1997 quarter. Private sector
economists cite the weakened outlook for New Zealand's export markets and
softer commodity prices in light of the Asian economic crisis as reasons for a
downwards revision of economic growth forecasts. The country's overseas
balance of payments current account deficit is likely to persist for some time
at a relatively high level. This may well constrain New Zealand's short term
growth prospects.
COMPETITION
Telecom expects competition in New Zealand's telecommunications markets to
continue to intensify, with the prospect of existing participants extending
their activities and new competitors entering the market. Competition exists
in each of the markets in which Telecom operates, including telephone
services, cellular and other mobile services, customer premises equipment,
leased services and Internet access. Telecom has now completed eight
interconnection agreements.
The competitive market has resulted in significant price reductions for
international calls in 1998 for both residential and business customers. ("See
International").
A new interconnection agreement was completed with BellSouth in February 1998
which runs until 31 March 2000. The agreement replaces the interconnection
agreement signed in March 1993.
A-21
<PAGE>
MANAGEMENT COMMENTARY
In May 1997, Telstra New Zealand Limited ("Telstra NZ") accepted Telecom's
offer to provide an interim solution for local number portability. On 11
November 1997 Telecom signed a new interconnection agreement with Telstra NZ
which includes number portability. Telstra has announced its intention to
provide local services.
On 26 November 1997 Telecom and Clear Communications Limited signed an
agreement establishing number portability between their two networks.
There will be further competition in the local service market with the
interconnection agreement with Saturn Communications Limited (a cable
television service provider) completed in June 1997. The agreement covers
local service interconnection as well as 0800 and national long distance
calling.
In September 1997, Telecom announced that it had signed an interconnection
agreement with Compass Communications Limited. The agreement covers both
national and international tolls bypass and 0800 services for voice, fax and
data.
OVERVIEW OF RESULTS
Surplus From Continuing Operations
The surplus from continuing operations increased by NZ$93.5 million, or 10.3%,
for the nine months and NZ$42.2 million, or 14.1%, for the third quarter
compared with the same periods last year. The surplus from continuing
operations as a percentage of revenue was 39.8% for the nine months and 39.7%
for Q3 1997-98 compared with 39.8% and 38.2% for the same periods last year.
Revenue
Revenue growth for the nine months to 31 December 1997 was driven largely by
growth in access lines and call volumes and increased usage of enhanced
network services and cellular services.
Telecom has enhanced its revenue reporting through reclassifications of
certain revenue items. The reclassifications are explained further in the
tables on pages A-31 and A-32. The prior periods' data have been restated.
Volume Growth
<TABLE>
<CAPTION>
AS AT AND FOR THE
NINE MONTHS VARIATION
ENDED 31 DECEMBER 97:96
-------------------------------
1996 1997 %
-------------------------------
<S> <C> <C> <C>
Access lines 1,761,000 1,823,000 3.5
Call minutes
(millions)
National calls 1,600.5* 1,661.8# 3.8
International
outward calls 197.2* 226.9 15.1
International
inward calls
(excluding
transits) 208.8 242.5 16.1
Cellular connec-
tions
Total at end of
period 410,300 469,400 14.4
Average during
the period 372,200 448,100 20.4
</TABLE>
* Reclassifications of prior period data have been made to conform to current
classifications.
# Excluding calls from Telecom's fixed line to BellSouth's cellular network.
<TABLE>
<CAPTION>
FOR THE THIRD
QUARTER ENDED VARIATION
31 DECEMBER 97:96
-------------------------
1996 1997 %
-------------------------
<S> <C> <C> <C>
Call minutes
(millions)
National calls 557.9* 548.2# (1.7)
International
outward calls 69.7* 79.5 14.1
International
inward calls
(excluding
transits) 71.9 84.9 18.1
</TABLE>
* Reclassifications of prior period data have been made to conform to current
classifications.
# Excluding calls from Telecom's fixed line to BellSouth's cellular network.
Local Service
Local service revenues increased by NZ$20.7 million, or 3.3%, for the nine
months and NZ$8 million, or 3.9%, for the third quarter, compared with the
same periods last year.
Business and residential line rental revenue increased by NZ$13.8 million, or
2.5%, for the nine months and NZ$4.1 million, or 2.2%, for the third quarter
as a result of a 3.5% growth in access lines partially offset by the net
effect of pricing changes.
The increase in access lines was partially attributable to the offers of free
installation of additional lines for business and residential
A-22
<PAGE>
MANAGEMENT COMMENTARY
customers and dedicated lines for EFTPOS (Electronic Funds Transfer at Point
of Sale) transactions.
Consistent with the provisions of the Kiwi Share, a 2.9% increase in
residential line rental took effect from 1 August 1997.
Telecom has introduced choices for customers in the way they pay for their
residential telephone service. Since August 1997, residential customers have
had the option to continue with the existing monthly line rental and unlimited
free local calling option or pay a lower monthly rental and 20 cents per local
call. At the end of Q3 1997-98, approximately 70,000 residential customers had
switched to the new pricing option.
In December 1997, charges were introduced of NZ50 cents per national Directory
Assistance call and NZ$1.50 per international Directory Assistance call. At
the same time, the monthly residential line rental was reduced by NZ$1.25 to
NZ$35.66 (including GST).
In December 1997, there was also a reduction in business line rentals of 3.3%
in conjunction with an increase in business local call prices.
Revenue from local calls increased by NZ$6.9 million, or 9.3%, for the nine
months, and NZ$3.9 million, or 16.2%, for the third quarter, due to higher
call volumes and the price increase for business local calls which has taken
place in conjunction with the price reduction in business line rentals. Local
call minutes increased by 7.6% for the nine months and 7.8% for the third
quarter.
National Calls
National call revenue for the nine months to 31 December 1997 included the
effect of a change in accounting for calls from Telecom's fixed line network
to BellSouth's cellular network necessitated by the implementation of new
terms in an agreement with BellSouth. Gross revenue from these calls is now
included in national call revenue with the termination payment included in
cost of sales. Previously national call revenue included this revenue net of
payments to BellSouth. Excluding the effect of this change, national call
revenue increased by NZ$4.3 million, or 1%, for the nine months and decreased
NZ$0.2 million, or 0.2%, for the third quarter (NZ$15.1 million, or 3.5%, and
NZ$3.9 million, or 2.7%, including the increases in Home 0800 and Virtual
Private Networks ("VPN") revenue from national calls). The increase for the
nine months reflected volume growth due to market-led price reductions and
other marketing initiatives, and continued growth in the cellular market. The
slower growth of the New Zealand economy had some effect on volume growth
rates. The decrease for the third quarter was largely due to lower call
volumes and the migration of calls to Home 0800 and VPN.
With the expanding range of services offered by Telecom, national call volume
and revenue trends continued to reflect the migration of calls into Telecom's
cellular network, VPN and Home 0800. VPN and Home 0800 revenues from national
calls can be regarded as direct substitutes for residential and business
tolls.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE THIRD
NATIONAL CALL MINUTES MONTHS QUARTER
GROWTH (VARIATION 97:96) % %
- ---------------------------------------------------------------------------------
<S> <C> <C>
Call minutes (including calls to the cellular network) # 3.8 (1.7)
Call minutes (including home 0800 and VPN) 5.9 4.4
Call minutes (excluding calls to the cellular network) 3.2 (2.7)
Call minutes to the cellular network # 8.4 5.8
</TABLE>
- -------------------------------------------------------------------------------
# Call minutes for calls to the cellular network excluding calls to
BellSouth's cellular network.
The average per minute charge for national calls, excluding those made to the
cellular network, was approximately 3.2% lower for the nine months compared
with the same period last year. The average per minute charge remained static
for the third quarter.
From the beginning of February 1998, residential national toll rate plans were
restructured. The number of calling periods for residential customers has been
cut from four to two, peak and off-peak, and the number of calling steps has
been cut from 15 to seven. The restructuring resulted in reductions for long-
distance calls of up to 65 percent against existing base rates. Some, but not
all, short distance calls increased in price, while the cost of longer
distance calls reduced in price. Customers have the option to remain on
existing toll rates. A further initiative is Favourite Place New Zealand which
provides a flat fee option for unlimited off-peak calling to another area in
New Zealand chosen by the customer.
Telecom's NZ$5 cap on off-peak national calls, offered through the NZ$5
Weeknights and NZ$5 Weekends, currently apply to all of the new toll price
plans until 31 December 1998. However, from 1 February 1998 the NZ$5 caps will
only be available to customers who choose Telecom as their preferred national
toll calls provider.
A-23
<PAGE>
MANAGEMENT COMMENTARY
A Talking Points loyalty programme which rewards residential customers for
using Telecom's services was introduced in May 1996. Approximately 461,000
customers have joined the programme. The schools connection loyalty programme
where residential customers nominate schools to receive sponsorship from
Telecom based on the customer usage of Telecom's service, has 520,000
customers.
International
Total international revenue increased by NZ$12.6 million, or 3.4%, for the
nine months and NZ$3.9 million, or 3.2%, for the third quarter compared with
the same periods last year. The increase for the nine months reflects
increases in revenue from outward calls, other international services and the
margin on transit calls partially offset by a reduction in inward call
revenue. A decrease in outward call revenue for the third quarter was more
than offset by increases in the margin from transit calls and other
international services revenue.
<TABLE>
- -------------------------------------------------------------------------------------------
<CAPTION>
NINE THIRD
INTERNATIONAL GROWTH (VARIATION MONTHS QUARTER
97:96) % %
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Outward calls
-Revenue 3.1 (2.5)
-Call minutes 15.1 14.1
Inward calls (excluding transits)
-Revenue (7.0) 0.6
-Call minutes 16.1 18.1
Net transit revenue # 81.0 166.7
- -------------------------------------------------------------------------------------------
</TABLE>
# Gross revenue net of outpayments
The rate of growth in outward call minutes reflected market growth and the
volume stimulation from price specials offered to New Zealand customers.
Outward call revenue and volumes have been affected by competitive pressures,
including increased activity by new players and the slow-down in the domestic
economy.
The average per minute charge for outward calls was approximately 10% and 15%
lower for the nine months and third quarter respectively compared with the
same periods last year, reflecting frequent weekend specials and the more
extensive application of call plans. New residential toll price plans were
introduced on 1 July 1997 aimed at offering substantial discounts to
residential customers based on their own typical calling patterns.
Further price reductions will be effective in 1998. From 1 January 1998
international toll prices for residential customers fell by an average of
almost 20%. Telecom has also simplified calling times to peak (8.00am to
6.00pm weekdays) and off-peak (6.00pm to 8.00am weekdays and all weekend).
International toll calling prices for Telecom business customers will decrease
on average by 15% from 1 February 1998. While price elasticity and market
growth have historically partially or wholly tended to offset price declines,
given the size of this decrease, management expects some decline in
international tolls revenues for the fourth quarter of fiscal 1998 relative to
the fourth quarter of fiscal 1997.
The average per minute charge for inward calls decreased by approximately 20%
for the nine months and 15% for the third quarter reflecting significant
reductions in call rates agreed with foreign carriers partly offset by the
effect of the weakening New Zealand dollar. These lower rates received for
inward calls were largely counterbalanced by lower accounting rates paid by
Telecom to foreign carriers for outward calls (see "Cost of Sales").
It is expected that competition in international calls and transit traffic
will continue to be intense. Further accounting rate reductions can be
anticipated with players in some markets prepared to offer termination rates
at levels below current accounting rates.
Telecom has established a point of presence in the United States which became
fully operational in December 1996. This point of presence has improved
Telecom's competitiveness in the transit call business and is part of
Telecom's continual efforts to lower its costs for outward call minutes.
Telecom is expanding its role in this dynamic market by interconnecting with
an increasing number of partner carriers in order to secure additional transit
business and further reduce costs.
The net revenue earned (revenue net of outpayments) from transit services
increased 81% for the nine months and 166.7% for the third quarter, largely
attributable to strong growth in calls from international switched traffic
transiting Telecom's facilities.
Revenue from other international services increased by 28.5% for the nine
months and 20% for the third quarter, largely due to increased revenue from
the net revenue on transit calls for information services.
Cellular and Other Mobile Services
Revenue from cellular and other mobile services grew by NZ$75.7 million, or
32%, for the nine months and NZ$29.5 million, or 34.7%, for the third quarter
compared with the same periods last year. Excluding the effect of certain
revenue adjustments which took place in 1996-97, the increase in cellular and
other mobile services revenue would have been 28.1% for the nine months.
A-24
<PAGE>
MANAGEMENT COMMENTARY
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CELLULAR GROWTH (EXCLUDING NINE THIRD
OTHER MOBILE SERVICES) MONTHS QUARTER
(VARIATION 97:96) % %
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue 35.8 * 38.4 #
Connections
-Total at end of period 14.4 14.4
-Average during the period 20.4 17.1
</TABLE>
- -------------------------------------------------------------------------------
* Allowing for revenue adjustments in 1996-97 growth would have been 31.4% for
the nine months (22.5% excluding the effect of the acquisitions of
Motorola's and Ericsson's cellular reselling businesses in June 1997 and
October 1997 respectively).
# Excluding the effect of the acquisitions of Motorola's and Ericsson's
cellular reselling businesses growth would have been 26%.
Telecom had 469,400 cellular connections at 31 December 1997. The continued
strong growth in connections is largely due to the "Telecom TO GO" promotion
launched in November 1996, which is aimed at making mobile communications more
affordable for the consumer market. Approximately 32.2% of total connections
are connected to the Telecom TO GO rate plans.
The connection growth rate for the nine months was affected by a downwards
adjustment of approximately 10,000 connections as a result of a service
provider completing an internal audit and a duplication in respect of tandem
connections. However, these adjustment do not affect revenue.
The total number of cellular connections, including BellSouth's connections,
is currently estimated to represent approximately 16% of the New Zealand
population. This penetration level, when compared with other relevant
countries, suggests scope for continued expansion of this market.
Call minutes for the nine months increased by approximately 21%. Average
revenue per customer is currently being maintained during a period of
significant connection growth and the expansion of the consumer market.
Telecom has been developing Personal Communication Services ("PCS") which,
using cellular technology, will eventually allow customers to use a single
handset for mobile and fixed line calls. The first of these services, Mobile
Extension, was launched to corporate customers in November 1996. This service
allows users to dial internal fixed extension numbers from their mobile phones
and the service is currently being extended to business customers.
The PCS BusinessZone product was launched in July 1997. This service is
primarily aimed at businesses where workers need to keep in touch on site at a
cost lower than the standard mobile rate.
Telecom has also created new value-added revenue streams in the mobile area
including Direct Dial (introduced in August 1996) and Voice Dial (introduced
in October 1996).
Interconnect
Interconnect revenue increased by NZ$0.3 million, or 0.6%, for the nine months
and NZ$1.8 million, or 10.1%, for the third quarter compared with the same
periods last year. The increase for the third quarter is largely due to new
interconnect carriers and increased activity with existing carriers.
Interconnect revenue is derived from charges for delivering to and accepting
from other service providers local, national, international and 0800 calls.
Installation charges and rental of interconnecting links and service delivery
point charges are also included.
Enhanced Network Services
Enhanced network services revenue increased by NZ$54.2 million, or 24.6%, for
the nine months and NZ$12.7 million, or 16.1%, for the third quarter compared
with the same periods last year, due primarily to the continued strong growth
in subscribers. Excluding a transfer from external revenue to internal revenue
for the value-added services provided by Netway in Q3 1997-98, enhanced
network services would have increased by 22.1% for the third quarter. Enhanced
network services revenue currently represents 10.9% of total revenue compared
with 9.6% a year ago.
0800 revenues increased strongly, due to higher demand and the growth of Home
0800. Increased revenues also reflected growth in the value-added services
provided by Netway, voice messaging and in the use of Centrex, VPN and ISDN
services. Centrex and VPN services provide individual business customers with
voice and data network capabilities to meet their specific needs, while ISDN
services enable high-speed, high-quality transmission of images and data.
Combined Centrex, VPN, ISDN and voice messaging revenues increased 49.9% for
the nine months and 49.4% for the third quarter.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE THIRD
ENHANCED NETWORK SERVICES GROWTH MONTHS QUARTER
(VARIATION 97:96) % %
- -----------------------------------------------------------------------------------------
<S> <C> <C>
0800 services (business and residential)
-Revenue 23.9 21.9
-Call minutes 28.3 27.4
Other enhanced network services
-Centrex lines 35.8 35.8
-Call Minder mailboxes 31.9 31.9
</TABLE>
- -------------------------------------------------------------------------------
A-25
<PAGE>
MANAGEMENT COMMENTARY
Directories
Revenue from regional directories increased by 7.9% for the nine months, and
4.0% for the third quarter as a result of tariff and volume growth in both
White Pages and Yellow Pages products. Revenue from specialised and local
directories increased for the nine months and Q3 1997-98 due largely to the
publication of an additional directory in these periods compared with 1996-97.
Miscellaneous Other Services
Miscellaneous other services revenue, which is derived largely from PayPhones,
an international outside plant project, Internet access ("XTRA") and
broadcasting transmission, increased by 27% for the nine months and 37.7% for
the third quarter.
The increase was largely due to XTRA, which first contributed revenue in the
third quarter of 1996-97. There were approximately 85,000 XTRA registered
customers at 31 December 1997 compared with 34,000, at 31 December 1996. Of
the registered customers 65,100 have been active within the last month.
Expenses
Excluding the effect of the change in accounting for the costs of terminating
calls from Telecom's fixed line network to BellSouth's cellular network (see
"Cost of Sales"), operating expenses increased by NZ$108.5 million, or 7.9%,
for the nine months and NZ$22.7 million, or 4.7%, for the third quarter.
Reported operating expenses as a percentage of reported revenue was 60.2% for
the nine months of both years and decreased from 61.8% to 60.3% for the third
quarter.
Personnel Costs
Gross personnel costs increased by 3.1% for the nine months and 0.4% for the
third quarter, compared with the same periods last year.
The increase in gross personnel costs reflected:
. Salary increases for personnel on individual contracts;
. Negotiated settlements for personnel covered by collective contracts;
. The acquisition of Motorola's and Ericsson's cellular reselling businesses.
The increases were partly offset by lower staff numbers.
<TABLE>
- -----------------------------------------------------------------------------------------------
<CAPTION>
PERSONNEL NUMBERS
- -----------------------------------------------------------------------------------------------
VARIATION
-------------------------------------------------------------------------------------------
DECEMBER MARCH DECEMBER DECEMBER MARCH
1996 1997 1997 1996 1997
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operations 6,832 6,882 6,742 (90) (140)
Other 1,989 1,828 1,719 (270) (109)
-------------------------------------------------------------------------------------------
Total 8,821 8,710 8,461 (360) (249)
-------------------------------------------------------------------------------------------
</TABLE>
Lower labour recoveries were due to a reduction in personnel involved in
direct labour activities and a change in the treatment of unproductive labour
while the decrease in labour capitalised reflects a lower level of capital
expenditure.
The significant change that has occurred in Telecom's workforce in the period
from 1993 to 1998 is the move from collective contracts to individual
contracts. The number of staff on agreed individual contracts has increased to
78% in 1998 from 10% in 1993.
For those employees remaining on collective contracts, Telecom has also moved
from a single collective contract to five business unit or work group based
contracts. The contracts are for variable terms ranging from fourteen months
to eighteen months.
Depreciation
Depreciation expense increased by 6.9% for the nine months and 2.7% for the
third quarter compared with the same periods last year. This reflected the
increasing fixed asset base resulting from capital expenditure and a higher
proportion of expenditure on information technology assets, which have shorter
depreciable lives compared with network assets.
Cost of Sales
Cost of sales increased by 26.2% in the nine months and 30.3% in the third
quarter, compared with the same periods last year.
As stated under "National Calls", cost of sales for the nine months to 31
December 1997 was affected by a change in accounting for calls from Telecom's
fixed line network to BellSouth. Excluding the termination charge related to
these calls, cost of sales increased by 15.3% for the nine months and 19% for
the third quarter.
The increase was largely due to growth in the cellular business, including the
acquisition of Motorola's and Ericsson's cellular reselling business, costs
related to an outside plant project and higher equipment cost of sales.
A-26
<PAGE>
MANAGEMENT COMMENTARY
The lower accounting rates (see "International") reduced the impact of a 15.1%
increase in international outward call minutes for the nine months and 14.1%
for the third quarter on international cost of sales for outbound calls, which
decreased by approximately 8.7% and 4.6% for the nine months and third quarter
respectively. The average, per minute international outpayment has reduced by
approximately 18% for the nine months and 15% for the quarter.
Maintenance
Maintenance costs decreased by 10.7% for the nine months and 20.6% for the
third quarter, compared with the same periods last year.
This decrease reflected the following:
. improved prices from external contractors;
. a significant increase in efficiency and productivity in 1997-98 as
reflected in lower labour and overhead recoveries; and
. a change in the treatment of unproductive time which was previously re-
allocated to maintenance and is now reflected in net personnel cost.
Other Operating Expenses
Other operating expenses increased by 9.9% for the nine months and 5.7% for
the third quarter compared with the same periods last year.
The increase in other operating expenses for the nine months and third quarter
was largely due to an allowance for certain litigation costs in the first half
of 1997-98, higher accommodation costs and bad debts and a lower level of
overhead recoveries relating to capital and maintenance work.
Net Interest Expense and Taxation
The increase in net interest expense of NZ$23 million, or 30.3%, for the nine
months and NZ$8.6 million, or 31.7%, for the third quarter compared with the
same periods last year was largely due to a higher level of debt resulting
from the share repurchase programme.
The surplus from continuing operations covered net interest expense (after
investment income but before interest capitalised) 9.1 and 8.6 times for the
nine months and third quarter, compared with 10.5 and 9.7 times for the same
periods last year.
Income tax expense increased by NZ$26.4 million, or 9.9%, for the nine months
and NZ$12.2 million, or 14%, for the third quarter compared with the same
periods last year. These increases were largely due to the 8.4% and 12.3%
increases in the surplus from continuing operations before income tax for the
nine months and third quarter respectively. The effective tax rates for the
nine months and third quarter were 32.4% and 32.5% compared with 32% for both
periods last year, 31.7% for fiscal 1997 and a statutory rate of 33%.
In accordance with established practice, a periodic review by the Inland
Revenue Department covering the fiscal years ended 31 March 1991 to 1996 is
currently in progress. The Directors believe that Telecom's tax provisions are
adequate. However, the tax ultimately assessed for these periods by the Inland
Revenue Department could differ from the amounts provided for taxation in the
financial statements.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows from operating activities for the nine months were NZ$1,175.2
million, an increase of NZ$130.3 million. This increase resulted from higher
receipts from customers, partially offset by increased payments to suppliers
and employees, redundancy, restructuring, Year 2000 and interest payments.
A decrease in cash applied to the purchase of fixed assets, and increase in
cash received from notes receivable was offset by an increase in net
investments purchased which led to net cash flows used in investing activities
remaining stable, excluding the change in cash flows related to discontinued
operations.
Net cash used in financing activities amounted to NZ$642.9 million compared
with NZ$460 million for the nine months to 31 December 1996. The movement
reflects the share repurchase, an increase in dividend payments and the
distribution on TeleNotes offset by increased proceeds from debt and the issue
of TeleNotes.
The net debt to net debt plus capital funds ratio (including TeleNotes and
Capital Securities) was 58.8% at 31 December 1997 compared with 51.4% at 31
March 1997. Telecom issued in February 1998 US$300 million worth of Restricted
Capital Securities to United States based institutional investors. US$150
million of such securities have a fixed coupon of 6.25 percent and will be
redeemable in 2003. The other US$150 million have a fixed coupon rate of 6.5
percent and will be redeemable in 2008. Telecom has entered into swaps to
remove the exposure to exchange rate fluctuations that would otherwise result
from the issue of Capital Securities. The effective cost of the Capital
Securities will reflect the results of these swaps and related New Zealand
interest rate swaps. The securities may be redeemed for
A-27
<PAGE>
MANAGEMENT COMMENTARY
either cash or American Depositary Receipts. If these Capital Securities were
included in the calculation of net debt to net debt plus capital funds at 31
December 1997, the ratio would have been approximately 44%.
The proceeds of the issue of Capital Securities will be used to repay short-
term borrowing of approximately NZ$500 million that Telecom used to fund the
share repurchase programme.
Cash and short-term investments were NZ$129.3 million at 31 December 1997
compared with NZ$36.3 million at 31 March 1997--and had available unutilised
committed facilities of NZ$281 million, as well as substantial uncommitted
other borrowing capacity.
As at 31 December 1997 total interest-bearing long-term and short-term
liabilities amounted to NZ$2,200.2 million, compared with NZ$1,809.6 million
at 31 March 1997.
CAPITAL EXPENDITURE
Capital expenditure for the nine months amounted to NZ$435.9 million
(including NZ$61.9 million on information technology assets), a decrease of
NZ$54.4 million, or 11.1%, compared with the same period last year. Cash
applied to capital expenditure amounted to NZ$421.5 million, a decrease of
NZ$60.4 million, or 12.5%. Capital expenditure for the year ending 31 March
1998 is not expected to exceed the NZ$700 million previously advised.
OTHER MATTERS
Broadband Strategy
The first stage of the residential hybrid fibre/coax ("HFC") cable roll-out is
now virtually complete with more than 68,000 homes in the Auckland and
Wellington suburbs passed.
During the programme, it has become clear that alternative technologies are
soon likely to become more appropriate for the carriage of fast data, and
possibly video in other geographical areas. Accordingly, the deployment of HFC
cable was halted after the first stage. Telecom is currently assessing other
options; in particular, a trial of ADSL technology (which allows, transmission
of high speed data services over copper wire) is underway in suburban
Wellington. In the current quarter, Telecom expects to launch a wider scale
trial of ADSL technology on a commercial basis and will supply customers
involved with fast internet access to XTRA and potentially video programming
from First Media.
Work is continuing on an assessment of the potential future role of fibre to
the kerb, particularly given the maintenance cost savings which may be
realised from this approach if overseas experience is a guide.
Telecom is also reassessing the value of its content businesses. During the
last 12 months, it has become plain that fast data is likely to show stronger
growth in the immediate future than video. This is consistent with the
original strategy for the HFC roll-out which was primarily revenue generation
from data rather than video traffic. In light of this, and in view of the
decision not to proceed beyond the first stage of the HFC roll-out, First
Media is currently being re-organised with a view to servicing existing
customers rather than pursuing aggressive growth. Staff numbers have been
reduced accordingly.
The costs associated with the reorganising of First Media and discontinuance
of further HFC roll-out may require an additional provision against earnings.
The amount of the provision will be recognised when the Directors are able to
determine a reliable estimate of further losses, if any. A provision for such
losses is likely to be made in the fourth quarter of fiscal 1998 and is not
currently expected to be material.
Share Repurchase
The Telecom share repurchase programme which started in February 1997 was
completed on 19 December 1997. Telecom acquired a total of 138.1 million
shares at an aggregate cost of NZ$1,001.3 million including professional fees
and brokerage costs of NZ$1.9 million. Purchases made on the New Zealand Stock
Exchange accounted for 74.1 million of the total shares bought to date at a
cost of NZ$534 million and purchases made directly from Ameritech and Bell
Atlantic represented 64 million shares at a cost of NZ$465.4 million.
Ameritech and Bell Atlantic were required to sell down their shares in order
to avoid violating the Kiwi Share provision which limits their holdings to a
maximum of 24.95% each.
As stated previously, the objectives of the repurchase were to reduce
Telecom's average cost of capital and further enhance value to shareholders.
Restructuring, Performance 2000 and Year 2000
Restructuring costs totalling NZ$64.5 million aimed at substantially reducing
Telecom's operating costs and the strategic restructuring of ConnecTel,
formerly the Design, Build and
A-28
<PAGE>
MANAGEMENT COMMENTARY
Maintenance division, were identified and provided against earnings for the
year ended 31 March 1997.
Redundancy and other restructuring costs of NZ$24.6 million incurred during
the nine months ended 31 December 1997, including amounts relating to an
earlier restructuring programme, have been charged against the restructuring
provision.
The Performance 2000 project team has identified where significant gaps exist
between Telecom's performance and world best practice and, using value
drivers, identified opportunities to close the gaps and established new
performance targets.
These new performance targets encompass savings in operating costs, a
moderation in capital expenditure (and therefore also savings in borrowing
costs and depreciation) and the maintenance and enhancement of Telecom's
competitiveness by enabling Telecom to reduce prices and grow volumes
efficiently, thereby increasing revenues.
The project team identified some major short-term opportunities, but its
principal focus was to improve Telecom's performance over the next two to
three years.
The costs required to be incurred in order to achieve the cost savings and
enhancement of competitiveness will be incurred progressively, with the
intention of achieving significant performance improvement in a range of areas
over the next two to three fiscal years. Included in other operating expenses
for the nine months to 31 December 1997 were redundancy and other costs of
NZ$4.7 million relating to Performance 2000 initiatives which were not
provided for at 31 March 1997.
The development of detailed plans and timetables to minimise the risk that any
of Telecom's business-critical systems are not Year 2000 compliant by 31
December 1998 was completed in May 1997. Management are currently completing
the identification and securing of the necessary resources and estimate that
all material modifications will be substantially completed by 31 December
1998.
Southern Cross
Telecom is planning a joint venture with other international
telecommunications organisations to build and operate a trans-Pacific
submarine optical fibre cable, called the Southern Cross Cable Network
("Southern Cross"), linking Australia and New Zealand with Hawaii and the West
Coast of the United States. Southern Cross is intended to provide
international capacity to meet expected growth of traffic generated by data
services, including Internet traffic, and is expected to commence operations
in 1999 and achieve full operational capacity in 2000. Telecom currently
anticipates entering into a take or pay commitment to purchase capacity From
Southern Cross and is considering making an equity investment in the entity
formed to manage Southern Cross.
Pacific Star
The process of winding down or disposing of the discontinued Pacific Star
operations continued during the nine months with the completion of the sale of
the private (non-government) customer base and the telecommunications
consulting division. Pacific Star's contractual obligation to the Queensland
State Government expired in August 1997 and the government service contract
with the Western Australian State Government which expired in February 1998
has not been renewed. Pacific Star is currently negotiating transitional
arrangements relating to these contracts. Winding down and disposal costs were
provided for in Telecom's 31 March 1997 financial statements. On 27 February
1998, Telstra and Pacific Star announced that they had reached a commercial
settlement of their dispute over outstanding payments and cross claims. The
successful implementation and finalization of this commercial settlement is
expected to result in all existing legal proceedings between the parties being
discontinued. The terms of the commercial settlement are covered by a
confidentiality agreement which precludes disclosure of its terms except in
specified circumstances. Telecom fully provided for the anticipated costs of
exiting the Pacific Star businesses in the year ended 31 March 1997. Following
the commercial settlement with Telstra and the progress to date in the winding
down of the operations, the final costs of exiting the businesses may be less
than was anticipated at 31 March 1997.
New Authoritative Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued a
Statement of Financial Accounting Standards ("SFAS") No. 130, "Comprehensive
Income". SFAS No. 130 becomes effective for fiscal years beginning after 15
December 1997 and requires reclassification of earlier financial statements
for comparative purposes. Earlier application is permitted. SFAS No. 130
established standards for the reporting and display of comprehensive income
and its components (revenues, gains and losses) in full set of general-purpose
financial statements. SFAS No. 130 does not require a specific format for the
financial statements in which comprehensive income is reported, but does
A-29
<PAGE>
MANAGEMENT COMMENTARY
require that an amount representing total comprehensive income be reported in
that statement. Telecom is evaluating the Statement's provisions to conclude
how it will present comprehensive income in its financial statements, and has
not yet determined the amounts to be disclosed, or the presentation to be
adopted.
Also, in June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments
of an Enterprise and Related Information". This Statement, which supersedes
SFAS No 14, "Financial Reporting for Segment of a Business Enterprise" will
change the way public companies report financial and descriptive information
on reportable segments in financial statements. It also requires entity-wide
disclosures about the products and services an entity
provides, the material countries in which it holds assets and reports
revenues, and its major customers. The Statement is effective for fiscal years
beginning after 15 December 1997. Telecom management are currently evaluating
the new Statements provisions to determine the effect, if any, of the adoption
of SFAS No. 131 on the financial statements.
US GAAP RECONCILIATION
The consolidated financial statements are prepared in accordance with NZ GAAP
which differ in certain significant respects from US GAAP. These differences,
and the approximate effect of the adjustments necessary to restate net
earnings and shareholders' funds, are detailed in Note 28 to the consolidated
financial statements and in Note 18 to the unaudited interim financial
statements.
As a result of these differences, Telecom's US GAAP net surplus from
continuing operations was higher than its NZ GAAP net surplus from continuing
operations by approximately NZ$93.4 million (14%) for the year ended 31 March
1997 and lower by NZ$52.2 million (8.7%), NZ$4.6 million (1%), NZ$1.8 million
(0.2%) and NZ$6.7 million (1.1%) for the nine months ended 31 December 1997
and 1996 and the years ended 31 March 1996 and 1995 respectively.
For the year ended 31 March 1997, US GAAP earnings were higher due largely to
the add back for US GAAP purposes of the provision for restructuring and Year
2000 costs, partially offset by the depreciation charge on interest previously
capitalised for US GAAP reporting purposes.
For the nine months ended 31 December 1997, US GAAP earnings were lower due
principally to the recognition of the provision for restructuring of NZ$62.7
million, such provision having been recognised for NZ GAAP purposes in the
year ended 31 March 1997.
Total shareholders' funds as at 31 December 1997 and 1996 and as at 31 March
1997, 1996 and 1995 were greater under US GAAP by approximately NZ$324 million
(33.1%), NZ$208.9 million (9.8%), NZ$320.4 million (19.5%), NZ209.7 million
(9.8%) and NZ$343.9 million (16.5%) respectively, due to the accumulated
effects of the differences referred to above and the fact that, under NZ GAAP,
dividends paid in respect of, but after, a fiscal year and quarter end are
deducted in computing retained earnings for such period, whereas they are not
so deducted under US GAAP.
A-30
<PAGE>
OVERVIEW OF SURPLUS FROM CONTINUING OPERATIONS
<TABLE>
<CAPTION>
Nine Months Ended 31 Variation
December 97:96
- ------------------------------------------------------------------------------------
(in NZ$ millions, except percentages) 1996 % 1997 % $ %
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES
Local service 621.4 27.2 642.1 25.5 20.7 3.3
National calls 412.1 18.0 451.8 17.9 39.7 9.6
International 366.6 16.0 379.2 15.0 12.6 3.4
Interconnection 51.3 2.2 51.6 2.0 0.3 0.6
Cellular and other mobile services 236.4 10.3 312.1 12.4 75.7 32.0
Enhanced network services 220.1 9.6 274.3 10.9 54.2 24.6
OTHER OPERATING REVENUES
Directories 81.8 3.6 88.8 3.5 7.0 8.6
Leased services 95.1 4.2 98.5 3.9 3.4 3.6
Equipment revenue 147.8 6.5 154.4 6.1 6.6 4.5
Miscellaneous other services 55.5 2.4 70.5 2.8 15.0 27.0
---------------------------------------------------------
380.2 16.7 412.2 16.3 32.0 8.4
---------------------------------------------------------
TOTAL OPERATING REVENUES 2,288.1 100.0 2,523.3 100.0 235.2 10.3
---------------------------------------------------------
OPERATING EXPENSES
Gross personnel costs 399.6 17.4 411.8 16.3 12.2 3.1
Labour capitalised (39.2) (1.7) (34.0) (1.3) 5.2 13.3
Labour recovered (96.4) (4.2) (87.6) (3.4) 8.8 9.1
---------------------------------------------------------
Net personnel costs 264.0 11.5 290.2 11.6 26.2 9.9
Depreciation 395.1 17.3 422.3 16.7 27.2 6.9
Cost of sales 304.1 13.3 383.9 15.2 79.8 26.2
Maintenance 153.3 6.7 136.9 5.4 (16.4) (10.7)
Other operating expenses 259.7 11.4 285.5 11.3 25.8 9.9
---------------------------------------------------------
1,376.2 60.2 1,518.8 60.2 142.6 10.4
Abnormal costs 0.9 -- -- -- (0.9) --
---------------------------------------------------------
TOTAL OPERATING EXPENSES 1,377.1 60.2 1,518.8 60.2 141.7 10.3
---------------------------------------------------------
SURPLUS FROM CONTINUING OPERATIONS 911.0 39.8 1,004.5 39.8 93.5 10.3
---------------------------------------------------------
</TABLE>
A-31
<PAGE>
OVERVIEW OF SURPLUS FROM CONTINUING OPERATIONS
<TABLE>
<CAPTION>
Quarter Ended 31 Variation
December 97:96
- --------------------------------------------------------------------------------
(in NZ$ millions, except percentages) 1996 % 1997 % $ %
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES
Local service 207.2 26.5 215.2 25.1 8.0 3.9
National calls 137.1 17.6 149.2 17.4 12.1 8.8
International 123.8 15.9 127.7 14.9 3.9 3.2
Interconnection 17.8 2.3 19.6 2.3 1.8 10.1
Cellular and other mobile services 85.0 10.9 114.5 13.3 29.5 34.7
Enhanced network services 79.1 10.1 91.8 10.7 12.7 16.1
OTHER OPERATING REVENUES
Directories 27.2 3.5 29.0 3.4 1.8 6.6
Leased services 31.5 4.0 33.0 3.8 1.5 4.8
Equipment revenue 52.9 6.8 51.3 6.0 (1.6) (3.0)
Miscellaneous other services 19.1 2.4 26.3 3.1 7.2 37.7
----------------------------------------
130.7 16.7 139.6 16.3 8.9 6.8
----------------------------------------
TOTAL OPERATING REVENUES 780.7 100.0 857.6 100.0 76.9 9.9
----------------------------------------
OPERATING EXPENSES
Gross personnel costs 136.1 17.4 136.7 15.9 0.6 0.4
Labour capitalised (15.0) (1.9) (10.4) (1.2) 4.6 30.7
Labour recovered (28.2) (3.6) (28.0) (3.2) 0.2 0.7
----------------------------------------
Net personnel costs 92.9 11.9 98.3 11.5 5.4 5.8
Depreciation 139.6 17.9 143.4 16.7 3.8 2.7
Cost of sales 105.5 13.5 137.5 16.0 32.0 30.3
Maintenance 52.4 6.7 41.6 4.9 (10.8) (20.6)
Other operating expenses 90.9 11.7 96.1 11.2 5.2 5.7
----------------------------------------
481.3 61.7 516.9 60.3 35.6 7.4
Abnormal costs 0.9 0.1 -- -- (0.9) --
----------------------------------------
TOTAL OPERATING EXPENSES 482.2 61.8 516.9 60.3 34.7 7.2
----------------------------------------
SURPLUS FROM CONTINUING OPERATIONS 298.5 38.2 340.7 39.7 42.2 14.1
----------------------------------------
</TABLE>
Certain reclassifications of prior periods' data have been made to conform to
current period classifications as follows:
. Interconnect revenue is now separately reported rather than allocated to
local service, national calls, international and leased services revenue.
. The basis for allocating account considerations and call plans has been
changed to more accurately reflect the revenue streams to which the account
considerations and call plans relate.
. Equipment revenue now includes customer premises equipment ("CPE") rental,
(previously included as local service revenue) and maintenance (previously
included as miscellaneous other services revenue).
. International transit revenue is now reported net of the international
outpayment. Previously the outpayment was included in cost of sales.
. PayPhone revenue is now all included under miscellaneous other services
revenue. Previously the network value of local, national and international
calls was reclassified to local service, national call and international
revenue respectively.
A-32
<PAGE>
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE
BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING
SHAREHOLDER OR ANY UNDERWRITER. NEITHER THE DELIVERY OF THE PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE AN IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH AN OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR
TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... ii
Reports to Shareholders................................................... ii
Incorporation of Documents by
Reference................................................................ iii
Certain Defined Terms, Currency of Presentation, Exchange Rates and
Conventions.............................................................. iii
Enforceability of Civil Liabilities....................................... iv
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 13
The Global Offering....................................................... 18
Dividends................................................................. 20
Exchange Rates............................................................ 21
Price Range of Shares and ADSs............................................ 22
Capitalization............................................................ 23
Selected Consolidated Financial
Information and Other Data............................................... 24
Management's Discussion and Analysis
of Financial Condition and
Results of Operations.................................................... 28
Business.................................................................. 30
Management................................................................ 48
Principal and Selling Shareholders........................................ 51
Description of Shares..................................................... 52
Description of Instalment Receipts and
Trust Deed............................................................... 58
Description of Interim American
Depositary Receipts and American
Depositary Receipts...................................................... 67
Taxation.................................................................. 80
Underwriting.............................................................. 87
Notice to Canadian Residents.............................................. 90
Legal Matters............................................................. 91
Experts................................................................... 91
Consolidated Financial Statements......................................... F-1
Appendix A................................................................ A-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
LOGO
Telecom Corporation of New Zealand Limited
87,400,000 Ordinary Shares
in the form of Instalment Receipts and Interim American Depositary Shares
PROSPECTUS
CREDIT SUISSE FIRST BOSTON
MERRILL LYNCH & CO.
SBC WARBURG DILLON READ INC.
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses attributable to the Global Offering are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... US$ 157,965
Australian Securities Commission............................ 1,154
New York Stock Exchange Listing Fee......................... 1,500
New Zealand Stock Exchange Listing Fee...................... 4,787
Australian Stock Exchange Listing Fee....................... 30,037
Printing and Engraving Expenses............................. 800,000
Legal Fees and Expenses..................................... 3,000,000
Accounting Fees and Expenses................................ 200,000
Trustee Fees and Expenses................................... 265,000
Insurance Premiums.......................................... 825,000
Miscellaneous............................................... 214,557
------------
Total................................................... US$5,500,000
============
</TABLE>
The Selling Shareholder has agreed to be responsible for its own legal and
incidental expenses in connection with the Global Offering as well as the
printing and certain trustee related expenses and a portion of the insurance
premiums and listing fees referred to above. The Company is responsible for
all of the other itemized expenses listed above. However, the Selling
Shareholder has agreed to pay a lump sum of US$4.0 million to the Company in
consideration of such expenses.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Pursuant to the Company's Constitution, the Directors of the Company and, if
approved by the Directors, the officers of the Company are entitled to
indemnification out of the assets of the Company against (i) liability for any
act or omission in their capacities as such (other than criminal liability and
liability resulting from a failure to act in good faith in the best interests
of the Company), (ii) costs incurred defending or settling any claim relating
to such liability and (iii) costs incurred in defending or settling any
criminal proceedings or claim in respect of breach of the duty to act in good
faith in respect of which the director or employee is acquitted, which is
discontinued or in respect of which judgment is given in the favor of the
director or the employee. The Directors have approved the indemnification of
certain officers of the Company in connection with this offering.
The Selling Shareholder and Ameritech have agreed to indemnify the Company's
Directors and certain of its officers against liabilities in connection with
the Global Offering.
The Selling Shareholder and the Company have obtained insurance for the
Company's Directors and certain of its officers against certain liabilities
that may be asserted against them in connection with the Global Offering. The
Selling Shareholder has agreed to be responsible for any deductible that may
be applicable under such insurance.
Under the laws of the State of Delaware, the state in which each of
Ameritech and Bell Atlantic is incorporated, and pursuant to its respective
Certificate of Incorporation and By-Laws, certain Directors of the Company
serving at the request of Ameritech and Bell Atlantic are entitled to
indemnification from Ameritech and Bell Atlantic against liabilities incurred
by them as a result of their service on the Board, including liabilities
arising as a result of the Global Offering.
II-1
<PAGE>
ITEM 16. EXHIBITS.
The following documents are exhibits to this Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
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1.1* Form of International Underwriting Agreement.
1.2* Form of International Guaranty.
4.1 Form of Interim Deposit Agreement among Ameritech New Zealand
Investments, Inc., Telecom Corporation of New Zealand Limited, The
New Zealand Guardian Trust Company Limited, as Trustee, The Bank
of New York, as Interim Depositary, and the owners and beneficial
owners from time to time of the Interim ADRs issued thereunder
(including the Form of Interim ADR) (incorporated by reference to
Exhibit A(2) to the Registration Statement on Form F-6
(Registration No. 333-8476) for Depositary Shares evidenced by
ADRs for Ordinary Shares, no par value, of Telecom Corporation of
New Zealand Limited).
4.2 Form of Trust Deed between Ameritech New Zealand Investments, Inc.
and The New Zealand Guardian Trust Company Limited, as Trustee
(incorporated by reference to Exhibit (b)(1) to the Registration
Statement on Form F-6 (Registration No. 333-8514) for Instalment
Receipts evidencing rights to acquire Ordinary Shares, no par
value, of Telecom Corporation of New Zealand Limited).
4.3 Constitution of Telecom Corporation of New Zealand Limited
(incorporated by reference to Exhibit 1.2 to the 1997 Form 20-F).
4.4 Form of Amended and Restated Deposit Agreement among Telecom
Corporation of New Zealand Limited, The Bank of New York, as
Depositary, and the owners and beneficial owners from time to time
of the ADRs issued thereunder (including the Form of ADR)
(incorporated by reference to Exhibit A to Amendment No. 2 to the
Registration Statement on Form F-6 for Depositary Shares evidenced
by ADRs for Ordinary Shares, no par value, of Telecom Corporation
of New Zealand Limited, filed with the Commission on March 15,
1997).
4.5 Form of Instalment Receipt Certificate issued by The New Zealand
Guardian Trust Company and Ameritech New Zealand Investments, Inc.
(incorporated by reference to Exhibit (b)(2) to the Registration
Statement on Form F-6 (Registration No. 333-8514) for Instalment
Receipts evidencing rights to acquire Ordinary Shares, no par
value, of Telecom Corporation of New Zealand Limited).
5.1** Opinion of Chapman Tripp Sheffield Young as to the validity of the
Shares (New Zealand law).
8.1** Opinion of Kirkland & Ellis as to certain United States tax
matters.
8.2** Opinion of Chapman Tripp Sheffield Young as to certain New Zealand
tax matters.
23.1** Consent of Chapman Tripp Sheffield Young (included as a part of
Exhibits 5.1 and 8.2).
23.2** Consent of Kirkland & Ellis (included as a part of Exhibit 8.1).
23.3 Consent of Coopers & Lybrand, independent accountants.
24.1** Power of attorney.
</TABLE>
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*Supersedes exhibit previously filed
**Filed previously
II-2
<PAGE>
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
1. That, for purposes of determining any liability under the Securities
Act, each filing of the Registrant's annual report pursuant to Section
13(a) or Section 15(d) of the Exchange Act that is incorporated by
reference in this Registration Statement shall be deemed to be a new
registration statement relating to the securities offered herein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
2. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is assessed by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM F-3 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF WELLINGTON, COUNTRY OF NEW ZEALAND, ON APRIL 2,
1998.
Telecom Corporation of New Zealand
Limited
*
By: _________________________________
Dr. Roderick S. Deane
Managing Director and Chief
Executive Officer, Director
* * * *
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED ON APRIL 2, 1998, BY THE FOLLOWING
PERSONS IN THE CAPACITIES INDICATED WITH RESPECT TO TELECOM CORPORATION OF NEW
ZEALAND LIMITED:
<TABLE>
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SIGNATURE TITLE
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<S> <C>
* Managing Director and Chief Executive
___________________________________________ Officer, Director (Principal executive
Dr. Roderick S. Deane officer)
* Chief Financial Officer
___________________________________________ (Principal financial officer)
Jeffrey White
* Controller
___________________________________________ (Principal accounting officer)
Peter Garty
* Director
___________________________________________
G. Peter Shirtcliffe
* Director
___________________________________________
Walter S. Catlow
* Director
___________________________________________
Alan Gibbs
* Director
___________________________________________
John F. Killian
* Director
___________________________________________
John C. King
* Director
___________________________________________
Robert Levetown
* Director
___________________________________________
Patsy Reddy
* Director
___________________________________________
Richard W. Pehlke
</TABLE>
II-4
<PAGE>
<TABLE>
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SIGNATURE TITLE
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<S> <C>
/s/ Donald J. Puglisi Authorized Representative
___________________________________________
Donald J. Puglisi,
Managing Director, Puglisi & Associates
</TABLE>
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* The undersigned, by signing his name hereto, does sign and execute this
Registration Statement on Form F-3 on behalf of the above named officers
and directors of Telecom Corporation of New Zealand Limited pursuant to the
Power of Attorney executed by such officers and directors and filed with
the Securities and Exchange Commission.
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<S> <C>
/s/ Malcolm R. Gillespie Attorney-in-Fact
___________________________________________
Malcolm R. Gillespie
</TABLE>
II-5
<PAGE>
EXHIBIT 1.1
258,246,064 Ordinary Shares
(no par value per Share)
in the form of Shares or American Depositary Shares
TELECOM CORPORATION OF NEW ZEALAND LIMITED
INTERNATIONAL UNDERWRITING AGREEMENT
April (4), 1998
(New York Time)
CREDIT SUISSE FIRST BOSTON CORPORATION
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
As Representatives of the Several Underwriters
named in Schedule I hereto,
CREDIT SUISSE FIRST BOSTON (EUROPE) LIMITED
MERRILL LYNCH INTERNATIONAL
As Representatives of the Several Underwriters
named in Schedule II hereto
c/o Credit Suisse First Boston Corporation
Eleven Madison Avenue
New York, N.Y. 10010-3629
Dear Sirs:
1. Introductory. Ameritech New Zealand Investments, Inc., a Delaware
corporation (the "Selling Shareholder"), proposes to offer and sell ordinary
shares, no par value per share (each, a "Share"), of Telecom Corporation of New
Zealand Limited, a New Zealand limited liability company (the "Company"), and
American Depositary Shares, each representing the right to receive eight Shares
(each, an "ADS"), in a U.S. Offering, a Rest of the World Offering, a New
Zealand Offering and an Australian Offering (each term as herein defined).
The Selling Shareholder proposes, subject to the terms and conditions
stated herein, to sell to the several Underwriters named in Schedule I hereto
(the "U.S. Underwriters") and the several Underwriters named in Schedule II
hereto (the "Rest of the World Underwriters" and, together with the U.S.
Underwriters, the "International Underwriters") an aggregate of 258,246,064
Shares (the "Firm Shares"), a portion of which may be delivered in the form of
Shares and a portion of which may be deposited by the Selling Shareholder
pursuant to the
<PAGE>
Deposit Agreement referred to below and delivered in the form of ADSs, and the
International Underwriters propose, subject to the terms and conditions stated
herein, to purchase the Firm Shares, with payment for such Firm Shares (whether
in the form of Shares or ADSs) to be made on an instalment basis as more fully
described below and in Section 5 hereof.
In addition, as set forth below, the Selling Shareholder proposes to sell
to the International Underwriters, at their election, up to an aggregate of
[39,624,606] additional Shares (the "Optional Shares"), a portion of which may
be delivered in the form of Shares and a portion of which may be deposited by
the Selling Shareholder pursuant to the Deposit Agreement and delivered in the
form of ADSs, with payment for such Optional Shares (whether in the form of
Shares or ADSs) to be made on an instalment basis as more fully described below
and in Section 5 hereof.
The Firm Shares and the Optional Shares which the U.S. Underwriters elect
to purchase pursuant to Section 3 hereof (in the form of Shares or ADSs) are
collectively called the "U.S. Firm Shares" and the "U.S. Optional Shares",
respectively, and the U.S. Firm Shares and the U.S. Optional Shares are
collectively called the "U.S. Shares". The offering of the U.S. Shares in the
United States and Canada is herein called the "U.S. Offering". The Firm Shares
and the Optional Shares which the Rest of the World Underwriters elect to
purchase pursuant to Section 3 hereof (in the form of Shares or ADSs) are
collectively called the "Rest of the World Firm Shares" and the "Rest of the
World Optional Shares", respectively, and the Rest of the World Firm Shares and
the Rest of the World Optional Shares are collectively called the "Rest of the
World Shares". The offering of the Rest of the World Shares outside the United
States, Canada, New Zealand and Australia is herein called the "Rest of the
World Offering". The U.S. Offering and the Rest of the World Offering are herein
collectively called the "International Offering".
It is understood that the Selling Shareholder is concurrently offering (i)
a total of 79,500,000 Shares (the "New Zealand Shares") by way of a public
offering in New Zealand (the "New Zealand Offering") and (ii) a total of
59,600,000 Shares (the "Australian Shares") by way of a public offering in
Australia (the "Australian Offering"). The New Zealand Offering is being made
pursuant to a registered prospectus and an investment statement in New Zealand
(together, the "New Zealand Prospectus") and the Australian Offering is being
made pursuant to a prospectus in Australia (the "Australian Prospectus"). It is
further understood that the Selling Shareholder is, concurrently with the
execution of this Agreement, entering into a New Zealand and Australian
Underwriting Deed dated the date hereof (the "New Zealand and Australian
Underwriting Agreement") with a syndicate of New Zealand underwriters named
therein (the "New Zealand Underwriters") and a syndicate of Australian
underwriters named therein (the "Australian Underwriters"). The International
Offering, the New Zealand Offering and the Australian Offering are herein
collectively called the "Global Offering". The U.S. Shares, the Rest of the
World Shares, the New Zealand Shares and the Australian Shares, whether in the
form of Shares or ADSs, are herein collectively called the "Offered Shares".
2
<PAGE>
To provide for the coordination of their activities, the International
Underwriters, the New Zealand Underwriters and the Australian Underwriters
(collectively, the "Underwriters") are simultaneously entering into an Agreement
Among U.S., Rest of the World, New Zealand and Australian Syndicates dated the
date hereof (the "Agreement Among Syndicates") which provides, among other
things, that Credit Suisse First Boston Corporation and Merrill Lynch, Pierce,
Fenner & Smith Incorporated are acting as the joint global coordinators (the
"Joint Global Coordinators") for the Global Offering and that sales may be made
among the syndicates of such number of Offered Shares as may be agreed with the
Joint Global Coordinators for purposes of resale to investors.
The Shares and ADSs to be sold hereunder are to be paid for in two
instalments as more fully described in Section 5 hereof. Prior to payment in
full of the Final Instalment (as defined below), beneficial interests in the
Shares will be represented by instalment receipts ("IRs"), and purchasers that
have elected to receive their Shares in the form of ADSs will receive interim
ADSs ("Interim ADSs") evidenced by interim American Depositary Receipts
("Interim ADRs"). Each IR will evidence the full beneficial ownership interest
in a Share, subject to the Trust Deed (as defined below), including the Security
Interest (as defined below) of the Selling Shareholder. Each Interim ADS will
represent the right to receive eight IRs. Upon payment in full of the Final
Instalment, the holder of an IR will become the registered holder of the Share
relating to such IR and the holder of an Interim ADS will become the registered
holder of an ADS.
Unless the context otherwise requires, all references in this Agreement to
(i) Shares shall mean IRs, (ii) ADSs shall mean Interim ADSs, (iii) ADRs shall
mean Interim ADRs, (iv) the Deposit Agreement (as defined below) shall mean the
Interim Deposit Agreement (as defined below) and (v) the Depositary (as defined
below) shall mean the Interim Depositary (as defined below), until the Final
Instalment shall have been paid with respect to the Shares and ADSs. Whenever
computations are contemplated herein that involve both numbers of Shares and
numbers of ADSs, they shall be made on a consistent basis, by first converting
the number of ADSs into the number of Shares they represent.
The IRs will be issued pursuant to the provisions of a Trust Deed dated as
of March 13, 1998 (the "Trust Deed") between the Selling Shareholder and The New
Zealand Guardian Trust Company Limited (the "Trustee"). Registered holders of
IRs (other than the custodian for the Interim Depositary) and registered holders
of Interim ADSs on the ninth business day prior to and inclusive of the Final
Instalment Due Date (as defined in Section 5 hereof) will be obligated to pay
the Final Instalment. The Interim ADSs, evidenced by Interim ADRs, will be
issued in accordance with the Interim Deposit Agreement to be dated on or about
April 9, 1998, (the "Interim Deposit Agreement") among the Company, the Selling
Shareholder, the Trustee, The Bank of New York as Interim Depositary (the
"Interim Depositary"), and the holders from time to time of Interim ADRs. The
holders of Interim ADRs, as parties to the Interim Deposit Agreement, will be
bound by the terms and conditions of the Trust Deed. Accordingly, each holder of
an Interim ADR will be deemed to have agreed to pay the Final
3
<PAGE>
Instalment of the purchase price by the Final Instalment Due Date in accordance
with the Trust Deed and the Interim Deposit Agreement. The ADSs, evidenced by
American Depositary Receipts ("ADRs"), will be issued in accordance with the
Amended and Restated Deposit Agreement dated as of April 1, 1997 (the "Deposit
Agreement"), among the Company, The Bank of New York, as Depositary (the
"Depositary"), and the holders from time to time of ADRs issued thereunder. IR
holders may transfer or sell their IRs subject to the terms of the Trust Deed,
and Interim ADS holders may transfer or sell their Interim ADSs, as evidenced by
Interim ADRs, subject to the terms of the Interim Deposit Agreement and the
Trust Deed. Upon registration of a transfer of an IR or Interim ADS, as
evidenced by an Interim ADR, in accordance with the provisions of the Trust
Deed, the transferor is discharged from any liability to pay the Final
Instalment. The Trust Deed and the Interim Deposit Agreement provide that, when
a transferee becomes a registered holder of an IR or Interim ADS, that
transferee becomes bound by all of the terms of the Trust Deed, the IR, the
Interim ADS and Interim Deposit Agreement, as applicable, including the
obligation to pay the Final Instalment. Therefore, notwithstanding anything
herein to the contrary, the Selling Shareholder acknowledges and agrees that,
upon registration of the transfer or sale of the IRs and Interim ADSs by the
Underwriters on the ninth business day prior to and inclusive of the Final
Instalment Due Date, such Underwriters shall have no liability or obligation
whatsoever with respect to the payment of the Final Instalment with respect to
the IRs and Interim ADSs so transferred or sold. If an IR holder or Interim ADR
holder defaults in payment of the Final Instalment and, in the event (i) an IR
holder or Interim ADR holder, as the case may be, is an Intermediary (as defined
in the Trust Deed) and (ii) prior to 5:00 p.m. (Wellington time) on the second
business day after the Final Instalment Due Date (as defined below), such
Intermediary effects a transfer on the IR Register or Interim ADR Register (each
as defined in the Trust Deed), as the case may be, of the IR or Interim ADR to
which a Share relates, to the beneficial owner on whose behalf such Intermediary
holds such IR or Interim ADR, then such beneficial owner shall be, and such
Intermediary shall cease to be, liable for the defaulted amount.
Four forms of offering documents will be used in connection with the
offering and sale of the Offered Shares contemplated by the foregoing: (i) the
U.S. Prospectus (as defined below) relating to the offer and sale of the U.S.
Shares in the United States and Canada as part of the U.S. Offering, (ii) an
offering circular relating to the offer and sale of the Rest of the World Shares
in the rest of the world as part of the Rest of the World Offering (in its final
form, the "Rest of the World Offering Circular"), (iii) the New Zealand
Prospectus in connection with the offering and sale of the New Zealand Shares in
the New Zealand Offering and (iv) the Australian Prospectus in connection with
the offering and sale of the Australian Shares in the Australian Offering.
Copies of a preliminary Rest of the World Offering Circular (as
supplemented or amended prior to becoming final, hereinafter called the
"Preliminary Rest of the World Offering Circular") have been delivered to you
and to you for each of the other Rest of the World Underwriters, and the
Company, at the request of the Selling Shareholder, will prepare the Rest of the
World Offering Circular. The Preliminary Rest of the World Offering Circular
4
<PAGE>
and the Preliminary U.S. Prospectus (as defined below) are collectively called
the "Preliminary Prospectus" and the Rest of the World Offering Circular and the
U.S. Prospectus are collectively called the "Prospectus". References in Section
2 of this Agreement to the "Prospectus" shall be deemed to refer to both the
Preliminary Prospectus and, once printed, the Prospectus.
2. Representations and Warranties of the Company and the Selling
Shareholder. (a) The truth and accuracy of each of the representations,
warranties and agreements being made by the Company to and with each of the
International Underwriters in subclause 2(b) below, by the Selling Shareholder
to and with each of the International Underwriters in subclause 2(c) below and
by Ameritech (as defined below) to and with each of the International
Underwriters in Section 4 of the International Guaranty (as defined below)
constitute the basis upon which the International Underwriters have agreed to
purchase the Firm Shares and, at their election, the Optional Shares and the
basis upon which the International Underwriters are entering into this
Agreement, and the International Underwriters, in entering into this Agreement,
are relying on the truth and accuracy of each such representation, warranty and
agreement.
(b) Except and to the extent prohibited (if at all) by New Zealand
law, the Company represents and warrants to each International Underwriter as of
the date hereof, as of the First Time of Delivery referred to in Section 5
hereof, and as of each Time of Delivery (if any) referred to in Section 5
hereof, and agrees with each International Underwriter that:
(i) The Company meets the requirements for use of Form F-3 under the
Securities Act of 1933, as amended (the "Act"). A registration statement on
Form F-3 (No. 333-47901) relating to the offer and sale of the U.S. Shares
in the United States and Canada in connection with the U.S. Offering,
including a form of prospectus relating to such U.S. Shares, has been filed
with the Securities and Exchange Commission (the "Commission") and either
(A) has been declared effective under the Act, and is not proposed to be
amended or (B) is proposed to be amended by amendment or post-effective
amendment. If such registration statement (the "initial registration
statement") has been declared effective, either (A) an additional
registration statement (the "additional registration statement") relating
to the U.S. Shares may have been filed with the Commission pursuant to Rule
462(b) ("Rule 462(b)") under the Act and, if so filed, has become effective
upon filing pursuant to such Rule and the U.S. Shares all have been duly
registered under the Act pursuant to the initial registration statement
and, if applicable, the additional registration statement or (B) such an
additional registration statement is proposed to be filed with the
Commission pursuant to Rule 462(b) and will become effective upon filing
pursuant to such Rule and upon such filing the U.S. Shares will all have
been duly registered under the Act pursuant to the initial registration
statement and such additional registration statement. If the Company does
not propose to amend the initial registration statement or if an additional
registration statement has been filed and the Company does not propose to
amend it, or
5
<PAGE>
if any post-effective amendment to either such registration statement has
been filed with the Commission prior to the execution and delivery of this
Agreement, the most recent amendment (if any) to each such registration
statement has been declared effective by the Commission or has become
effective upon filing pursuant to Rule 462(c) ("Rule 462(c)") under the Act
or, in the case of the additional registration statement, Rule 462(b). For
purposes of this Agreement, "Effective Time" with respect to the initial
registration statement or, if filed prior to the execution and delivery of
this Agreement, the additional registration statement means (A) if the
Company has advised the Joint Global Coordinators that it does not propose
to amend such registration statement, the date and time as of which such
registration statement, or the most recent post-effective amendment thereto
(if any) filed prior to the execution and delivery of this Agreement, was
declared effective by the Commission or has become effective upon filing
pursuant to Rule 462(c), or (B) if the Company has advised the Joint Global
Coordinators that it proposes to file an amendment or post-effective
amendment to such registration statement, the date and time as of which
such registration statement, as amended by such amendment or post-effective
amendment, as the case may be, is declared effective by the Commission. If
an additional registration statement has not been filed prior to the
execution and delivery of this Agreement but the Company has advised the
Joint Global Coordinators that it proposes to file one, "Effective Time"
with respect to such additional registration statement means the date and
time as of which such registration statement is filed and becomes effective
pursuant to Rule 462(b). "Effective Date" with respect to the initial
registration statement or the additional registration statement (if any)
means the date of the Effective Time thereof. The initial registration
statement, as amended at its Effective Time, including all materials
incorporated by reference therein, including all information contained in
the additional registration statement (if any) and deemed to be a part of
the initial registration statement as of the Effective Time of the
additional registration statement pursuant to the General Instructions of
the Form on which it is filed and including all information (if any) deemed
to be a part of the initial registration statement as of its Effective Time
pursuant to Rule 430A(b) ("Rule 430A(b)") under the Act, and including all
exhibits thereto and all of the documents incorporated by reference
therein, is hereinafter referred to as the "Initial Registration
Statement". The additional registration statement, as amended at its
Effective Time, including the contents of the initial registration
statement incorporated by reference therein and including all information
(if any) deemed to be a part of the additional registration statement as of
its Effective Time pursuant to Rule 430A(b), and including all exhibits
thereto and all of the documents incorporated by reference therein, is
hereinafter referred to as the "Additional Registration Statement". The
Initial Registration Statement and the Additional Registration Statement
(if any) are hereinafter referred to collectively as the "Registration
Statements" and individually as a "Registration Statement". Any preliminary
prospectus included in the Registration Statement or filed with the
Commission pursuant to Rule 424(a) of the rules and regulations of the
Commission including all documents filed by the Company with the Commission
pursuant to the Exchange Act and incorporated by reference therein is
6
<PAGE>
hereinafter called a "Preliminary U.S. Prospectus". The form of
prospectus relating to the U.S. Shares as first filed with the Commission
pursuant to and in accordance with Rule 424(b) ("Rule 424(b)") under the
Act or (if no such filing is required) as included in the Registration
Statement, including all documents filed by the Company with the Commission
pursuant to the Exchange Act and incorporated by reference therein is
herein called the "U.S. Prospectus". No document has been or will be
prepared or distributed in reliance on Rule 434 under the Act.
(ii) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement: (A) on the Effective
Date of the Initial Registration Statement and at the First Time of
Delivery and each Time of Delivery, the Initial Registration Statement
conformed and will conform in all material respects to the requirements of
the Act and the rules and regulations of the Commission (the "Rules and
Regulations") and did not and will not include any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, (B) on
the Effective Date of the Additional Registration Statement (if any) and at
the First Time of Delivery and each Time of Delivery, each Registration
Statement conformed, or will conform, in all material respects to the
requirements of the Act and the Rules and Regulations and did not include,
or will not include, any untrue statement of a material fact and did not
omit, or will not omit, to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, and (C)
on the date of this Agreement, the Initial Registration Statement and, if
the Effective Time of the Additional Registration Statement is prior to the
execution and delivery of this Agreement, the Additional Registration
Statement each conforms, and, at the time of filing of the U.S. Prospectus
pursuant to Rule 424(b) or (if no such filing is required) at the Effective
Date of the Additional Registration Statement in which the U.S. Prospectus
is included, and at the First Time of Delivery and each Time of Delivery,
each Registration Statement and the U.S. Prospectus will conform, in all
material respects to the requirements of the Act and the Rules and
Regulations, and neither of such documents includes, or will include, any
untrue statement of a material fact or omits, or will omit, to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading. If the Effective Time of the Initial
Registration Statement is subsequent to the execution and delivery of this
Agreement, on the Effective Date of the Initial Registration Statement and
at the First Time of Delivery and each Time of Delivery, the Initial
Registration Statement and the U.S. Prospectus will conform in all material
respects to the requirements of the Act and the Rules and Regulations,
neither of such documents will include any untrue statement of a material
fact or will omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, and no
Additional Registration Statement has been or will be filed. The two
preceding sentences do not apply to any statements made in reliance upon
and in conformity with (A) written information furnished to the Company by
the Selling Shareholder expressly for use therein (it being understood and
agreed that the only
7
<PAGE>
written information so furnished by or on behalf of the Selling Shareholder
is the "Selling Shareholder Information" identified in Annex A hereto) or
(B) written information furnished to the Company or the Selling Shareholder
by any International Underwriter through the Joint Global Coordinators
expressly for use therein, it being understood and agreed that the only
such information furnished by or on behalf of the International
Underwriters consists of the following information (the "Furnished
Information"): the last paragraph at the bottom of the cover page
concerning the terms of the offering by the International Underwriters, the
legend concerning over-allotments and stabilizing on the inside front cover
page, the third and eighth paragraphs under the caption "The Global
Offering", and the fourth, tenth, eleventh and fourteenth paragraphs under
the caption "Underwriting" in the U.S. Prospectus and the fourth, eleventh,
twelfth, thirteenth, fourteenth and eighteenth paragraphs under the caption
"Underwriting" in the Rest of the World Offering Circular.
(iii) The documents incorporated or deemed to be incorporated by
reference in the Registration Statement and the Prospectus, at the time
they were or hereafter are filed with the Commission and at the First Time
of Delivery and each Time of Delivery, complied and will comply in all
respects with the requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and the rules and regulations of the
Commission thereunder (the "1934 Act Regulations"), and, when read together
with the other information in the Prospectus, at the Effective Time of the
Initial Registration Statement and the Additional Registration Statement,
at the time the Prospectus was issued and at each Time of Delivery (as
defined herein), did not include, or will not include any untrue statement
of a material fact and did not omit, or will not omit, to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading.
(iv) A registration statement on Form F-6 (No. 333-8476) relating to
the Interim ADSs and a registration statement on Form F-6 (No. 333-8514)
relating to the IRs have been filed with the Commission (each such
registration statement, including all exhibits thereto and including the
documents incorporated by reference therein, as amended at the time such
registration statements become effective, being hereinafter called an
"Global Offering F-6 Registration Statement" and collectively the "Global
Offering F-6 Registration Statements"); a registration statement on Form
8-A (No. 001-10798) relating to the Interim ADSs has been filed with the
Commission (such registration statement, including all exhibits thereto and
including the documents incorporated by reference therein, as amended at
the time such registration statement becomes effective, being hereinafter
called the "Form 8-A Registration Statement"); the Global Offering F-6
Registration Statements and the Form 8-A Registration Statement, as of
their respective effective dates and at the First Time of Delivery and each
Time of Delivery, complied or will comply, and each amendment or supplement
thereto, when it is filed with the Commission or becomes effective, as the
case may be, will comply, in all material respects with the applicable
requirements of the Act and the Rules and
8
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Regulations, and did not or will not, as of their effective dates and at
the First Time of Delivery and each Time of Delivery, contain any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading; and a registration statement on Form F-6 (No. 33-41013)
relating to the ADSs has been declared effective by the Commission (such
registration statement, including all exhibits thereto and including all
documents incorporated by reference therein, together with each Global
Offering F-6 Registration Statement, being hereinafter call an "F-6
Registration Statement" and collectively the "F-6 Registration
Statements").
(v) To the best of the Company's knowledge, after consultation with
the Commission's staff and confirmation from CT Corporation System as agent
for service of process, no stop order suspending the effectiveness of the
Registration Statement, any of the F-6 Registration Statements or the Form
8-A Registration Statement is in effect (if they have been declared
effective), and no proceedings for such purpose are pending before or
threatened by the Commission or to the knowledge of the Company, are
contemplated by the Commission, and any request on the part of the
Commission for additional information has been complied with.
(vi) The Preliminary U.S. Prospectus and the Preliminary Rest of the
World Offering Circular as of their respective dates did not, and the U.S.
Prospectus and the Rest of the World Offering Circular and any further
amendments and supplements thereto will not as of their respective dates
and at the First Time of Delivery and each Time of Delivery, contain an
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with (A)
written information furnished to the Company by the Selling Shareholder
expressly for use therein (it being understood that the only written
information so furnished by or on behalf of the Selling Shareholder is the
Selling Shareholder Information) or (B) written information furnished to
the Company or the Selling Shareholder by any International Underwriter
through the Joint Global Coordinators expressly for use therein (it being
understood that the only written information so furnished by or on behalf
of the International Underwriters is the Furnished Information).
(vii) The Company has been duly incorporated and is validly existing
as a corporation under the laws of New Zealand, with power and authority
(corporate and other) to own its properties and conduct its business as
described in the Prospectus and the Company is duly qualified as a foreign
corporation for the transaction of business under the laws of each other
jurisdiction, if any, in which it owns or leases properties or conducts any
business so as to require such qualification, or is subject to no material
liability or disability by reason of the failure to be so qualified in any
such jurisdiction.
9
<PAGE>
(viii) Each of the subsidiaries listed in Annex B hereto (the
"Material Subsidiaries") has been duly incorporated and is validly existing
as a corporation under the laws of its jurisdiction of incorporation. Other
than the Material Subsidiaries, the Company has no "significant
subsidiaries" within the meaning of Rule 1-02 of Regulation S-X under the
Act.
(ix) The total issued and outstanding capital of the Company is as set
forth in the Prospectus, and all of the issued and outstanding shares in
the capital of the Company have been duly and validly authorized and
issued, are fully paid and nonassessable and conform to the description
thereof contained in the Prospectus; all of the issued shares in the
capital of each Material Subsidiary of the Company have been duly and
validly authorized and issued, are fully paid and are owned directly or
indirectly by the Company, free and clear of all liens, encumbrances,
equities or claims.
(x) The Company's outstanding Shares are approved for quotation on the
New Zealand Stock Exchange (the "NZSE") and the Australian Stock Exchange
(the "ASX"). The Company's outstanding ADSs are listed on the New York
Stock Exchange (the "NYSE"). The Interim ADSs and the ADSs to be sold in
the Global Offering have been approved for listing on the NYSE subject to
notice of issuance; the Shares to be sold in the Global Offering, including
those to be deposited in respect of ADSs, have been approved for official
quotation on the NZSE and the ASX, such approval has not been withdrawn,
and the Company is listed with the NZSE and admitted to the official list
of the ASX (as an exempt foreign entity).
(xi) No consent, approval, authorization, order, registration or
qualification of or with any such court or governmental agency or body is
required to be obtained by the Company for the issuance of Interim ADRs by
the Interim Depositary, the deposit of any IRs with the Interim Depositary
by the Trustee pursuant to the Interim Deposit Agreement, the deposit of
any Shares with the Depositary by the Interim Depositary pursuant to the
Deposit Agreement and the consummation by the Company of the transactions
contemplated by this Agreement, the Interim Deposit Agreement and the
Deposit Agreement, except (A) the registration under the Act of the Shares,
the IRs and the Interim ADSs and (B) such consents, approvals,
authorizations, orders, registrations or qualifications as may be required
under state securities or Blue Sky laws in connection with the purchase and
distribution of the Offered Shares by the International Underwriters,
provided, however, that this representation shall not apply to any such
consents, approvals, authorizations, orders, registrations or
qualifications as may be required by laws of jurisdictions other than New
Zealand and the United States.
(xii) The deposit of any IRs with the Interim Depositary by the
Trustee pursuant to the Interim Deposit Agreement, the deposit of any
Shares with the Depositary by the Interim Depositary pursuant to the
Deposit Agreement, the offer,
10
<PAGE>
sale and delivery of the Offered Shares (in the form of Shares or ADSs) by
the International Underwriters and the compliance by the Company with the
applicable provisions of this Agreement, the Interim Deposit Agreement and
the Deposit Agreement, and the consummation by the Company of the
transactions herein and therein contemplated will not conflict with or
result in a breach by the Company or any Material Subsidiary or violation
by the Company or any Material Subsidiary of any of the terms or provisions
of, or constitute a default by the Company or any Material Subsidiary
under, any indenture, mortgage, deed of trust, loan agreement or other
material agreement or instrument to which the Company or any of the
Material Subsidiaries is party or by which the Company or any of the
Material Subsidiaries is bound or to which any property or asset, which is
material to the Company and its subsidiaries considered as a whole, is
subject, nor will any such action result in any violation of the provisions
of the Company's Constitution or any statute or any regulation made under
any statute of New Zealand or the United States (or any political
subdivision thereof) or any order, rule or regulation of any court or
governmental agency or body of New Zealand or the United States (or any
political subdivision thereof) having jurisdiction over the Company or any
of its subsidiaries or any of their properties or business assets.
(xiii) This Agreement has been duly authorized, executed and
delivered by the Company.
(xiv) The Interim Deposit Agreement has been duly authorized,
executed and delivered by the Company and constitutes a valid and legally
binding agreement of the Company, enforceable in accordance with its terms,
subject as to enforcement to (A) bankruptcy, insolvency, fraudulent
transfer, reorganization and other laws of general applicability relating
to or affecting creditors' rights generally and (B) general principles of
equity; upon due issuance by the Interim Depositary of Interim ADRs
evidencing Interim ADSs against the deposit of IRs in respect thereof in
accordance with the Interim Deposit Agreement, such Interim ADRs will be
duly and validly issued under the Interim Deposit Agreement and persons in
whose names such Interim ADRs are registered will be entitled to the rights
of registered holders of Interim ADRs specified therein and in the Interim
Deposit Agreement.
(xv) The Deposit Agreement has not been amended or terminated since
April 1, 1997 and constitutes a valid and legally binding agreement of the
Company, enforceable in accordance with its terms, subject as to
enforcement to (A) bankruptcy, insolvency, fraudulent transfer,
reorganization and other laws of general applicability relating to or
affecting creditors' rights generally and (B) general principles of equity;
upon due issuance by the Depositary of ADRs evidencing ADSs against the
deposit of Shares in respect thereof in accordance with the Deposit
Agreement, such ADRs will be duly and validly issued under the Deposit
Agreement and persons in whose names such ADRs are registered will be
entitled to the rights of registered holders of ADRs
11
<PAGE>
specified therein and in the Deposit Agreement; and the information in the
Prospectus under the caption "Description of Interim American Depositary
Receipts and American Depositary Receipts", to the extent that it
constitutes a summary of the ADRs or the Deposit Agreement, fairly presents
the information disclosed thereunder.
(xvi) Except as set forth in the Prospectus, the Company and its
subsidiaries possess such certificates, authorities or permits issued by
the appropriate regulatory agencies or bodies necessary to conduct the
business now operated by them, and neither the Company nor any of its
subsidiaries has received any notice of proceedings relating to the
revocation or modification of any such certificate, authority or permit
which, when considered individually or in the aggregate, will have a
material adverse effect on the business, financial position, shareholders'
equity or results of operations of the Company and its subsidiaries
considered as a whole (a "Material Adverse Effect").
(xvii) The Company and its subsidiaries own or have the right to use
pursuant to license, sub-license, agreement or permission all patents,
patent rights, licenses, inventions, copyrights, know-how (including trade
secrets and other unpatented and/or unpatentable proprietary or
confidential information, systems or procedures), trademarks, service marks
and trade names material to the business of the Company and its
subsidiaries considered as a whole and currently employed by them in
connection with the business now operated by them, and neither the Company
nor any of its subsidiaries has received any notice of infringement of or
conflict with asserted rights of others with respect to any of the
foregoing which, when considered individually or in the aggregate, will
have a Material Adverse Effect.
(xviii) The Company and its subsidiaries have no knowledge of any
strike as that term is defined in section 61 of the Employment Contracts
Act 1991 which is occurring or is threatened by any of their respective
employees which would be expected to have a Material Adverse Effect.
(xix) No holders of securities of the Company do or will have rights,
pursuant to any agreement with the Company, to the registration of such
securities under the Registration Statement or the F-6 Registration
Statements.
(xx) Except as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company or any of its
subsidiaries is a party or of which any property or assets of the Company
or any of its subsidiaries is the subject in which there is a reasonable
possibility of an adverse decision that could, individually or in the
aggregate, have a Material Adverse Effect; and, to the best of the
Company's knowledge, no such proceedings are threatened or contemplated by
any governmental agency or body or threatened by others.
(xxi) The financial statements included in each Registration
Statement and the
12
<PAGE>
Prospectus present fairly the financial position of the Company and its
consolidated subsidiaries as of the dates shown and their results of
operations and cash flows for the periods shown, and, except as otherwise
disclosed in the Prospectus, such financial statements have been prepared
in conformity with generally accepted accounting principles in New Zealand
applied on a consistent basis; the schedules included in the Registration
Statement present fairly the information required to be stated therein; and
Coopers & Lybrand, who have certified the financial statements and
supporting schedules included in the Registration Statement, are
independent public accountants as required by the Act and the Rules and
Regulations thereunder.
(xxii) Neither the Company nor any Material Subsidiary has sustained
since the date of the latest audited financial statements included in the
Prospectus any material loss or interference with its business from
earthquake, fire, explosion, flood or other calamity, whether or not
covered by insurance, or from any labor dispute or court or governmental
action, order or decree otherwise than as set forth or contemplated in the
Prospectus; and, since the respective dates as of which information is
given in the Registration Statement and the Prospectus, there has not been
any change in the share capital of the Company or any Material Subsidiary,
material decrease in the Company's consolidated working capital or material
increase in the Company's consolidated short-term debt or consolidated
long-term debt or any material adverse change or any development which the
Company has reasonable cause to believe will involve a prospective material
adverse change in or materially adversely affect the business, financial
position, shareholders' equity or results of operations of the Company and
its subsidiaries considered as a whole, otherwise than as set forth or
contemplated in the Prospectus.
(xxiii) The Company is not, and after giving effect to the offering
and sale of the Offered Shares will not be, an "investment company" as
defined in the Investment Company Act of 1940.
(xxiv) Subject to the provisions of the Treaty of Waitangi Act 1975
and the Treaty of Waitangi (State Enterprises) Act 1988, the Company and
its subsidiaries have good and marketable title to all estates and
interests in land held by them and which are material to the Company and
its subsidiaries considered as a whole and for which certificates of title
have been issued in their respective names and certificates of title are
expected to be issued for all estates in fee simple in land held by them
for which certificates of title have not yet issued; in each such case such
estates and interests in land which are material to the Company and its
subsidiaries considered as a whole are held free and clear of all liens,
encumbrances and reservations, except such as do not materially affect the
value of such estates and interests and land and do not materially
interfere with the use made, or proposed to be made, of such estates and
interests in land by the Company and its subsidiaries; and any land and
buildings held under lease by the Company and its subsidiaries that are
material to the Company and its
13
<PAGE>
subsidiaries considered as a whole are held by them under valid, subsisting
and enforceable leases with such exceptions as are not material and do not
materially interfere with the use made, and proposed to be made, of such
land and buildings by the Company and its subsidiaries; and, to the extent
that any estate or interest in land held by the Company or any of its
subsidiaries is, or may be, subject to any claim under the Treaty of
Waitangi Act 1975 or the Treaty of Waitangi (State Enterprises) Act 1988,
the Company does not believe that any order or declaration that may be made
by the Waitangi Tribunal in respect of such land will have a Material
Adverse Effect.
(xxv) The Company and its subsidiaries have good title to all
personal property owned by them that is material to the Company and its
subsidiaries considered as a whole, in each case free and clear of all
liens, encumbrances and reservations except such as are described in the
Prospectus or such as do not materially affect the value of such property
of the Company or the relevant subsidiary, and do not materially interfere
with the use made and proposed to be made of such property by the Company
and its subsidiaries.
(xxvi) Other than the entering into of this Agreement and the New
Zealand and Australian Underwriting Agreement, the Company has not taken
and will not take, directly or indirectly, any action which is designed to
cause or result in, or which has constituted, or which might be expected to
cause or result in, stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Shares.
(c) The Selling Shareholder represents and warrants to each
International Underwriter as of the date hereof, as of the First Time of
Delivery and as of each Time of Delivery, and agrees with each International
Underwriter that:
(i) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement: (A) on the Effective
Date of the Initial Registration Statement and at the First Time of
Delivery and each Time of Delivery, the Initial Registration Statement
conformed and will conform in all material respects to the requirements of
the Act and Rules and Regulations and did not and will not include any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein
not misleading, (B) on the Effective Date of the Additional Registration
Statement (if any) and at the First Time of Delivery and each Time of
Delivery, each Registration Statement conformed, or will conform, in all
material respects to the requirements of the Act and the Rules and
Regulations and did not include, or will not include, any untrue statement
of a material fact and did not omit, or will not omit, to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading, and (C) on the date of this Agreement,
the Initial Registration Statement and, if the Effective Time of the
Additional Registration Statement is prior to the execution and delivery of
this
14
<PAGE>
Agreement, the Additional Registration Statement each conforms, and at the
time of filing of the U.S. Prospectus pursuant to Rule 424(b) or (if no
such filing is required) at the Effective Date of the Additional
Registration Statement in which the U.S. Prospectus is included, and at the
First Time of Delivery and each Time of Delivery, each Registration
Statement and the U.S. Prospectus will conform, in all material respects to
the requirements of the Act and the Rules and Regulations, and neither of
such documents includes, or will include, any untrue statement of a
material fact or omits, or will omit, to state any material fact required
to be stated therein or necessary to make the statements therein not
misleading. If the Effective Time of the Initial Registration Statement is
subsequent to the execution and delivery of this Agreement: on the
Effective Date of the Initial Registration Statement and at the First Time
of Delivery and each Time of Delivery, the Initial Registration Statement
and the U.S. Prospectus will conform in all material respects to the
requirements of the Act and the Rules and Regulations, neither of such
documents will include any untrue statement of a material fact or will omit
to state any material fact required to be stated therein or necessary to
make the statements therein not misleading. The two preceding sentences do
not apply to any statements in or omissions from a Registration Statement
or the Prospectus made in reliance upon and in conformity with written
information furnished to the Company or the Selling Shareholder by any
International Underwriter through the Joint Global Coordinators expressly
for use therein, it being understood and agreed that the only such written
information so furnished by or on behalf of the International Underwriters
is the Furnished Information.
(ii) The Preliminary U.S. Prospectus and the Preliminary Rest of the
World Offering Circular as of their respective dates did not, and the U.S.
Prospectus and the Rest of the World Offering Circular and any further
amendments and supplements thereto will not as of their respective dates
and at the First Time of Delivery and each Time of Delivery, contain an
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with
written information furnished to the Company or the Selling Shareholder by
any International Underwriter through the Joint Global Coordinators
expressly for use therein (it being understood that the only written
information so furnished by or on behalf of the International Underwriters
is the Furnished Information).
(iii) The Selling Shareholder has been duly incorporated and is
validly existing as a corporation in good standing under the laws of its
jurisdiction of incorporation, with power and authority (corporate and
other) to perform its obligations hereunder; and there exist no preemptive
rights created under any contract to which Ameritech or the Selling
Shareholder is a party with respect to the Offered Shares.
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<PAGE>
(iv) This Agreement has been duly authorized, executed and delivered
by the Selling Shareholder.
(v) The Trust Deed has been duly authorized, executed and delivered by
the Selling Shareholder and, when duly and validly authorized, executed and
delivered by the Trustee, will constitute a valid and legally binding
agreement of the Selling Shareholder enforceable in accordance with its
terms, subject as to enforcement to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and to general
equity principles; and the information in the Prospectus under the caption
"Description of Instalment Receipts and Trust Deed", to the extent that it
constitutes a summary of the IRs or the Trust Deed, fairly presents the
information disclosed thereunder.
(vi) The Selling Shareholder has full right, authority and power to
enter into and perform its obligations under this Agreement, the Trust Deed
and the Interim Deposit Agreement, to transfer Shares to the Trustee, to
cause the Trustee to deposit IRs with the Interim Depositary and to sell,
assign, transfer and deliver the Offered Shares (in the form of Shares or
ADSs) to the International Underwriters upon payment of the First
Instalment therefor.
(vii) The Selling Shareholder has good and valid title to the Offered
Shares, free and clear of all liens, encumbrances or claims; and with
respect to each Time of Delivery, immediately prior to such Time of
Delivery, the Selling Shareholder will have good and valid title to the
Shares to be sold by the Selling Shareholder hereunder, free and clear of
all liens, encumbrances or claims and upon delivery of the Shares (in the
form of Shares or ADSs) to be delivered to the International Underwriters
by the Selling Shareholder at such Time of Delivery pursuant to this
Agreement and upon payment of the First Instalment therefor as provided
herein (and assuming that each International Underwriter purchases Shares
(in the form of Shares or ADSs) in good faith and without notice of any
adverse claim within the meaning of the Uniform Commercial Code), full
beneficial ownership thereof, free and clear of all liens, encumbrances or
claims (subject to the Trust Deed, including the claim of the Selling
Shareholder for payment of the Final Instalment and other amounts payable
under the Trust Deed and the Security Interest in such Shares as defined in
the Trust Deed (the "Security Interest")), will have passed to the several
International Underwriters.
(viii) All consents, approvals, authorizations and orders necessary
for the execution, performance and delivery of this Agreement, the Interim
Deposit Agreement and the Trust Deed by the Selling Shareholder, the
transfer to the Trustee of any Shares by the Selling Shareholder pursuant
to the Trust Deed, the deposit of any IRs with the Interim Depositary by
the Trustee pursuant to the Deposit Agreement, the deposit of any Shares
with the Depositary by the Interim Depositary pursuant to the Deposit
Agreement, the offer, sale and delivery of the Offered Shares (in the form
of Shares or
16
<PAGE>
ADS) by the International Underwriters and the consummation by the Selling
Shareholder of the transactions contemplated by this Agreement, the Interim
Deposit Agreement and the Trust Deed have been obtained, provided, however,
that this representation shall not apply to any such consents, approvals,
authorizations or orders as may be required by laws of jurisdictions other
than New Zealand, Australia and the United States.
(ix) The Interim Deposit Agreement has been duly authorized, executed
and delivered by the Selling Shareholder and when duly and validly
authorized, executed and delivered by the Interim Depositary, the Trustee
and the Company, will constitute a valid and legally binding agreement of
the Selling Shareholder enforceable in accordance with its terms, subject
as to enforcement to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity
principles; upon due issuance by the Interim Depositary of Interim ADRs
evidencing Interim ADSs against the deposit of IRs in respect thereof in
accordance with the Interim Deposit Agreement, such Interim ADRs will be
duly and validly issued under the Interim Deposit Agreement and persons in
whose names such Interim ADRs are registered will be entitled to the rights
of registered holders of Interim ADRs specified therein and in the Interim
Deposit Agreement; and the information in the Prospectus under the caption
"Description of Interim American Depositary Receipts and American
Depositary Receipts", to the extent that it constitutes a summary of the
Interim ADRs or the Interim Deposit Agreement, fairly presents the
information disclosed thereunder.
(x) On or prior to each Time of Delivery, the Shares underlying any
IRs to be sold and delivered by the Selling Shareholder at such Time of
Delivery will have been transferred to the Trustee pursuant to the Trust
Deed and the IRs underlying any Interim ADRs will have been deposited with
the Interim Depositary pursuant to the Interim Deposit Agreement (as
applicable); and upon transfer of such Shares to the Trustee, all right,
title and interest in such Shares, subject to the Trust Deed, including the
claim of the Selling Shareholder for payment of the Final Instalment and
other amounts payable under the Trust Deed and the Security Interest, and
the beneficial interest of the holders from time to time of such IRs in the
Shares corresponding thereto, will be transferred to the Trustee.
(xi) Except as described in the Prospectus, no stamp or other issuance
or transfer taxes or duties, and no capital gains, income, withholding or
other taxes are payable by or on behalf of the International Underwriters
in connection with (A) the transfer by the Selling Shareholder of the
Shares to the Trustee for the respective accounts of the International
Underwriters in the manner contemplated by this Agreement, (B) the issuance
by the Trustee of IRs to the International Underwriters, (C) the deposit of
the IRs with the Interim Depositary as contemplated by the Interim Deposit
Agreement, (D) the issuance by the Interim Depositary of Interim ADRs for
17
<PAGE>
the accounts of the International Underwriters, (E) the sale and delivery
by the International Underwriters of the IRs or Interim ADSs to the initial
purchasers thereof (other than (i) such taxes or duties arising in
connection with any International Underwriter being "resident" in New
Zealand as defined in the New Zealand Goods and Services Tax Act of 1985,
and/or (ii) in respect of International Underwriters not resident in a
jurisdiction which has an applicable double taxation treaty with New
Zealand (it being noted that New Zealand has double taxation treaties with,
among others, the United States and the United Kingdom), New Zealand income
tax on the gain realized on the sale by such International Underwriters of
the IRs or Interim ADSs to the initial purchasers thereof) and (iii) any
income, capital gains or withholding taxes imposed on any International
Underwriter by a jurisdiction in which such International Underwriter is
organized, residing or has a permanent establishment) or (F) the
consummation of any other transaction contemplated in this Agreement as
being directly connected to the sale of the Shares, the IRs or Interim ADRs
by the Selling Shareholder to the International Underwriters or by the
International Underwriters to the initial purchasers; provided, however,
that this representation shall not apply to any such taxes or duties
arising under the laws of jurisdictions other than New Zealand, Australia
and the United States or with respect to witholding tax on dividends (if
any) derived by the International Underwriters.
(xii) The execution, delivery and performance of this Agreement, the
Trust Deed and the Interim Deposit Agreement, the transfer to the Trustee
of any Shares by the Selling Shareholder pursuant to the Trust Deed, the
deposit of any IRs with the Interim Depositary by the Trustee pursuant to
the Interim Deposit Agreement, the deposit of any Shares with the
Depositary by the Interim Depositary pursuant to the Deposit Agreement, the
offer, sale and delivery of the Offered Shares (in the form of Shares or
ADSs) by the International Underwriters and the compliance by the Selling
Shareholder with the applicable provisions of this Agreement, the Trust
Deed and the Interim Deposit Agreement and the consummation of the
transactions contemplated hereby or thereby do not and will not conflict
with or result in a breach or violation of any of the terms and provisions
of, or constitute a default under, any indenture, mortgage, deed of trust,
loan agreement or other material agreement or instrument to which Ameritech
or the Selling Shareholder is a party or by which Ameritech or the Selling
Shareholder is bound, or to which any property or assets, which is material
to Ameritech or the Selling Shareholder is subject, nor will such action
result in any violation by Ameritech or the Selling Shareholder of the
provisions of the charter or by-laws of Ameritech or the Selling
Shareholder or any statute or regulation or any order, rule or regulation
of any court or governmental agency or body having jurisdiction over
Ameritech or the Selling Shareholder or such property or assets of
Ameritech or the Selling Shareholder.
(xiii) Upon payment of the Final Instalment and all other amounts
payable under the Trust Deed in respect of each IR, the holder thereof will
be entitled to one
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<PAGE>
Share, with good and valid title thereto, free and clear of all liens,
encumbrances, equities or claims.
(xiv) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between Ameritech or any of its subsidiaries
and any person that would give rise to a valid claim against Ameritech or
any of its subsidiaries or any International Underwriter for a brokerage
commission, finder's fee or other like payment in connection with the offer
and sale of the Offered Shares.
(xv) Other than the entering into of this Agreement and the New
Zealand and Australian Underwriting Agreement, the Selling Shareholder has
not taken and will not take, directly or indirectly, any action which is
designed to cause or result in, or which has constituted, or which might be
expected to cause or result in, stabilization or manipulation of the price
of any security of the Company to facilitate the sale or resale of the
Shares.
(xvi) The Selling Shareholder is listed on the NZSE (in relation to
the IRs) and the IRs have been approved for official quotation on the NZSE
and the ASX (and in both cases such approval for quotation has not been
withdrawn).
3. Purchase, Sale and Delivery of Offered Shares. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, (a) the Selling Shareholder agrees to
sell to each of the International Underwriters, and each of the International
Underwriters agrees, severally and not jointly, to purchase from the Selling
Shareholder, at a purchase price (the "Share Purchase Price") per Firm Share as
described below, the respective numbers of Firm Shares set forth opposite the
name of such International Underwriter in Schedules I or II hereto (it being
understood that the International Underwriters may elect to receive all or a
portion of their allotments in the form of Shares or ADSs as provided for below)
and (b) in the event and to the extent that the Joint Global Coordinators on
behalf of the International Underwriters shall exercise the election to purchase
Optional Shares as provided below, the Selling Shareholder agrees to sell to
each of the International Underwriters, and each of the International
Underwriters agrees, severally and not jointly, to purchase from the Selling
Shareholder, at the Share Purchase Price per Optional Share, that portion of the
number of Optional Shares as to which such election shall have been exercised
(to be adjusted by you so as to eliminate fractional shares) determined by
multiplying such number of Optional Shares by a fraction the numerator of which
is the maximum number of Optional Shares which such International Underwriter is
entitled to purchase as set forth opposite the name of such International
Underwriter in Schedules I or II hereto and the denominator of which is the
maximum number of the Optional Shares which all of the International
Underwriters are entitled to purchase hereunder. The Share Purchase Price per
Offered Share is equal to NZ$__ per Share less underwriting discounts equal to
NZ$__ per Share. The Share Purchase Price per Offered Share shall be payable in
instalments consisting of a first instalment of NZ$4.70 per Share (the
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"First Instalment") less underwriting discounts equal to NZ$_____ per Share and
a final instalment of NZ$___ per Share (the "Final Instalment"), each payable as
described in Section 5 hereof.
The Selling Shareholder hereby grants to the Joint Global Coordinators on
behalf of the International Underwriters the right to purchase at their election
up to an aggregate of [39,624,606] Optional Shares, at the Share Purchase Price
per Optional Share, for the sole purpose of covering over-allotments in the sale
of the Firm Shares. Any such election to purchase Optional Shares may be
exercised by written notice from the Joint Global Coordinators to the Selling
Shareholder, given on a date within a period of 30 calendar days after the date
of this Agreement setting forth the aggregate number of Optional Shares to be
purchased and the date on which such Optional Shares are to be delivered (which
date of delivery shall be, other than with respect to the First Time of
Delivery, at least three business days after such notice is delivered unless the
Selling Shareholder consents otherwise). With respect to the First Time of
Delivery, such date of delivery shall be at least two business days after such
notice is delivered unless the Selling Shareholder consents otherwise. No
Optional Shares shall be sold or delivered unless the Firm Shares previously
have been, or simultaneously are, sold and delivered. Upon such election and
notice by the Joint Global Coordinators, the Selling Shareholder agrees to sell
to the International Underwriters the Optional Shares specified in such notice
and the International Underwriters agree, severally and not jointly, to purchase
such Optional Shares. The right to purchase the Optional Shares or any portion
thereof may be exercised from time to time and to the extent not previously
exercised may be surrendered and terminated at any time upon notice by the Joint
Global Coordinators to the Selling Shareholder. Payments of the First Instalment
and Final Instalment in respect of the Optional Shares, if any, shall be made in
a similar manner as the Firm Shares as described in Section 5 hereof.
4. Offering by the Underwriters. It is understood that the several
International Underwriters propose to offer the Firm Shares for sale upon the
terms and conditions set forth in the Prospectus. Each International Underwriter
hereby makes to, and agrees with, the Selling Shareholder and the Company the
representations and agreements set forth in Annex C hereto.
5. Initial Settlement. With respect to any portion of the Offered Shares
to be purchased and sold hereunder at each Time of Delivery, Credit Suisse First
Boston Corporation ("CSFBC"), on behalf of the International Underwriters, may
elect to have ADSs in respect of such Shares delivered and paid for hereunder in
lieu of, and in satisfaction of the Selling Shareholder's obligation to sell to
the several International Underwriters and the several International
Underwriters' obligation to purchase, such Shares. Notice of such election with
respect to any Time of Delivery shall be given in writing by CSFBC, on behalf of
the International Underwriters, to the Selling Shareholder prior to the
Notification Time (as hereinafter defined) with respect to such Time of
Delivery. The purchase price for each ADS so delivered in lieu of any Firm
Shares (the "ADS Purchase Price") is equal to the sum of
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US$___ and the US$ equivalent (as determined and payable in accordance with the
Trust Deed and the Interim Deposit Agreement) of NZ$___ per ADS, less
underwriting discounts equal to US$_____ per ADS and the purchase price per ADS
for any ADSs so delivered in lieu of any Optional Shares shall be the ADS
Purchase Price less such underwriting discounts. The ADS Purchase Price shall be
payable in instalments consisting of a first instalment of US$___ per ADS (the
"First ADS Instalment") less underwriting discounts equal to US$_____ per ADS
and a final instalment of the US$ equivalent of NZ$____ per ADS (the "Final ADS
Instalment") as determined and payable in accordance with the Trust Deed and
Interim Deposit Agreement. Payment of the First Instalment for the Offered
Shares, and the First ADS Instalment in the case of any such Shares taken in the
form of ADSs, shall be made at each Time of Delivery and the Final Instalment
for such Shares shall be payable as set forth in the Trust Deed and Interim
Deposit Agreement (the "Final Instalment Due Date").
With respect to each Time of Delivery, the Shares, in the form of IRs, to
be acquired by each of the International Underwriters hereunder at such Time of
Delivery and, if an election has been made in accordance with the preceding
paragraph, one or more Interim ADRs evidencing the Interim ADSs to be acquired
by each International Underwriter at such Time of Delivery, shall be delivered
by or on behalf of the Selling Shareholder, as described in the next succeeding
paragraph, against payment by CSFBC, on behalf of the International
Underwriters, for each Share or Interim ADS as described in Section 3 or the
first paragraph of Section 5 hereof, as the case may be, multiplied by the
number of Shares or Interim ADSs, respectively, to be delivered at such Time of
Delivery.
Upon payment of the First Instalment in respect of such Shares, and of the
First ADS Instalment with respect to any Shares taken in the form of ADSs, the
Selling Shareholder will transfer legal title to the Shares to the Trustee to
hold such Shares in trust pursuant to the Trust Deed. Certificates representing
any Shares, in the form of IRs, to be delivered at each Time of Delivery by or
on behalf of the Selling Shareholder shall be delivered to the accounts to be
specified by Credit Suisse First Boston (Europe) Limited ("CSFBL"), on behalf of
the International Underwriters, at their designated nominee or nominees in New
Zealand, in such respective portions and also to such other accounts as CSFBL,
on behalf of the International Underwriters, may designate, upon notice to the
Selling Shareholder given on or prior to the Notification Time with respect to
such Time of Delivery. If an election has been made to purchase ADSs in respect
of any of the Shares, with respect to each Time of Delivery, Interim ADRs
evidencing the Interim ADSs to be acquired by an International Underwriter
pursuant to such election shall be delivered through the book entry facilities
of The Depository Trust Company ("DTC") by or on behalf of the Selling
Shareholder to CSFBC for the account of such International Underwriter. The
delivery or transfer of Shares (in the form of IRs or Interim ADSs) to be
purchased and sold hereunder at a Time of Delivery shall be made against payment
therefor and DTC and the Selling Shareholder shall have furnished or caused to
be furnished to you at such Time of Delivery certificates or other evidence
reasonably satisfactory to you of the execution in favor of the International
Underwriters of the book entry transfer, whether by delivery to the nominee in
New Zealand or to the custodian for DTC. The term
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<PAGE>
"Notification Time", with respect to any Time of Delivery, shall mean not later
than _____, Wellington, New Zealand time, on April __, 1998 with respect to the
first Time of Delivery and not later than _____, Wellington, New Zealand time,
on the second business day prior to the second Time of Delivery, if any.
The time and date of such delivery and payment shall be, with respect to
the Firm Shares (in the form of IRs), at or before _____, Wellington, New
Zealand time, on April __, 1998, and, with respect to the Optional Shares (in
the form of IRs), at or before _____, Wellington, New Zealand time, on the date
specified by you in the written notice given by you of the International
Underwriters' election to purchase such Optional Shares. The time and date of
such delivery and payment shall be, with respect to the Firm Shares (in the form
of ADSs), at or before _____, Wellington, New Zealand time, on April __, 1998,
and, with respect to the Optional Shares (in the form of ADSs), at or before
_____, Wellington, New Zealand time, on the date specified by you in the written
notice given by you of the International Underwriters' election to purchase such
Optional Shares (provided, however, that in each such case such delivery and
payment shall become in all other respects unconditional as of the time and date
of the corresponding delivery and payment for Firm Shares or Optional Shares (in
the form of IRs)). The written notice given by you with respect to the purchase
of Optional Shares shall specify the number of Shares (including the number
represented by Shares and ADSs, respectively). Payment for the Firm Shares and
the Optional Shares, respectively (other than for Shares represented by ADSs),
shall be made in New Zealand dollars in same day funds to the Selling
Shareholder at the account specified to CSFBL, on behalf of the International
Underwriters, in writing by the Selling Shareholder. Payment for the Firm Shares
and the Optional Shares, respectively, that are represented by ADSs shall be
made in U.S. dollars in same day funds to the Selling Shareholder at the account
specified to CSFBC, on behalf of the International Underwriters, in writing by
the Selling Shareholder. Such time and date for delivery of the Firm Shares is
herein call the "First Time of Delivery" and each time and date for delivery of
the Optional Shares, if not the First Time of Delivery, is herein called a "Time
of Delivery". Unless the context otherwise requires, references to a Time of
Delivery include the First Time of Delivery. For purposes of Rule 15c6-1 under
the Exchange Act, the First Time of Delivery (if later than the otherwise
applicable settlement date) shall be the settlement date for payment of funds
and delivery of securities for all the Firm Shares sold pursuant to the Global
Offering.
If applicable, ADR certificates evidencing ADSs to be delivered at each
Time of Delivery will be made available for checking and packaging at least 24
hours prior to each Time of Delivery at the office of the Depositary in New York
City, New York. Such ADR certificates will be available for release at each Time
of Delivery at said office of the Depositary.
IR holders may transfer or sell their IRs subject to the terms of the Trust
Deed and Interim ADS holders may transfer or sell their Interim ADSs, evidenced
by Interim ADRs, subject to the terms of the Interim Deposit Agreement and the
Trust Deed. Upon registration
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<PAGE>
of a transfer of an IR or Interim ADS, as evidenced by an Interim ADR, the
transferor is discharged from any liability to pay the Final Instalment or the
Final ADS Instalment, as the case may be. The Trust Deed and the Interim Deposit
Agreement provide that, when a transferee becomes a registered holder of an IR
or Interim ADS, as evidenced by an Interim ADR, that transferee becomes bound by
all of the terms of the Trust Deed, the IR, the Interim ADS and the Interim
Deposit Agreement, as applicable, including the obligation to pay the Final
Instalment or Final ADS Instalment. Therefore, notwithstanding anything herein
to the contrary, the Selling Shareholder acknowledges and agrees that, upon
registration of transfer of the IRs and Interim ADSs by the International
Underwriters, such International Underwriters shall have no liability or
obligation whatsoever with respect to the payment of the Final Instalment with
respect to the IRs and the Final ADS Instalment with respect to the Interim ADSs
so transferred.
The documents to be delivered at each Time of Delivery by or on behalf of
the parties hereto pursuant to Section 8 hereof, including the cross-receipts
for the Shares and ADSs, will be delivered at the Wellington, New Zealand
offices of Chapman Tripp Sheffield Young (the "Closing Location") and, if
applicable, the ADSs will be delivered as specified above, all at such Time of
Delivery. A meeting will be held at the Closing Location at 1:00 P.M.,
Wellington, New Zealand time, on the Business Day next preceding such Time of
Delivery, at which meeting the final drafts of the documents to be delivered
pursuant to the preceding sentence will be available for review by the parties
hereto. For the purposes of this Section 5, "Business Day" shall mean each
Monday, Tuesday, Wednesday, Thursday and Friday which is a day settlements are
allowed to take place on the NYSE and which is not a day on which banking
institutions in New York, New York or Wellington, New Zealand are generally
authorized or obligated by law or executive order to close.
6. Certain Agreements of the Company and the Selling Shareholder. (a) The
Company agrees with the several International Underwriters and the Selling
Shareholder as follows:
(i) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement, the Company will
file the U.S. Prospectus with the Commission pursuant to and in accordance
with subparagraph (1) (or, if applicable and if consented to by the Joint
Global Coordinators, subparagraph (4)) of Rule 424(b) not later than the
earlier of (A) the second business day following the execution and delivery
of this Agreement or (B) the fifteenth business day after the Effective
Date of the Initial Registration Statement.
The Company will advise the Joint Global Coordinators promptly of any such
filing pursuant to Rule 424(b). If the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of this
Agreement and an additional registration statement is necessary to register
a portion of the Offered Shares under the Act but the Effective Time
thereof has not occurred as of such execution and delivery, the
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<PAGE>
Company will file the additional registration statement or, if filed, will
file a post-effective amendment thereto with the Commission pursuant to and
in accordance with Rule 462(b) on or prior to 10:00 P.M., New York time, on
the date of this Agreement or, if earlier, on or prior to the time the U.S.
Prospectus is printed and distributed to any International Underwriter, or
will make such filing at such later date as shall have been consented to by
the Joint Global Coordinators.
(ii) The Company will advise the Joint Global Coordinators and the
Selling Shareholder promptly of any proposal to amend or supplement
(whether directly or by incorporation by reference) the initial or any
additional registration statement as filed or the related prospectus or the
Initial Registration Statement, the Additional Registration Statement (if
any) or the Prospectus or the F-6 Registration Statements and will not
effect such amendment or supplementation without the Joint Global
Coordinators' prior consent; and the Company will also advise the Joint
Global Coordinators promptly of the effectiveness of each Registration
Statement (if its Effective Time is subsequent to the execution and
delivery of this Agreement) and each F-6 Registration Statement (if their
effectiveness is subsequent to the execution and delivery of this
Agreement) and of any amendment or supplementation of the Registration
Statement or the Prospectus or the F-6 Registration Statements and of the
institution by the Commission of any stop order proceedings in respect of a
Registration Statement or the F-6 Registration Statements and will use its
best efforts to prevent the issuance of any such stop order and to obtain
as soon as possible its lifting, if issued.
(iii) The Company will comply with the Act and the Rules and
Regulations and the Exchange Act and the 1934 Act Regulations so as to
permit the completion of the distribution of the Offered Shares as
contemplated in this Agreement and in the Prospectus. If, at any time after
nine months after the time of the issue of the Prospectus, when a
prospectus relating to the Offered Shares is required to be delivered under
the Act in connection with sales by any International Underwriter or
dealer, any event occurs as a result of which it is necessary, in the
opinion of counsel for the International Underwriters or for the Company,
to amend the Registration Statement or amend or supplement the Prospectus
in order that the Prospectus would not include an untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, or if it is necessary, in the opinion of such
counsel, at any time to amend the Registration Statement or the Prospectus
to comply with the Act and the Rules and Regulations, the Company will
promptly notify the Joint Global Coordinators of such event and will
promptly prepare and, in the case of the U.S. Prospectus, file with the
Commission, at its own expense, an amendment or supplement which will
correct such statement or omission or an amendment which will effect such
compliance. Neither the Joint Global Coordinators' consent to, nor the
International Underwriters' delivery of, any such amendment or supplement
shall constitute a waiver of any of the conditions set forth in Section 8.
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(iv) As soon as practicable, but not later than the Availability Date
(as defined below), the Company will make generally available to its
securityholders an earnings statement covering a period of at least 12
months beginning after the Effective Date of the Initial Registration
Statement (or, if later, the Effective Date of the Additional Registration
Statement) which will satisfy the provisions of Section 11(a) of the Act.
For the purpose of the preceding sentence, "Availability Date" means the
45th day after the end of the fourth fiscal quarter following the fiscal
quarter that includes such Effective Date, except that, if such fourth
fiscal quarter is the last quarter of the Company's fiscal year,
"Availability Date" means the 120/th/ day after the end of such fourth
fiscal quarter.
(v) The Company will furnish to the Joint Global Coordinators or the
Selling Shareholder ____ copies of the Registration Statement and the F-6
Registration Statements (each of which will be signed and will include all
exhibits), each preliminary prospectus relating to the Offered Shares, and,
so long as delivery of a prospectus relating to the Offered Shares,
pursuant to Section 6(a)(iii) of this Agreement, is required to be
delivered under the Act in connection with sales by any International
Underwriter or dealer, the U.S. Prospectus and all amendments and
supplements to such documents, in each case in such quantities as the Joint
Global Coordinators and the Selling Shareholder may request. The U.S.
Prospectus shall be so furnished on or prior to 3:00 P.M., New York time,
on the business day following the later of the execution and delivery of
this Agreement or the Effective Time of the Initial Registration Statement.
All other such documents shall be so furnished as soon as available. The
Selling Shareholder will pay the expenses of printing and distributing to
the Joint Global Coordinators all such documents.
(vi) Promptly from time to time, the Company shall take such action as
the Joint Global Coordinators may reasonably request to qualify the Offered
Shares for offering and sale under the securities laws of such jurisdiction
as the Joint Global Coordinators may reasonably request and to comply with
such laws so as to permit the continuance of sales and dealings therein in
such jurisdictions for as long as may be necessary to complete the
distribution provided that in connection therewith the Company shall not be
required to qualify as a foreign corporation or to file a general consent
to service of process in any jurisdiction.
(vii) During the period of three years hereafter, the Company will
furnish to the Joint Global Coordinators and, upon request, to each of the
other International Underwriters, as soon as practicable after the end of
each fiscal year, a copy of its annual report to shareholders for such
year; and the Company will furnish to the Joint Global Coordinators (i) as
soon as available, a copy of each report of the Company filed with the
Commission under the Exchange Act or mailed to shareholders, and (ii) from
time to time, such other information concerning the Company as the Joint
Global Coordinators may reasonably request.
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(viii) The Company will furnish to its shareholders (including
holders of IRs) as soon as practicable after the end of (A) the first six
months of each fiscal year and each fiscal year a semi-annual report and an
annual report respectively, (including a balance sheet and statements of
income, shareholders' equity and cash flow of the Company and its
consolidated subsidiaries (certified, in the case of the annual report, by
independent public accountants), including a reconciliation to generally
accepted accounting principles in the United States ("U.S. GAAP") and (B)
each of the first and third quarters of each fiscal year (beginning with
the fiscal quarter ending after the effective date of the Registration
Statement), consolidated summary, financial information of the Company and
its subsidiaries, including a reconciliation to U.S. GAAP for such quarter
in reasonable detail.
(ix) Promptly after receipt thereof to inform the Joint Global
Coordinators and the Selling Shareholder of any written communications
received by the Company from the NZSE, the ASX, the NYSE, SEAQ
International, the New Zealand Securities Commission, the Australian
Securities Commission or the Commission and any written communications from
any other regulatory agency or authority which, in each case, could have an
effect other than an insignificant effect, on the offering of the Offered
Shares or the Global Offering or relating to the distribution, form,
content or use of any of the Preliminary Prospectus, the Prospectus, the
New Zealand Prospectus or the Australian Prospectus and to furnish the
Joint Global Coordinators and the Selling Shareholder with copies of any
such written communications thereof.
(x) The Company will use its best efforts to (A) maintain its listing
with the NZSE and the ASX (as an exempt foreign entity) and quotation of
the Shares on the NZSE and the ASX ; (B) maintain the listing and quotation
of the ADSs on the NYSE; (C) cause and maintain the quotation of the Shares
and IRs to be sold in the Global Offering on the NZSE and the ASX; (D)
cause and maintain the listing of the ADSs and Interim ADSs to be sold in
the Global Offering on the NYSE; and (E) cause and maintain the quotation
of the IRs and Interim ADSs on SEAQ International.
(xi) During the period commencing on the date hereof and ending on the
date 60 days after the date hereof, the Company will not (i) directly or
indirectly, offer, sell, contract to sell, pledge, sell any option or
contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, or file with the Commission a registration
statement under the Act relating to, any Shares (other than the Offered
Shares) or securities convertible into or exchangeable or exercisable for
Shares, or deposit any such securities in an American depositary receipt
facility, or publicly disclose the intention to make any such offer, sale,
pledge, disposal, filing or deposit, or (ii) enter into any swap or any
other agreement or any transaction that transfers in whole, or in part,
directly or indirectly, the economic consequence of ownership of the
Shares, whether any such swap or transaction described in clause (i) and
(ii) above is to be settled by
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<PAGE>
delivery of Shares or such other securities in cash or otherwise, in each
case without the prior written consent of the Joint Global Coordinators,
except for (a) the grant of employee share options pursuant to the terms of
a plan in effect on the date hereof or the issuance of securities in
respect of the exercise of any such options and (b) the issuance of
additional capital securities similar to those that are currently
outstanding.
(xii) The Company will comply with the terms of each of the Interim
Deposit Agreement and the Deposit Agreement.
(xiii) The Company shall not, without the prior written consent of
the Selling Shareholder and the Joint Global Coordinators, permit the
incorporation by reference into the Registration Statement of any part or
all of any Form 6-K submitted to the Commission by the Company.
(xiv) The Selling Shareholder and Ameritech shall be entitled to rely
on the representations and warranties of the Company set out in Section
2(b) as if those representations and warranties had been made in favor of
the Selling Shareholder and Ameritech. The Company's liability to the
Selling Shareholder and Ameritech in respect of such representations and
warranties shall be limited to any amount recovered by the Company under
the Agreed Insurance Policy (as defined in the Deed of Indemnity between
the Company and the Selling Shareholder dated March 13, 1998) in respect of
that liability except to the extent that such liability results from:
(A) an act or omission of the Company or any director, officer or
employee of the Company which constitutes:
(aa) wilful misconduct, recklessness or gross negligence; or
(bb) conduct which the relevant person did not reasonably
believe to be in, or not opposed to, the best interests of the
Company or the Selling Shareholder;
(B) a statement made by the Company or any director, officer or
employee of the Company to the extent that such statement was:
(aa) knowingly false; or
(bb) made with gross negligence,
in which event there shall be no such limit on the Company's
liability to the Selling Shareholder and Ameritech under this Section
6(a)(xiv).
(b) The Selling Shareholder agrees with the several International
Underwriters and
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<PAGE>
the Company as follows:
(i) The Selling Shareholder will indemnify and hold harmless the
International Underwriters against any New Zealand documentary, stamp,
transaction, registration or similar tax, including any interest and
penalties, in relation to the creation, issuance and sale of the Offered
Shares and on the execution and delivery of this Agreement. All payments to
be made by the Selling Shareholder hereunder shall be made without
withholding or deduction for or on account of any present or future taxes,
duties or governmental charges whatsoever unless the Selling Shareholder is
compelled by law to deduct or withhold such taxes, duties or charges. In
that event, the Selling Shareholder shall pay such additional amounts as
may be necessary in order that the net amounts received after such
withholding or deduction shall equal the amounts that would have been
received if no withholding or deduction had been made.
(ii) If, at any time prior to the date on which the initial
distribution of the Shares in the Global Offering has been completed, or
for as long as a Prospectus is required to be delivered by law, as
determined by the Joint Global Coordinators, the Selling Shareholder has
knowledge of the occurrence of any event as a result of which the
Prospectus as then amended or supplemented would include an untrue
statement of a material fact or omit to state any material fact necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading, the Selling Shareholder will promptly
notify the Company and the Joint Global Coordinators thereof and the
reasons therefor.
(iii) Subject to the terms and conditions of this Agreement, the
Selling Shareholder will transfer the Offered Shares to be sold at each
Time of Delivery to the Trustee in accordance with the terms of the Trust
Deed and the Selling Shareholder will comply with the terms of the Trust
Deed.
(iv) (A) The Selling Shareholder will approve and procure the
furnishing to the International Underwriters of the relevant copies of the
Prospectus in such quantities as you may from time to time reasonably
request and (B) if the Company is required to prepare an amended or
supplemented Prospectus pursuant to Section 6(a)(iii), upon your request
will approve the furnishing without charge to each International
Underwriter and to any dealer in securities of as many copies as you may
from time to time reasonably request of the document so prepared.
(v) During the period commencing on the date hereof and ending on the
date 60 days after the date hereof, the Selling Shareholder will not (i)
directly or indirectly offer, sell, contract to sell, pledge, sell any
option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase or otherwise transfer or
dispose of, directly or indirectly, or cause the Company to file with the
Commission a registration statement under the Act relating to, any Shares
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<PAGE>
(other than the Offered Shares) or securities convertible into or
exchangeable or exercisable for Shares, or deposit any such securities in
an American depositary receipt facility, or publicly disclose the intention
to make any such offer, sale, pledge, disposal, filing or deposit, or (ii)
enter into any swap or any other agreement or any transaction that
transfers in whole, or in part, directly or indirectly, the economic
consequence of ownership of the Shares, whether any such swap or
transaction described in clause (i) and (ii) above is to be settled by
delivery of Shares or such other securities in cash or otherwise, in each
case without the prior written consent of the Joint Global Coordinators.
(vi) The Selling Shareholder will take all reasonable steps to
maintain (i) its listing (in relation to the IRs) on the NZSE; and (ii)
quotation of the IRs on the NZSE and the ASX.
(vii) The Company shall be entitled to rely on the representations
and warranties of the Selling Shareholder set out in Section 2(c) as if
those representations and warranties had been made in favor of the Company.
7. Payment of Expenses. The Selling Shareholder and the Company will (in
accordance with the payment arrangements agreed between them) procure the
payment of, or (where relevant) procure the reimbursement to the International
Underwriters of, the following: (i) the fees, disbursements and expenses of
accountants for the Company in connection with the Global Offering; (ii)
reasonable marketing expenses and the reasonable costs of advertisements and the
Company's and the Selling Shareholder's roadshow expenses (including any
reasonable travel expenses of the Selling Shareholder's representatives, the
Company's officers and employees and the Joint Global Coordinators' officers and
employees, and any other reasonable expenses of the Selling Shareholder, the
Company and the Joint Global Coordinators in connection with attending or
hosting meetings with prospective purchasers of the Offered Shares); (iii) the
fees, disbursements and expenses of U.S., New Zealand and all other counsel for
the Company and the Selling Shareholder; (iv) the taxes described in Section
6(b)(i) hereof; (v) any costs incurred in connection with the admission of the
IRs and Interim ADSs for trading on SEAQ International, the admission and
listing of the IRs and Shares for trading on the NZSE and the ASX, and the
admission and listing of the Interim ADSs and ADSs for trading on the NYSE and
the qualification of the Shares (in the form of Shares or ADSs) for offering and
sale under the laws of such jurisdictions as the Joint Global Coordinators
designate and under state securities laws as provided in Section 6(a)(vi)
hereof, including the reasonable fees and disbursements of counsel for the
International Underwriters in connection with such qualification; (vi) any
filing fees relating to the IRs, Shares, Interim ADSs and ADSs or the offer and
sale thereof, including but not limited to the filing fees of the Commission,
any U.S. state securities commission or Canadian provinces; (vii) the reasonable
fees and disbursements of U.S. counsel to the International Underwriters in
connection with compliance with the rules of the National Association of
Securities Dealers, Inc. of the underwriting arrangements; (viii) the costs and
expenses incurred or charged by
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printers in connection with the processing, reproducing and printing of the
Preliminary Prospectus, the Prospectus, the New Zealand Prospectus, the
Australian Prospectus and any amendments and supplements thereto and the mailing
and delivering of copies thereof to the International Underwriters and dealers;
(ix) the costs and charges of the Interim Depositary, Depositary, custodian and
any transfer agent or registrar which relate to the establishment of the Interim
ADR facility and the ADR facility or the cost of preparing share certificates,
Interim ADRs or ADRs; (x) the costs and charges of the Trustee in connection
with the Trust Deed; and (xi) any and all other expenses incidental to the
performance of their obligations under this Agreement, the Interim Deposit
Agreement, the Deposit Agreement and the Trust Deed.
It is understood however that the foregoing in this Section 7 shall be
without prejudice to any separate arrangement between or among the Company,
Ameritech, the Selling Shareholder or any of their respective vendors, attorneys
or accountants with respect to such costs, charges and expenses.
8. Conditions of the Obligations of the International Underwriters. The
obligations of the several International Underwriters, as to the Offered Shares
at each Time of Delivery (in the form of ADSs or Shares), will be subject to the
accuracy of the representations and warranties on the part of the Company and
the Selling Shareholder herein and on the part of Ameritech in the International
Guaranty, to the accuracy of the statements of Company's officers and the
Selling Shareholder's officers made pursuant to the provisions hereof and
Ameritech's officers made pursuant to the provisions of the International
Guaranty, to the performance by the Company and the Selling Shareholder of their
respective obligations hereunder and the performance of Ameritech of its
obligations under the International Guaranty and to the following additional
conditions precedent:
(a) If the Effective Time of the Initial Registration Statement is not
prior to the execution and delivery of this Agreement, such Effective Time
shall have occurred not later than 10:00 P.M., New York time, on the date
of this Agreement or such later date as shall have been consented to by the
Joint Global Coordinators. If the Effective Time of the Additional
Registration Statement (if any) is not prior to the execution and delivery
of this Agreement, such Effective Time shall have occurred not later than
10:00 P.M., New York time, on the date of this Agreement or, if earlier,
the time the Prospectus is printed and distributed to any International
Underwriter, or shall have occurred at such later date as shall have been
consented to by the Joint Global Coordinators. If the Effective Time of the
Initial Registration Statement is prior to the execution and delivery of
this Agreement, the U.S. Prospectus shall have been filed with the
Commission in accordance with the Rules and Regulations and Section 6(a)(i)
of this Agreement. Each F-6 Registration Statement shall have been declared
effective not later than 10:00 P.M., New York time, on the date of this
Agreement or such later date as shall have been consented to by the Joint
Global Coordinators. Prior to such Time of Delivery, no stop order
suspending the effectiveness of a Registration
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Statement or the F-6 Registration Statements shall have been issued and no
proceedings for that purpose shall have been instituted or, to the
knowledge of the Company, the Selling Shareholder or the Joint Global
Coordinators, shall be contemplated by the Commission.
(b) Subsequent to the execution and delivery of this Agreement, there
shall not have occurred: (i) any change, or any development or event
involving a prospective change, in the business, financial position,
shareholders' equity or results of operations of the Company and its
subsidiaries considered as a whole; (ii) any suspension or material
limitation of trading in securities generally on the NZSE, ASX, LSE or the
NYSE, or any setting of minimum or maximum prices for trading on any such
exchange or any suspension of trading of any securities of the Company on
any exchange or in the over-the-counter market; (iii) any banking
moratorium declared by New Zealand, U.S. Federal or New York authorities;
(iv) any outbreak or escalation of major hostilities or any other
substantial national or international calamity or emergency; (v) any change
or development involving a prospective change in national or international
political, financial, economic or financial market conditions or (vi) any
material change or an official announcement of a material change in New
Zealand, Australian or United States taxation affecting the Company, the
Shares or the consummation of the transactions contemplated in this
Agreement, provided, in the case of each matter referred to in the
preceding clauses (i) through (vi), that the effect of such matter is, in
the judgment of the Joint Global Coordinators after consultation, to the
extent practicable, with the Selling Shareholder, so material and adverse
as to make it impractical or inadvisable to proceed with completion of the
public offering or the sale of and payment for the Offered Shares.
(c) Kirkland & Ellis, as U.S. counsel for the Company and as U.S.
counsel for Ameritech and the Selling Shareholder, shall have furnished to
you their written opinion or opinions, dated such Time of Delivery,
substantially to the effect set forth in Annex D hereto.
(d) Chapman Tripp Sheffield Young, New Zealand counsel for the
Company, shall have furnished to you their written opinion or opinions,
dated such Time of Delivery, substantially to the effect set forth in Annex
E hereto.
(e) Malcolm Gillespie, general counsel of the Company, shall have
furnished to you his written opinion or opinions, dated such Time of
Delivery, substantially to the effect set forth in Annex F hereto.
(f) Russell McVeagh, McKenzie Bartleet & Co., New Zealand counsel for
the Selling Shareholder, shall have furnished to you their written opinion
or opinions, dated such Time of Delivery, substantially to the effect set
forth in Annex G hereto.
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(g) Shearman & Sterling, U.S. counsel for the International
Underwriters; shall have furnished to you their written opinion or
opinions, dated such Time of Delivery, with respect to the validity of the
ADSs delivered at such Time of Delivery, the Registration Statement, the
Prospectus and other related matters as you may require.
(h) Simpson Grierson, New Zealand counsel for the International
Underwriters, shall have furnished to you their written opinion or
opinions, dated such Time of Delivery, with respect to the incorporation of
the Company, the validity of the Shares delivered at such Time of Delivery
and other related matters as you may require.
(i) Emmet, Marvin & Martin, U.S. counsel for the Depositary, shall
have furnished to you their written opinion or opinions, dated such Time of
Delivery, substantially to the effect set forth in Annex H hereto.
(j) Bell Gully Buddle Weir, New Zealand counsel for the Trustee, shall
have furnished to you their written opinion or opinions, dated such Time of
Delivery, substantially to the effect set forth in Annex I hereto.
(k) Bruce B. Howat, in-house legal counsel for Ameritech, shall have
furnished to you his written opinion or opinions dated such Time of
Delivery, substantially to the effect set forth in Annex J hereto.
(l) Simpson Grierson, special New Zealand tax counsel for Ameritech
and the Selling Shareholder, shall have furnished to you their written
opinion or opinions, dated such Time of Delivery substantially to the
effect set forth in Annex K hereto.
(m) Coopers & Lybrand shall have furnished to you, Ameritech, the
Selling Shareholder and the Company a letter or letters, (A) on the date
hereof, dated the date of delivery thereof, in form and substance
satisfactory to you, based upon procedures described in their letter
carried out to a date not more than three days prior to the date hereof and
(B) at each Time of Delivery, dated the date of delivery thereof, in form
and substance satisfactory to you, based upon procedures described in their
letter carried out to a date not more than three days prior to each Time of
Delivery.
(n) The Interim ADSs to be sold by the Selling Shareholder at such
Time of Delivery shall have been duly listed, and subject to notice of
issuance, on the NYSE, the Company shall have been duly admitted to the
official list of the NZSE, the Shares, including those to be deposited in
respect of ADSs, shall have been approved for official quotation on the
NZSE and the ASX and the Interim ADSs and the IRs shall have been approved
for quotation and trading through SEAQ International.
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(o) The Interim Depositary shall have furnished or caused to be
furnished to the International Underwriters a certificate satisfactory to
the Joint Global Coordinators with respect to the deposit with it of the
IRs represented by the Interim ADSs against issuance of the Interim ADRs
evidencing the Interim ADSs, the execution, issuance, countersignature and
delivery of the Interim ADRs evidencing the Interim ADSs pursuant to the
Interim Deposit Agreement and such other matters related thereto as the
Joint Global Coordinators reasonably request.
(p) The Trustee shall have furnished or caused to be furnished to the
International Underwriters a certificate satisfactory to the Joint Global
Coordinators with respect to the enforceability of the Trust Deed against
the Trustee and such other matters related thereto as the Joint Global
Coordinators reasonably request.
(q) You shall have received a certificate, dated such Time of
Delivery, of the Chief Executive Officer and a principal financial or
accounting officer of the Company in which such officers, to the best of
their knowledge after reasonable investigation, shall state that: (i) the
representations and warranties of the Company in this Agreement are true
and correct at such Time of Delivery as if given on such Time of Delivery;
(ii) the Company has complied with all agreements and satisfied all
conditions on its part to be performed or satisfied hereunder at or prior
to such Time of Delivery; (iii) no order, ruling or determination having
the effect of ceasing the trading or suspending the sale of Shares,
Instalment Receipts, Interim ADRs or ADS or any related security or any
other securities of the Company has been issued by any stock exchange,
securities authority or other regulatory authority and is continuing in
effect and no proceedings for such purpose have been instituted and are
continuing or are pending or contemplated or threatened, no stop order
suspending the effectiveness of any Registration Statement, the F-6
Registration Statements or the Form 8-A Registration Statement have been
issued and no proceedings for that purpose have been instituted or are
contemplated by the Commission; (iv) the Additional Registration Statement
(if any) satisfying the requirements of subparagraphs (1) and (3) of Rule
462(b) was filed pursuant to Rule 462(b), including payment of the
applicable filing fee in accordance with Rule 111(a) or (b) under the Act,
prior to the time the U.S. Prospectus was printed and distributed to any
International Underwriter; and (v) neither the Company nor any Material
Subsidiary has sustained since the date of the latest audited financial
statements included in the Prospectus any material loss or interference
with its business from earthquake, fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor dispute or
court or governmental action, order or decree otherwise than as set forth
or contemplated in the Prospectus, and, since the respective dates as of
which information is given in the Registration Statement and the
Prospectus, there has not been any change in the capital stock of the
Company or any Material Subsidiary, material decrease in the Company's
consolidated working capital or material increase in the Company's
consolidated short-term debt or consolidated long-term debt or any material
adverse change or any development which
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the Company has reasonable cause to believe will involve a prospective
material adverse change in or materially adversely affect the business,
financial position, shareholders' equity or results of operations of the
Company and its subsidiaries considered as a whole, otherwise than as set
forth or contemplated in the Prospectus.
(r) You shall have received a certificate, dated such Time of
Delivery, of a duly authorized executive officer of the Selling Shareholder
that shall state that (i) the representations and warranties of the Selling
Shareholder in this Agreement are true and correct at such Time of Delivery
as if given on such Time of Delivery and (ii) the Selling Shareholder has
complied with all agreements and satisfied all conditions on its part to be
performed or satisfied hereunder at or prior to such Time of Delivery.
(s) You shall have also received a certificate, dated such Time of
Delivery, of the duly appointed Secretary of the Company certifying as to:
(i) the trueness and completeness of the Constitution of the Company (as
attached to such certificate) in full force and effect from ___________,
the date of reregistration of the Company under the New Zealand Companies
Act 1993; (ii) the absence of any amendment or other document (or any
action taken or contemplated by the Company, its directors or officers, or
to the best knowledge of such secretary, its shareholders, in contemplation
of any such amendment) relating to or affecting the Constitution of the
Company or any action taken by the Company, its directors or officers, or
to the best knowledge of such secretary, its shareholders, in contemplation
of the liquidation or dissolution of the Company; (iii) the absence of any
proceedings towards the merger, consolidation, sale of assets outside the
ordinary course of business, liquidation or dissolution of the Company that
have been taken or, to the best knowledge of such secretary are pending, or
any steps taken by the directors or, to the best knowledge of such
secretary, the shareholders of the Company, to authorize or institute the
foregoing, (iv) the trueness and completeness of the resolutions (as
attached to such certificate) adopted at meetings held by the Board of
Directors of the Company in connection with the offering, at which meeting
a quorum was present and acting throughout; absence of any amendments,
modifications or recisions to such resolutions which remain in full force
and effect; and such resolutions being the only resolutions necessary in
connection with the offering; (v) the Registration Statement, the F-6
Registration Statements, the Prospectus, this Agreement, the Interim
Deposit Agreement and the Deposit Agreement are in substantially the form
approved by the Board of Directors of the Company or by persons authorized
by the Board of Directors of the Company; (vi) to the best knowledge of
such secretary, all written communication between the Company, its officers
and employees, the Company's accountants, counsel or representatives (other
than the International Underwriters) on one hand and the Commission or its
staff on the other relating to the Registration Statement, the F-6
Registration Statements or the Form 8-A Registration Statement have been
provided to the Joint Global Coordinators or their counsel; (vii) each
director or officer of the Company who signed the Registration Statements,
the F-6 Registration Statements, or the Form 8-A Registration
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Statement, this Agreement, the Interim Deposit Agreement and any other
document delivered on or prior to the date of such certificate in
connection with the transactions described in this Agreement was, at the
time of signing and delivery or filing with the Commission, duly elected or
appointed, qualified and acting as such director or officer or duly
appointed and acting as such attorney-in-fact, and was duly authorized to
sign such document, and the signatures of such persons appearing on such
documents are their genuine signatures; and (viii) other than the minutes
of any meeting held on such Time of Delivery (the substance of which were
communicated to Shearman & Sterling), the minute books made available to
Shearman & Sterling contained all minutes of the proceedings of the
Company's Board of Directors from December 1, 1995, through the date of
such certificate.
(t) Ameritech Corporation, a Delaware corporation and the owner of
100% of the capital stock of the Selling Shareholder ("Ameritech"), shall
have entered into an International Guaranty in favor of the International
Underwriters dated the date hereof (the "International Guaranty"),
substantially in the form attached as Annex L hereto, providing for, among
other things, a guaranty of and indemnity for, the representations,
warranties, covenants, expenses and indemnities of the Selling Shareholder
under this Agreement; Ameritech shall have complied with all agreements and
satisfied all conditions on its part under the International Guaranty on
the First Time of Delivery and on each subsequent Time of Delivery; and
such International Guaranty shall be in full force and effect (without any
notice of revocation or termination thereof) on the First Time of Delivery
and on each subsequent Time of Delivery.
(u) The closing of each portion of the Global Offering shall have been
conducted concurrently.
The Company and the Selling Shareholder shall furnish the Joint Global
Coordinators with such conformed copies of such opinions, certificates, letters
and documents as the Joint Global Coordinators reasonably request. The Joint
Global Coordinators may in their sole discretion waive on behalf of the
International Underwriters compliance with any conditions to the obligations of
the International Underwriters hereunder.
9. Indemnification and Contribution. (a) The Selling Shareholder will
indemnify and hold harmless each International Underwriter against any losses,
claims, damages or liabilities, joint or several, to which such International
Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement, any F-6 Registration
Statement, the Prospectus, or any amendments or supplements thereto, or any
related preliminary prospectus, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein, and, in the case
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of the Prospectus in light of the circumstances under which they were made, not
misleading, and will reimburse each International Underwriter for any legal or
other expenses reasonably incurred by such International Underwriter in
connection with investigating or defending any such loss, claim, damage,
liability or action as such expenses are incurred; provided, however, that the
Selling Shareholder will not be liable in any such case to the extent that any
such loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement in or omission or alleged omission from
any of such documents in reliance upon and in conformity with written
information furnished to the Company or the Selling Shareholder by any
International Underwriter through the Joint Global Coordinators expressly for
use therein, it being understood and agreed that the only information so
furnished by or on behalf of any International Underwriter is the Furnished
Information; and provided, further, that with respect to any untrue statement or
alleged untrue statement in or omission or alleged omissions from any
preliminary prospectus, the indemnity agreement contained in this subsection (a)
shall not inure to the benefit of any International Underwriter from whom the
person asserting any such losses, claims, damages or liabilities purchased the
Offered Shares concerned, to the extent that a prospectus relating to such
Offered Shares was required to be delivered by such International Underwriter
under the Act in connection with such purchase and any such loss, claim, damage
or liability of such International Underwriter results from the fact that there
was not sent or given to such person, at or prior to the written confirmation of
the sale of such Offered Shares to such person, a copy of the U.S. Prospectus
(exclusive of material incorporated by reference) if the Company had previously
furnished copies thereof to such International Underwriter.
(b) Each International Underwriter will severally and not jointly
indemnify and hold harmless the Selling Shareholder against any losses, claims,
damages or liabilities to which the Selling Shareholder may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
the Registration Statement, any F-6 Registration Statement, the Prospectus, or
any amendments or supplements thereto, or any related preliminary prospectus, or
arise out of or are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with written
information furnished to the Company by such International Underwriter through
the Joint Global Coordinators expressly for use therein (it being understood and
agreed that the only information furnished so furnished by or on behalf of any
International Underwriter is the Furnished Information), and will reimburse any
legal or other expenses reasonably incurred by the Selling Shareholder in
connection with investigating or defending any such loss, claim, damage,
liability or action as such expenses are incurred.
(c) Promptly after receipt by an indemnified party under this Section of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under
subsection (a) or (b) above, notify the
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indemnifying party of the commencement thereof; but the omission so to notify
the indemnifying party will not relieve it from any liability which it may have
to any indemnified party otherwise than under subsection (a) or (b) above. In
case any such action is brought against any indemnified party and it notifies
the indemnifying party of the commencement thereof, the indemnifying party will
be entitled to participate therein and, to the extent that it may wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel reasonably satisfactory to such indemnified party (who
shall not, except with the consent of the indemnified party, be counsel to the
indemnifying party), and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under this
Section for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation. No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement of any pending or
threatened action in respect of which any indemnified party is or could have
been a party and indemnity could have been sought hereunder by such indemnified
party unless such settlement includes an unconditional release of such
indemnified party from all liability on any claims that are the subject matter
of such action.
(d) If the indemnification provided for in this Section is unavailable or
insufficient to hold harmless an indemnified party under subsection (a) or (b)
above, then each indemnifying party shall contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in subsection (a) or (b) above (i) in such proportion as
is appropriate to reflect the relative benefits received by the Selling
Shareholder on the one hand and the International Underwriters on the other from
the offering of the Shares or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause (i) above but
also the relative fault of the Selling Shareholder and the Company on the one
hand and the International Underwriters on the other in connection with the
statements or omissions which resulted in such losses, claims, damages or
liabilities as well as any other relevant equitable considerations. The
relative benefits received by the Selling Shareholder on the one hand and the
International Underwriters on the other shall be deemed to be in the same
proportion as the total net proceeds from the offering pursuant to this
Agreement (before deducting expenses but after underwriting discounts) received
by the Selling Shareholder bear to the total underwriting discounts and
commissions received by the International Underwriters. The relative fault
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company or the
Selling Shareholder on the one hand or the International Underwriters on the
other and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such untrue statement or omission. The amount
paid by an indemnified party as a result of the losses, claims, damages or
liabilities referred to in the first sentence of this subsection (d) shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any action or
claim which is the subject of
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this subsection (d). Notwithstanding the provisions of this subsection (d), no
International Underwriter shall be required to contribute any amount in excess
of the amount by which the total price at which the Shares underwritten by it
and distributed to the public were offered to the public exceeds the amount of
any damages which such International Underwriter has otherwise been required to
pay by reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The International
Underwriters' obligations in this subsection (d) to contribute are several in
proportion to their respective underwriting obligations and not joint.
(e) The obligations of the Selling Shareholder under this Section shall
be in addition to any liability which the Selling Shareholder may otherwise have
and shall extend, upon the same terms and conditions, to each person, if any,
who controls any International Underwriter within the meaning of the Act; and
the obligations of the International Underwriters under this Section shall be in
addition to any liability which the respective International Underwriters may
otherwise have and shall extend, upon the same terms and conditions, and to each
person, if any, who controls the Company or the Selling Shareholder within the
meaning of the Act.
10. Default of Underwriters. If any International Underwriter or
International Underwriters default in their obligations to purchase the Shares
which it has agreed to purchase hereunder at a Time of Delivery and the
aggregate number of Shares that such defaulting International Underwriter or
International Underwriters agreed but failed to purchase does not exceed 10% of
the total number of Offered Shares that the Underwriters are obligated to
purchase on such Time of Delivery, the Joint Global Coordinators may make
arrangements satisfactory to the Selling Shareholder for the purchase of such
Shares by other persons, including any of the Underwriters, but if no such
arrangements are made on such Time of Delivery the non-defaulting Underwriters,
shall be obligated severally, in proportion to their respective commitments
hereunder, to purchase the Shares that such defaulting International
Underwriters agreed but failed to purchase at such Time of Delivery. If any
International Underwriter or International Underwriters so default and the
aggregate number of Shares with respect to which such default occurs exceeds 10%
of the total number of Offered Shares that the Underwriters are obligated to
purchase at such Time of Delivery and arrangements satisfactory to the Joint
Global Coordinators and the Selling Shareholder for the purchase of such Shares
by other persons are not made within 36 hours after such default, this Agreement
will terminate without liability on the part of any non-defaulting International
Underwriter or the Selling Shareholder, except as provided in Section 11
(provided that if such default occurs with respect to Optional Shares after the
first Time of Delivery, this Agreement will not terminate as to the Firm Shares
or any Optional Shares purchased prior to such termination). As used in this
Agreement, the term "International Underwriter" includes any person substituted
for an International Underwriter under this Section. Nothing herein will
relieve a defaulting International Underwriter from liability for its default.
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11. Survival of Certain Representations and Obligations. The respective
indemnities, agreements, representations, warranties and other statements of the
Company, the Selling Shareholder or any of their respective officers, on the one
hand, and of the several International Underwriters, on the other hand, set
forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation, or statement as to the results thereof,
made by or on behalf of any International Underwriter, the Company, the Selling
Shareholder or any of their respective representatives, officers or directors or
any controlling person with respect to any International Underwriter and the
Company and any controlling person with respect to the Selling Shareholder, and
will survive delivery of and payment for the Shares. If this Agreement is
terminated pursuant to Section 10 or if for any reason the purchase of the
Shares by the International Underwriters is not consummated, the Selling
Shareholder and the Company shall remain responsible for the expenses to be paid
or reimbursed by it pursuant to Section 7 and the respective obligations of the
Selling Shareholder and the International Underwriters pursuant to Section 9
shall remain in effect and if any Shares have been purchased hereunder the
representations and warranties in Section 2 and all obligations under Section 6
and Section 7 shall also remain in effect. If the purchase of the Shares by the
International Underwriters is not consummated for any reason other than solely
because of the termination of this Agreement pursuant to Section 10 or the
occurrence of any event specified in clause (ii), (iii), (iv), (v) or (vi) of
Section 8(b), the Selling Shareholder will reimburse the International
Underwriters for all out-of-pocket expenses (including fees and disbursements of
counsel) reasonably incurred by them in connection with the offering of the
Shares.
12. Notices. All communications hereunder will be in writing and, if sent
to (a) the International Underwriters, will be mailed, delivered or telegraphed
and confirmed to the Joint Global Coordinators c/o Credit Suisse First Boston
Corporation, Eleven Madison Avenue, New York, N.Y. 10010-3629, Attention:
Investment Banking Department - Transactions Advisory Group, with a copy to
Shearman & Sterling, 80 Raffles Place, #16-21, UOB Plaza 2, Singapore 048624,
Attention: Alan F. Denenberg, (b) the Company, will be mailed, delivered or
telegraphed and confirmed to it at Networks House, 68 Jervois Quay, P.O. Box
570, Wellington, New Zealand, Attention: General Counsel, with a copy to
Kirkland & Ellis, 200 East Randolph Drive, Chicago, Illinois 60601 Attention:
Carter W. Emerson, P.C. and (c) the Selling Shareholder, will be mailed,
delivered or telegraphed and confirmed to it at 30 South Wacker Drive, Chicago,
Illinois, U.S.A 60606, Attention: Assistant General Counsel Transactions, with a
copy to Kirkland & Ellis, 200 East Randolph Drive, Chicago, Illinois 60601,
Attention: Robert S. Osborne, P.C.; provided, however, that any notice to an
International Underwriter pursuant to Section 9 will be mailed, delivered or
telegraphed and confirmed to such International Underwriter.
13. Successors. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors and controlling
persons referred to in Section 9, and no other person will have any right or
obligation hereunder.
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14. Representation of International Underwriters. The Joint Global
Coordinators shall act for the several International Underwriters in connection
with the transactions contemplated by this Agreement, and any action under this
Agreement taken by the Joint Global Coordinators jointly will be binding upon
all the International Underwriters.
15. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
16. Applicable Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York, without regard to principles
of conflicts of laws.
17. Submission to Jurisdiction. (a) Each of the Company and the Selling
Shareholder hereby submits to the non-exclusive jurisdiction of the Federal and
state courts in the Borough of Manhattan in The City of New York in any suit or
proceeding arising out of or relating to this Agreement or the transactions
contemplated hereby. Each of the Company and the Selling Shareholder
irrevocably appoints CT Corporation System, 1633 Broadway, 23rd Floor, New York,
New York 10019, as its authorized agent in the Borough of Manhattan in The City
of New York upon which process may be served in any such suit or proceeding, and
agrees that service of process upon such agent, and written notice of said
service to the Company or the Selling Shareholder, as the case may be, by the
person serving the same to the address provided in Section 12, shall be deemed
in every respect effective service of process upon the Company or the Selling
Shareholder, as the case may be, in any such suit or proceeding. Each of the
Company, or the Selling Shareholder further agrees to take any and all action as
may be necessary to maintain such designation and appointment of such agent in
full force and effect for a period of seven years from the date of this
Agreement.
(b) The obligation of the Company or the Selling Shareholder, as the case
may be, in respect of any sum due to any International Underwriter shall,
notwithstanding any judgment in a currency other than United States dollars, not
be discharged until the first business day, following receipt by such
International Underwriter of any sum adjudged to be so due in such other
currency, on which (and only to the extent that) such International Underwriter
may in accordance with normal banking procedures purchase United States dollars
with such other currency; if the United States dollars so purchased are less
than the sum originally due to such International Underwriter hereunder, the
Company or the Selling Shareholder, as the case may be, agrees, as a separate
obligation and notwithstanding any such judgment, to indemnify such
International Underwriter against such loss. If the United States dollars so
purchased are greater than the sum originally due to such International
Underwriter hereunder, such International Underwriter agrees to pay to the
Company or the Selling Shareholder, as the case may be, an amount equal to the
excess of the United States dollars so purchased over the sum originally due to
such International Underwriter hereunder.
40
<PAGE>
18. Severability. Any provision or part of this Agreement which is
invalid, unenforcable or illegal in any situation in any jurisidiction shall, as
to such situation and such jurisdiction, be ineffective only to the extent of
such invalidity, unenforceability or illegality and shall not affect the
validity, enforceability or legality of the remaining provisions hereof or the
validity, enforceability or legality of any such provision in any situation or
in any other jurisdiction. If the final judgment of a court of competent
jurisdiction declares that any term or provision hereof is invalid,
unenforceable or illegal, the parties agree that the court making such
determination of invalidity, unenforceability or illegality shall have the power
to reduce the scope of such provision to delete specific words or phrases or to
replace any invalid, unenforceable or illegal term or provision with a term or
provision that is valid, enforceable and legal and that comes closes to
expressing the intention of the invalid, unenforceable or illegal term or
provision, and this Agreement shall be valid, enforceable and legal as so
modified, subject to the rights of any party to appeal any such determination.
If the foregoing is in accordance with the Joint Global Coordinators'
understanding of our agreement, kindly sign and return to each of the Company
and the Selling Shareholder one of the counterparts hereof, whereupon it will
become a binding agreement among the Company, the Selling Shareholder and the
several International Underwriters in accordance with its terms.
41
<PAGE>
Very truly yours,
AMERITECH NEW ZEALAND INVESTMENTS, INC.
By:
----------------------------------------------
Name:
Title:
TELECOM CORPORATION OF NEW ZEALAND LIMITED
By:
----------------------------------------------
Director
By:
----------------------------------------------
Director/Authorized Signatory
The foregoing International Underwriting Agreement is hereby confirmed
and accepted as of the date first above written.
CREDIT SUISSE FIRST BOSTON CORPORATION
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
Acting for themselves and as representatives on behalf of
the several U.S. Underwriters.
By: CREDIT SUISSE FIRST BOSTON CORPORATION
By:
----------------------------------------------
Name:
Title:
CREDIT SUISSE FIRST BOSTON (EUROPE) LIMITED
MERRILL LYNCH INTERNATIONAL
Acting for themselves and as representatives on behalf of
the several Rest of the World Underwriters.
By: MERRILL LYNCH INTERNATIONAL
By:
----------------------------------------------
Name:
Title:
42
<PAGE>
SCHEDULE I
(U.S. Offering)
<TABLE>
<CAPTION>
Total Number of Number of Shares
Firm Shares to be Purchased if
Underwriter to be Purchased Maximum Option
----------- --------------- ------------------
Exercised
------------------
<S> <C> <C>
Credit Suisse First Boston Corporation
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...........................
SBC Warburg Dillon Read, Inc............
- ----------------------------------------
- ----------------------------------------
- ----------------------------------------
- ----------------------------------------
- ----------------------------------------
- ----------------------------------------
- ----------------------------------------
- ----------------------------------------
- ----------------------------------------
- ----------------------------------------
---------- ----------
Total................................... 87,400,000
========== ==========
</TABLE>
43
<PAGE>
SCHEDULE II
(Rest of the World Offering)
<TABLE>
<CAPTION>
Total Number of Number of Shares
Firm Shares to be Purchased if
Underwriter to be Purchased Maximum Option
----------- --------------- ------------------
Exercised
------------------
<S> <C> <C>
Credit Suisse First Boston
(Europe) Limited.......................
Merrill Lynch International.............
SBC Warburg Dillon Read.................
- ----------------------------------------
- ----------------------------------------
- ----------------------------------------
- ----------------------------------------
- ----------------------------------------
- ----------------------------------------
- ----------------------------------------
----------- -----------
Total................................... 170,846,064
=========== ===========
</TABLE>
44
<PAGE>
ANNEX A
(Selling Shareholder Information)
The "Selling Shareholder Information" is identified by reference to the specific
page and caption of the U.S. Prospectus and the Rest of the World Offering
Circular.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Page (of the U.S. Caption Selling Shareholder
Prospectus and the Information
Rest of the World
Offering Circular)
- --------------------------------------------------------------------------------
<S> <C> <C>
Front cover N/A Second paragraph
- --------------------------------------------------------------------------------
8 Prospectus Summary -- The Global Entire paragraph
Offering -- Offering Price
- --------------------------------------------------------------------------------
9 Prospectus Summary -- The Global Entire paragraph
Offering -- Selling Shareholder
- --------------------------------------------------------------------------------
9 Prospectus Summary -- The Global Entire paragraph
Offering -- Instalment Payment
Arrangements
- --------------------------------------------------------------------------------
9 Prospectus Summary -- The Global Entire paragraph
Offering -- Instalment Receipts
- --------------------------------------------------------------------------------
10 Prospectus Summary -- The Global Entire paragraph
Offering -- Interim ADSs
- --------------------------------------------------------------------------------
10 Prospectus Summary -- The Global Entire paragraph
Offering -- Use of Proceeds
- --------------------------------------------------------------------------------
12 Prospectus Summary -- The Global First sentence
Offering -- Settlement of First
Instalment
- --------------------------------------------------------------------------------
21 Risk Factors -- Deferred Payment Entire paragraph
Characteristics of IRs and Interim
ADSs
- --------------------------------------------------------------------------------
22 The Global Offering Fourth paragraph,
except penultimate
sentence
- --------------------------------------------------------------------------------
22 The Global Offering -- Instalment Entire paragraph
Payment Arrangements
- --------------------------------------------------------------------------------
53 Management Entire paragraph
preceding the
list of executive
officers
- --------------------------------------------------------------------------------
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Page (of the U.S. Caption Selling Shareholder
Prospectus and the Information
Rest of the World
Offering Circular)
- --------------------------------------------------------------------------------
<S> <C> <C>
55 Principal and Selling Shareholders 1. reference in
the table of
ownership to
the Selling
Shareholders'
ownership of
437,080,670
Shares as of
[February 28,
1998] (the
"Table")
2. disclaimer by
Messrs. Pehlke
and Cadow of
beneficial
ownership in
such Shares in
note (a) to the
Table
3. except for the
first sentence
thereof, entire
fourth
paragraph
- --------------------------------------------------------------------------------
62-70 Description of Instalment Receipts Entire section
and Trust Deed (and the
Corresponding
section of the
Form F-6
Registration
Statement for
Instalment
Receipts)
- --------------------------------------------------------------------------------
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Page (of the U.S. Caption Selling Shareholder
Prospectus and the Information
Rest of the World
Offering Circular)
- -----------------------------------------------------------------------------------------
<C> <S> <C>
71-82 Description of Interim American Entire section (and the
Depositary Receipts and American corresponding section of
Depositary Receipts the Form F-6 Registration
Statement for Interim
ADRs) to the extent that it
describes the Interim ADSs
represented by Interim
ADRs and the Interim
Deposit Agreement, but
excluding:
1. all information
pertaining to the
Depositary, the Deposit
Agreement and/or the
ADSs represented by
ADRs
2. all information
pertaining to the
Company's
Constitution or New
Zealand law
3. first paragraph under
the caption
"Limitations on
Shareholders" on page
78
4. last paragraph under the
caption "General" on
page 82
- -----------------------------------------------------------------------------------------
</TABLE>
* For purposes hereof, cross-references to other parts of the U.S. Prospectus
and the Rest of the World Offering Circular shall be considered as a
"sentence" for purposes of counting the sentences, but the Selling
Shareholder Information shall not include the information contained in the
cross-referenced portion of the U.S. Prospectus and Rest of the World
Offering Circular unless and to the extent specifically identified above.
47
<PAGE>
ANNEX B
(Material Subsidiaries of the Company)
Telecom New Zealand Limited
Telecom Investments Limited
Telecom Wellington Investments Limited
TCNZ (UK) Investments Limited
TCNZ (United Kingdom) Securities Limited
Telecom Credit Limited
Telecom Purchasing Limited
TCNZ Finance Limited
Telecom New Zealand Finance Limited
48
<PAGE>
ANNEX C
I. Each of the Rest of the World Underwriters represents and agrees that:
(a) (i) it has not offered or sold, and will not offer or sell, any Offered
Shares to persons in the United Kingdom, except to persons whose ordinary
activities involve them in acquiring, holding, managing or disposing of
investments (as principal or agent) for the purposes of their businesses or
circumstances which have not resulted and will not result in an offer to the
public within the meaning of the Public Offers of Securities Regulation 1995
(the "Regulations"), (ii) it has complied and will comply with all applicable
provisions of the Financial Services Act 1986 and the Regulations with respect
to anything done by it in relation to the Offered Shares in, from or otherwise
involving the United Kingdom and (iii) it has only issued or passed on and will
only issue or pass on in the United Kingdom any document received by it in
connection with the issue of the Offered Shares to a person who is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisement) (Exemptions) Order 1996 or is a person to whom the document may
otherwise lawfully be issued or passed on.
(b) the Offered Shares have not been registered under the Securities and
Exchange Law of Japan and are not being offered or sold and may not be offered
or sold, directly or indirectly, in Japan or to or for the account of any
resident of Japan or to any persons for reoffering or resale, directly or
indirectly, in Japan or to any resident of Japan, except (a) pursuant to an
exemption from the registration requirements of the Securities and Exchange Law
of Japan and (b) in compliance with any other applicable requirements of
Japanese law.
II. Each International Underwriter acknowledges that no representation is made
by the Company, the Selling Shareholder, the Joint Global Coordinators or any
other International Underwriter that any action has been or will be taken in any
jurisdiction other than the United States, New Zealand and Australia that would
permit a public offering of the Offered Shares, or possession or distribution of
any offering material, in any country or jurisdiction where action for that
purpose is required.
49
<PAGE>
EXHIBIT 1.2
INTERNATIONAL GUARANTY
THIS AGREEMENT MADE THIS DAY OF APRIL, 1998 AMONG:
AMERITECH CORPORATION,
a corporation organized and existing
under the laws of Delaware (the "Guarantor")
and
CREDIT SUISSE FIRST BOSTON CORPORATION
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
as Representatives of the Several Underwriters named
in Schedule I to the International Underwriting Agreement
referred to below (the "U.S. Underwriters")
and
CREDIT SUISSE FIRST BOSTON (EUROPE) LIMITED
MERRILL LYNCH INTERNATIONAL
as Representatives of the Several Underwriters named
in Schedule II to the International Underwriting Agreement
(the "Rest of the World Underwriters" and, together with
the U.S. Underwriters, the "International Underwriters")
and
TELECOM CORPORATION OF NEW ZEALAND LIMITED
a corporation organized and existing under the laws of
New Zealand (the "Company")
WHEREAS:
(1) The International Underwriters are parties to an International
Underwriting Agreement dated the date hereof (the "International
Underwriting Agreement", the
<PAGE>
2
terms defined therein and not otherwise defined herein being used
herein as defined therein) among themselves, Ameritech New Zealand
Investments, Inc., a Delaware corporation and a wholly-owned
subsidiary of the Guarantor (the "Selling Shareholder"), and the
Company;
(2) It is a condition precedent to the purchase of the Offered Shares
by the International Underwriters pursuant to Section 8(t) of the
International Underwriting Agreement that the Guarantor, as owner of
100% of the outstanding shares of capital stock of the Selling
Shareholder, shall have executed and delivered this International
Guaranty;
(3) Pursuant to Section 2(c) of the International Underwriting
Agreement, the Selling Shareholder has made certain representations
and warranties to the several International Underwriters as set forth
in Section 2(c) of the International Underwriting Agreement (the
"Underwriting Representations and Warranties");
(4) Pursuant to section 6(b)(vii) of the International Underwriting
Agreement the Company is entitled to rely on the Underwriting
Representations and Warranties (the obligations of the Selling
Shareholder to the Company in respect of such Underwriting
Representations and Warranties being referred to below as the "Company
Obligations");
(5) Pursuant to Section 9 of the International Underwriting Agreement,
the Selling Shareholder and the International Underwriters have agreed
to indemnify each other under certain circumstances and in the manner
described therein (the "Underwriting Indemnification Obligations");
and
(6) Pursuant to (without limitation) Section 2(c), 3, 5, 6(b), 7, 8,
9, 11 and 17 of the International Underwriting Agreement, the Selling
Shareholder has agreed to fulfill certain other obligations,
including, but not limited to, the obligation to sell the Offered
Shares to the International Underwriters, the obligation to transfer
legal title in the Offered Shares to the Trustee under the Trust Deed
upon receipt by the Selling Shareholder of payment of the First
Instalment (the "Other Underwriting Obligations" and, together with
the Underwriting Indemnification Obligations, the "Underwriting
Obligations").
NOW, THEREFORE, in consideration of the premises and in order to
induce the International Underwriters to purchase the Offered Shares under the
International Underwriting Agreement and in order to induce the Company to enter
into the International Underwriting Agreement, the Guarantor hereby agrees as
follows:
<PAGE>
3
Section 1. International Guaranty. The Guarantor hereby
unconditionally and irrevocably guarantees to the International Underwriters the
performance and punctual payment as, when and to the extent due of all the
Underwriting Obligations of the Selling Shareholder now or hereafter existing
under the International Underwriting Agreement and unconditionally and
irrevocably guarantees to the Company the performance and punctual payment as,
when and to the extent due of all the Company Obligations of the Selling
Shareholder now or hereafter existing under the International Underwriting
Agreement, agrees to indemnify the International Underwriters pursuant to
Section 6 in this International Guaranty, and agrees to pay any and all
reasonable expenses (including reasonable counsel fees and expenses) incurred by
the International Underwriters and the Company in enforcing any rights under
this International Guaranty.
Section 2. International Guaranty Absolute. The Guarantor guarantees
that the Underwriting Obligations and the Company Obligations of the Selling
Shareholder will be paid and performed as, when and to the extent due strictly
in accordance with the terms, and subject to the conditions, of the
International Underwriting Agreement. The obligations of the Guarantor under
this International Guaranty are independent of the Underwriting Obligations and
the Company Obligations, as the case may be, and of obligations of the Company
under the International Underwriting Agreement, and a separate action or actions
may be brought and prosecuted against the Guarantor to enforce this
International Guaranty, irrespective of whether any action is brought against
the Selling Shareholder or the Company or whether the Selling Shareholder or the
Company is joined in any such action or actions. The liability of the Guarantor
under this International Guaranty shall be irrevocable, absolute and
unconditional.
Section 3. Payments Free and Clear of Taxes, Etc. The Guarantor will
indemnify and hold harmless the International Underwriters and the Company
against any New Zealand documentary, stamp, transaction, registration or similar
tax, including interest and penalties, in relation to the execution and delivery
of the International Guaranty. Any and all payments made by the Guarantor
hereunder shall be made without withholding or deduction for or on account of
any present or future taxes, duties or governmental charges whatsoever unless
the Guarantor is compelled by law to deduct or withhold such taxes, duties or
charges. In that event, the Guarantor shall pay such additional amounts as may
be necessary in order that the net amounts received after such withholding or
deduction shall equal the amounts that would have been received if no
withholding or deduction had been made.
Section 4. Representations and Warranties. (A) The Guarantor hereby
represents and warrants to each of the International Underwriters and the
Company as of the date hereof, as of the First Time of Delivery and of each Time
of Delivery, and agrees with each International Underwriter and the Company as
follows:
<PAGE>
4
(1) The Guarantor hereby makes all of the Underwriting Representations
and Warranties, all of which are incorporated by reference in this International
Guaranty.
(2) The Guarantor is duly incorporated and is validly existing as a
corporation in good standing under the laws of its jurisdiction of
incorporation, with power and authority (corporate and other) to perform its
obligations hereunder; and the Guarantor has good and valid title to all of the
outstanding capital stock of the Selling Shareholder;
(3) This International Guaranty has been duly authorized,
executed and delivered by the Guarantor;
(4) All consents, approvals, authorizations and orders necessary for
the execution, delivery and performance of this International Guaranty and the
consummation of the transactions contemplated hereby have been obtained
provided, however, that this representation shall not apply to any such
consents, approvals, authorizations or orders as may be required by laws of
jurisdictions other than New Zealand, Australia and the United States.
(5) The execution, delivery and performance of this International
Guaranty do not and will not conflict with or result in a breach or violation of
any of the terms and provisions of, or constitute a default under, any
indenture, mortgage, deed of trust, loan agreement or other material agreement
or instrument to which the Guarantor or the Selling Shareholder is a party or by
which the Guarantor or the Selling Shareholder is bound, or to which any
property or assets, which is material to the Guarantor or the Selling
Shareholder is subject, nor will such action result in any violation by the
Guarantor or the Selling Shareholder of the provisions of the charter or by-laws
of the Guarantor or the Selling Shareholder or any statute or regulation or any
rule or regulation of any court or governmental agency or body having
jurisdiction over the Guarantor or the Selling Shareholder or such property or
assets of the Guarantor or the Selling Shareholder.
(6) There are no conditions precedent to the effectiveness of this
International Guaranty that have not been satisfied or waived.
(B) Each International Underwriter hereby makes to, and agrees with,
the Guarantor the representations and agreements set forth in Annex C to the
International Underwriting Agreement.
Section 5. Covenants. The Guarantor covenants and agrees with
the several International Underwriters that:
(1) it will perform or pay in full or cause the performance or payment
in full of each of the Underwriting Obligations as and to the extent due under
the International Underwriting Agreement.
<PAGE>
5
(2) on the First Time of Delivery and on each subsequent Time of
Delivery, it will deliver to the International Underwriters a certificate, dated
such Time of Delivery, of a duly authorized executive officer of the Guarantor
in which such officer, to the best of such officer's knowledge after reasonable
investigation, shall state that: (i) the representations and warranties of the
Guarantor in this International Guaranty are true and correct at such Time of
Delivery as if given on such Time of Delivery and (ii) the Guarantor has
complied with all agreements and satisfied all conditions on its part to be
performed or satisfied hereunder at or prior to such Time of Delivery.
Section 6. Indemnification. (I) (a) Without prejudice to the
Underwriting Indemnification Obligations in the International Underwriting
Agreement, the Guarantor will indemnify and hold harmless each International
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such International Underwriter may become subject, under the
Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in the Registration
Statement, any F-6 Registration Statement, the Prospectus, or any amendments or
supplements thereto, or any related preliminary prospectus, or arise out of or
are based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein, and,
in the case of the Prospectus in light of the circumstances under which they
were made, not misleading, and will reimburse each International Underwriter for
any legal or other expenses reasonably incurred by such International
Underwriter in connection with investigating or defending any such loss, claim,
damage, liability or action as such expenses are incurred; provided, however,
that the Guarantor will not be liable in any such case to the extent that any
such loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement in or omission or alleged omission from
any of such documents in reliance upon and in conformity with written
information furnished to the Company or the Selling Shareholder by any
International Underwriter through the Joint Global Coordinators expressly for
use therein, it being understood and agreed that the only information so
furnished by or on behalf of any International Underwriter is the Furnished
Information; and provided, further, that with respect to any untrue statement or
alleged untrue statement in or omission or alleged omissions from any
preliminary prospectus, the indemnity agreement contained in this subsection (a)
shall not inure to the benefit of any International Underwriter from whom the
person asserting any such losses, claims, damages or liabilities purchased the
Offered Shares concerned, to the extent that a prospectus relating to such
Offered Shares was required to be delivered by such International Underwriter
under the Act in connection with such purchase and any such loss, claim, damage
or liability of such International Underwriter results from the fact that there
was not sent or given to such person, at or prior to the written confirmation of
the sale of such Offered Shares to such person, a copy of the U.S. Prospectus
(exclusive of material incorporated by reference) if the Company had previously
furnished copies thereof to such International Underwriter.
<PAGE>
6
(b) Each International Underwriter will severally and not jointly
indemnify and hold harmless the Guarantor against any losses, claims, damages or
liabilities to which the Guarantor may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the Registration Statement,
any F-6 Registration Statement, the Prospectus, or any amendments or supplements
thereto, or any related preliminary prospectus, or arise out of or are based
upon the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in reliance upon and in conformity with written information furnished to the
Company by such International Underwriter through the Joint Global Coordinators
expressly for use therein (it being understood and agreed that the only
information so furnished by or on behalf of any International Underwriter is the
Furnished Information), and will reimburse any legal or other expenses
reasonably incurred by the Guarantor in connection with investigating or
defending any such loss, claim, damage, liability or action as such expenses are
incurred.
(c) Promptly after receipt by an indemnified party under this Section
(6)(I) of notice of the commencement of any action, such indemnified party will,
if a claim in respect thereof is to be made against the indemnifying party under
subsection (a) or (b) above, notify the indemnifying party of the commencement
thereof; but the omission so to notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified party otherwise than
under subsection (a) or (b) above. In case any such action is brought against
any indemnified party and it notifies the indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate therein and, to
the extent that it may wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel reasonably satisfactory to
such indemnified party (who shall not, except with the consent of the
indemnified party, be counsel to the indemnifying party), and after notice from
the indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation. No indemnifying party
shall, without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened action in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party unless such settlement includes an
unconditional release of such indemnified party from all liability on any claims
that are the subject matter of such action.
(d) If the indemnification provided for in this Section (6)(I) is
unavailable or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above, then each indemnifying party shall contribute to
the amount paid or payable by such indemnified party as
<PAGE>
7
a result of the losses, claims, damages or liabilities referred to in subsection
(a) or (b) above (i) in such proportion as is appropriate to reflect the
relative benefits received by the Selling Shareholder and the Guarantor on the
one hand and the International Underwriters on the other from the offering of
the Shares or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of the Selling Shareholder, the Guarantor and the Company on the one hand
and the International Underwriters on the other in connection with the
statements or omissions which resulted in such losses, claims, damages or
liabilities as well as any other relevant equitable considerations. The relative
benefits received by the Selling Shareholder and the Guarantor on the one hand
and the International Underwriters on the other shall be deemed to be in the
same proportion as the total net proceeds from the offering pursuant to the
International Underwriting Agreement (before deducting expenses but after
underwriting discounts) received by the Selling Shareholder and the Guarantor
bear to the total underwriting discounts and commissions received by the
International Underwriters. The relative fault shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company, the Selling Shareholder or the
Guarantor on the one hand or the International Underwriters on the other and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such untrue statement or omission. The amount paid by an
indemnified party as a result of the losses, claims, damages or liabilities
referred to in the first sentence of this subsection (d) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any action or claim which is
the subject of this subsection (d). Notwithstanding the provisions of this
subsection (d), no International Underwriter shall be required to contribute any
amount in excess of the amount by which the total price at which the Shares
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages which such International Underwriter has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The International Underwriters' obligations in this
subsection (d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(e) The obligations of the Guarantor under this Section (6)(I) shall
be in addition to any liability which the Guarantor may otherwise have and shall
extend, upon the same terms and conditions, to each person, if any, who controls
any International Underwriter within the meaning of the Act; and the obligations
of the International Underwriters under this Section (6)(I) shall be in addition
to any liability which the respective International Underwriters may otherwise
have and shall extend, upon the same terms and conditions, and to
<PAGE>
8
each person, if any, who controls the Company or the Guarantor within the
meaning of the Act.
(II) Without limitation on any other obligations of the Guarantor or
remedies of the International Underwriters or the Company under this
International Guaranty, the Guarantor shall, to the fullest extent permitted by
law, indemnify, defend and save and hold harmless each International Underwriter
and the Company, as the case may be, from and against, and shall pay on demand,
any and all losses, liabilities, damages, costs, expenses and charges (including
the reasonable fees and disbursements of such International Underwriter's and
the Company's legal counsel) suffered or incurred by such International
Underwriter as a result of any Underwriting Obligation or suffered or incurred
by the Company as result of any Company Obligation not being a legal, valid and
binding obligation of the Guarantor enforceable against the Guarantor in
accordance with its terms because the Guarantor has undertaken the Underwriting
Obligations and Company Obligations in the form of this International Guaranty
rather than as a primary obligation of the Guarantor.
Section 7. Amendments, Etc. No amendment or waiver of any provision
of this International Guaranty and no consent to any departure by the Guarantor
therefrom shall in any event be effective (i) as between the Guarantor and the
International Underwriters unless the same shall be in writing and signed by the
Joint Global Coordinators on behalf of the International Underwriters, and then
such waiver or consent shall be effective only in the specific instance and for
the specific purpose for which given and (ii) as between the Guarantor and the
Company unless the same shall be in writing and signed by or on behalf of the
Company and then such waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given.
Section 8. Notices, Etc. All notices and other communications
provided for hereunder shall be in writing (including telegraphic communication)
and mailed, delivered or telegraphed and confirmed to it, if to the Guarantor,
addressed to it at 30 South Wacker Drive, Chicago, Illinois, U.S.A. 60606,
Attention: Assistant General Counsel Transactions, with a copy to Kirkland &
Ellis, 200 East Randolph Drive, Chicago, Illinois, U.S.A. 60601, Attention:
Robert S. Osborne, P.C., if to the International Underwriters, to the attention
of the Joint Global Coordinators and their counsel at their respective addresses
specified in the International Underwriting Agreement, provided, however that
any notice to an International Underwriter pursuant to Section 6 hereof will be
mailed, delivered or telegraphed and confirmed to such International Underwriter
and, if to the Company, to Level 8, North Tower, Telecom Networks House, 68
Jervois Quay, P.O. Box 570, Wellington, New Zealand (Facsimile No. 64-4-498-
9039) Attention: General Counsel, or such other address as may be notified by
the Company to the Guarantor.
<PAGE>
9
Section 9. No Waiver; Remedies. No failure on the part of the
International Underwriters or the Company to exercise, and no delay in
exercising, any right hereunder shall operate as a waiver thereof; nor shall any
single or partial exercise of any right hereunder preclude any other or further
exercise thereof or the exercise of any other right. The remedies herein
provided are cumulative and not exclusive of any remedies provided by law.
Section 10. Continuing Guaranty. This International Guaranty shall
(a) remain in full force and effect until the later of the performance in full
of the Underwriting Obligations and all other amounts payable under this
International Guaranty; (b) be binding upon the Guarantor, its successors and
assigns and (c) inure to the benefit of and be enforceable by the Guarantor and
the International Underwriters and the Company and their respective successors,
transferees and assigns.
Section 11. Governing Law; Jurisdiction; Waiver of Jury Trial, Etc.
(a) This International Guaranty shall be governed by, and construed in
accordance with, the laws of the State of New York.
(b) The Guarantor hereby submits to the non-exclusive jurisdiction of
the Federal and state courts in the Borough of Manhattan in The City of New York
in any suit or proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby. The Guarantor irrevocably appoints CT
Corporation System, 1633 Broadway, 23rd Floor, New York, New York 10019, as its
authorized agent in the Borough of Manhattan in The City of New York upon which
process may be served in any such suit or proceeding, and agrees that service of
process upon such agent, and written notice of said service to the Guarantor by
the person serving the same to the address provided in Section 8, shall be
deemed in every respect effective service of process upon the Guarantor in any
such suit or proceeding. The Guarantor further agrees to take any and all
action as may be necessary to maintain such designation and appointment of such
agent in full force and effect for a period of seven years from the date of this
International Guaranty.
Section 12. Severability. Any provision or part of this Agreement
which is invalid, unenforceable or illegal in any situation in any jurisdiction
shall, as to such situation and such jurisdiction, be ineffective only to the
extent of such invalidity, unenforceability or illegality and shall not affect
the validity, enforceability or legality of the remaining provisions hereof, or
the validity, enforceability or legality of any such provision in any other
situation or in any other jurisdiction. If the final judgment of a court of
competent jurisdiction declares that any term or provision hereof is invalid,
unenforceable or illegal, the parties agree that the court making such
determination of invalidity, unenforceability or illegality shall have the power
to reduce the scope of such provision, to delete specific words or phrases or to
replace any invalid, unenforceable or illegal term or provision with a term or
provision that is valid, enforceable and legal and that comes closest to
expressing the intention of the invalid,
<PAGE>
10
unenforceable or illegal term or provision, and this Agreement shall be valid,
enforceable and legal as so modified subject to the rights of any party to
appeal any such determination.
Section 13. Counterparts. This International Guaranty may be
executed in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
agreement.
<PAGE>
11
IN WITNESS WHEREOF, the International Underwriters, the Company and
the Guarantor have caused this International Guaranty to be duly executed and
delivered by their respective officers thereunto duly authorized as of the date
first above written.
AMERITECH CORPORATION
By
----------------------------------
Title:
CREDIT SUISSE FIRST BOSTON CORPORATION
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
Acting for themselves and as representatives on
behalf of the several U.S. Underwriters.
By CREDIT SUISSE FIRST BOSTON CORPORATION
By
----------------------------------
Name:
Title:
CREDIT SUISSE FIRST BOSTON (EUROPE) LIMITED
MERRILL LYNCH INTERNATIONAL
Acting for themselves and as representatives on
behalf of the several Rest of the World
Underwriters.
By MERRILL LYNCH INTERNATIONAL
By
----------------------------------
Name:
Title:
TELECOM CORPORATION OF NEW ZEALAND
LIMITED
By:
---------------------------------
Director
By:
---------------------------------
Director/Authorized Signatory
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form F-3 (File
No.333-47901) of our report dated May 8, 1997, on our audits of the financial
statements of Telecom Corporation of New Zealand Limited as of March 31, 1997
and 1996 and for the years ended March 31, 1997, 1996 and 1995. We also
consent to the reference to our firm under the captions "Experts", "Selected
Consolidated Financial Data and Other Data" and "Summary Consolidated
Information and Other Data."
/s/ Coopers & Lybrand
COOPERS & LYBRAND
Wellington, New Zealand
2 April 1998
