<PAGE>
FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Report of Foreign Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the period 20 August 1998 to 4 December 1998
TELECOM CORPORATION OF NEW ZEALAND LIMITED
- --------------------------------------------------------------------------------
(Translation of registrant's name into English)
Telecom Networks House, North Tower, 66-68 Jervois Quay, Wellington,
New Zealand
- --------------------------------------------------------------------------------
(Address of principal executive offices)
The registrant will file annual reports on Form 20-F
(File No. 1-10798)
-----------------------
<PAGE>
CONTENTS
This report on Form 6-K contains the following:
1. Half Year Result to 30 September 1998
-------------------------------------
1.1 Condensed Financial Statements
1.2 Management Commentary
1.3 Media Release dated 17 November 1998
2. Miscellaneous Media Releases
----------------------------
2.1 Southern Cross Cable Network awards Alcatel/Fujitsu US$800 million
supply - dated 6 October 1998
2.2 Telecom changes balance date - dated 6 November 1998
-------------------------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorised.
TELECOM CORPORATION OF NEW ZEALAND LIMITED
By: /s/ M R Gillespie
-------------------------------------
Malcolm Ross Gillespie
Company Secretary
Dated: 4 December 1998
<PAGE>
TELECOM CORPORATION OF NEW ZEALAND LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL PERFORMANCE
For the six months ended 30 September (Unaudited)
<TABLE>
<CAPTION>
Year ended Six months ended
31 March 30 September
---------- -----------------------------
(Dollars in millions, except per share amounts) Notes 1998 1997 1998 1998
- ----------------------------------------------------------------------------------------------------------
NZ$ NZ$ NZ$ US$
-------- ------------------------------
<S> <C> <C> <C> <C> <C>
Operating revenues
Local service 856.6 426.9 429.0 215.1
National calls 594.3 302.6 280.2 140.5
International 495.9 251.5 234.8 117.7
Interconnection 71.1 32.0 42.3 21.2
Cellular and other mobile services 424.1 197.6 227.6 114.1
Enhanced network services 366.2 179.5 200.5 100.5
Other operating revenues 589.8 275.6 280.5 140.6
------- -----------------------------
3,398.0 1,665.7 1,694.9 849.7
------- -----------------------------
Operating expenses
Net personnel costs 382.5 191.9 185.6 93.0
Depreciation 564.0 278.9 277.3 139.0
Cost of sales 515.2 246.4 285.8 143.3
Maintenance 171.0 95.3 84.3 42.3
Other operating expenses 387.8 189.4 177.6 89.0
Abnormal costs 2 37.3 - - -
-------- ------------------------------
2,057.8 1,001.9 1,010.6 506.6
-------- ------------------------------
Surplus from continuing operations 1,340.2 663.8 684.3 343.1
Investment income 28.5 11.8 28.5 14.3
Interest expense (157.1) (74.9) (88.7) (44.5)
-------- ------------------------------
Surplus from continuing operations before income tax 1,211.6 600.7 624.1 312.9
Income tax (396.2) (194.6) (202.1) (101.3)
-------- ------------------------------
Surplus from continuing operations after income tax 815.4 406.1 422.0 211.6
Discontinued operations: 3
Write back of provision for loss on disposal of
Pacific Star Group 30.0 - - -
-------- ------------------------------
Surplus after income tax 845.4 406.1 422.0 211.6
Minority interests in profits of subsidiaries (0.3) - (0.9) (0.5)
Share of profits of associate company
after income tax 0.1 0.1 - -
-------- ------------------------------
Net surplus 845.2 406.2 421.1 211.1
Distribution of capital note coupons after income tax (24.9) (7.4) (24.8) (12.4)
-------- ------------------------------
Net earnings attributable to shareholders 820.3 398.8 396.3 198.7
======== ==============================
Earnings per share from continuing operations $ 0.443 $ 0.220 $ 0.226 $ 0.113
======== ==============================
Net earnings per share $ 0.459 $ 0.220 $ 0.226 $ 0.113
======== ==============================
Weighted average number of ordinary
shares outstanding (in millions) 1,786.3 1,811.6 1,752.0 1,752.0
======== ==============================
</TABLE>
The accompanying notes form part of and are to be read in conjunction with
these financial statements.
1
<PAGE>
TELECOM CORPORATION OF NEW ZEALAND LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
As at 30 September (Unaudited)
<TABLE>
<CAPTION>
31 March 30 September
--------- --------------------------
(Dollars in millions) notes 1998 1997 1998 1998
- ---------------------------------------------------------------------------------------------------------
NZ$ NZ$ NZ$ US$
--------- --------------------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash 11.6 19.8 27.3 13.7
Short-term investments 429.9 99.1 605.6 303.6
Accounts receivable, net of allowance
for doubtful accounts 486.9 438.0 473.8 237.5
Unbilled rentals and tolls 166.6 132.9 135.3 67.8
Inventories 45.0 63.6 46.6 23.4
Prepaid income tax 17.5 - 17.7 8.9
Prepaid expenses and other 76.0 86.4 37.6 18.8
--------- --------------------------
Total current assets 1,233.5 839.8 1,343.9 673.7
Future tax benefit 22.6 0.8 - -
Investments 63.2 60.5 78.8 39.5
Other assets 7 51.4 34.9 63.5 31.8
Fixed assets 3,793.3 3,760.2 3,700.8 1,855.2
--------- --------------------------
Total assets 5,164.0 4,696.2 5,187.0 2,600.2
========= ==========================
LIABILITIES AND CAPITAL FUNDS
Current liabilities:
Debt due within one year 746.3 589.8 1,012.5 507.6
Amounts payable for share repurchases - 22.8 - -
Trade accounts payable 397.5 286.7 395.7 198.4
Taxation payable - 5.4 - -
Accrued personnel costs 85.9 78.5 78.7 39.4
Rentals billed in advance 51.7 54.0 59.1 29.6
Accrued interest 68.7 52.0 59.6 29.9
Other accrued expenses 162.8 129.1 104.5 52.3
Restructuring provision - current 4 34.2 31.9 24.1 12.1
Year 2000 provision - current 4 55.0 48.2 47.6 23.9
Net liabilities of discontinued operations - 27.5 - -
Provision for dividend 6 228.6 212.8 227.1 113.8
--------- --------------------------
Total current liabilities 1,830.7 1,538.7 2,008.9 1,007.0
Deferred taxation - - 18.2 9.1
Restructuring provision - non-current 4 13.9 36.4 15.3 7.7
Year 2000 provision - non-current 4 17.1 34.0 2.0 1.0
Long-term debt 1,292.1 1,381.8 1,137.8 570.4
--------- --------------------------
Total liabilities 3,153.8 2,990.9 3,182.2 1,595.2
--------- --------------------------
Commitments and contingent liabilities 8, 9
Capital funds: 5
Shareholders' funds 1,062.7 1,262.4 1,057.3 530.0
Capital notes 941.0 436.4 941.7 472.1
Minority interests 6.5 6.5 5.8 2.9
--------- --------------------------
Total capital funds 2,010.2 1,705.3 2,004.8 1,005.0
--------- --------------------------
Total liabilities and capital funds 5,164.0 4,696.2 5,187.0 2,600.2
========= ==========================
</TABLE>
The accompanying notes form part of and are to be read in conjunction with
these financial statements.
2
<PAGE>
TELECOM CORPORATION OF NEW ZEALAND LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the six months ended 30 September (Unaudited)
<TABLE>
<CAPTION>
Year ended Six months ended
31 March 30 September
---------- ----------------------------
(Dollars in millions) 1998 1997 1998 1998
- -------------------------------------------------------------------------------------------------------------
NZ$ NZ$ NZ$ US$
---------- ---------------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities
Cash was provided from/(applied to):
Cash received from customers 3,285.4 1,656.7 1,733.5 869.0
Interest income 22.9 9.3 26.0 13.0
Payments to suppliers and employees (1,273.3) (699.1) (702.7) (352.3)
Redundancy, restructuring and Year 2000 payments (60.1) (23.4) (32.2) (16.1)
Income tax paid (288.7) (96.4) (102.0) (51.1)
Interest paid on debt (149.2) (72.1) (103.2) (51.8)
---------- ----------------------------
Net cash flows from operating activities 1,537.0 775.0 819.4 410.7
---------- ----------------------------
Cash flows from investing activities
Cash was provided from/(applied to):
Sale of fixed assets 11.0 5.9 8.5 4.3
Purchase of investments, net (469.5) (114.7) (203.4) (102.0)
Purchase of fixed assets (558.7) (245.2) (225.8) (113.2)
Capitalised interest paid (14.4) (7.7) (4.6) (2.3)
Redemption of notes receivable 46.2 - - -
---------- ----------------------------
Net cash flows used in investing activities (985.4) (361.7) (425.3) (213.2)
---------- ----------------------------
Cash flows from financing activities
Cash was provided from/(applied to):
Proceeds from long-term debt 269.0 262.6 6.3 3.2
Repayment of long-term debt (191.2) (168.8) (151.4) (75.9)
Proceeds from short-term debt, net 102.3 49.1 256.1 128.4
Capital contributed 1.7 0.4 0.8 0.4
Dividend paid to minority interest - - (0.3) (0.2)
Dividends paid (841.0) (431.3) (454.9) (228.0)
Share repurchase (808.2) (545.4) - -
Proceeds from issue of capital notes, net 940.5 436.2 - -
Capital note coupons paid (26.2) (9.4) (35.0) (17.5)
---------- ----------------------------
Net cash flows used in financing activities (553.1) (406.6) (378.4) (189.6)
---------- ----------------------------
Net cash flow (1.5) 6.7 15.7 7.9
Opening cash position (including bank overdrafts) 13.1 13.1 11.6 5.8
---------- ----------------------------
Closing cash position (including bank overdrafts) 11.6 19.8 27.3 13.7
========== ============================
</TABLE>
..........................SUPPLEMENTARY CASH FLOW DATA..........................
Reconciliation of net earnings attributable to shareholders to net cash flows
from operating activities
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Net earnings attributable to shareholders 820.3 398.8 396.3 198.7
Adjustments to reconcile net earnings to cash
flows from operating activities:
Depreciation 564.0 278.9 277.3 139.0
Bad and doubtful accounts 34.2 15.2 13.2 6.6
Deferred income tax (2.1) 23.0 40.8 20.5
Minority interests 0.3 - 0.9 0.5
Share of profits of associate company (0.1) (0.1) - -
Distribution of capital note coupons 24.9 7.4 24.8 12.4
Other 6.0 0.9 1.3 0.7
Discontinued operations (30.0) - - -
Changes in assets and liabilities net of effects of
non-cash and investing and financing activities:
Decrease/(increase) in accounts receivable and related items (107.9) (13.4) 70.1 35.1
(Increase)/decrease in inventories 20.1 2.0 (4.9) (2.5)
Increase in current taxation 105.5 75.1 59.4 29.7
Decrease in restructuring provision (39.5) (19.3) (8.7) (4.4)
Decrease in Year 2000 provision (13.8) (3.7) (22.5) (11.3)
(Decrease)/increase in accounts payable and related items 155.1 10.2 (28.6) (14.3)
-----------------------------------------
Net cash flows from operating activities 1,537.0 775.0 819.4 410.7
=========================================
.............................................................................................................
</TABLE>
The accompanying notes form part of and are to be read in conjunction with
these financial statements.
3
<PAGE>
TELECOM CORPORATION OF NEW ZEALAND LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF MOVEMENTS IN
CAPITAL FUNDS
For the six months ended 30 September (Unaudited)
<TABLE>
<CAPTION>
Year ended Six months ended
31 March 30 September
---------- -----------------------------
(Dollars in millions) notes 1998 1997 1998 1998
- --------------------------------------------------------------------------------------------------------
NZ$ NZ$ NZ$ US$
---------- -----------------------------
<S> <C> <C> <C> <C>
Capital funds at the beginning of the period 1,642.6 1,642.6 2,010.2 1,007.7
Net earnings attributable to shareholders 820.3 398.8 396.3 198.7
Net foreign currency and minority interests movement 5.1 4.7 0.2 0.1
---------- -----------------------------
2,468.0 2,046.1 2,406.7 1,206.5
Dividends 6 (859.4) (425.4) (454.5) (227.8)
Tax credit on supplementary dividends 6 102.7 51.6 51.1 25.6
Capital contributed 5 1.7 0.4 0.8 0.4
Discount on capital notes amortised 0.5 0.2 0.7 0.3
Redemption of capital notes (5.9) - - -
Issue of capital notes 946.4 436.2 - -
Share repurchase (643.8) (403.8) - -
---------- -----------------------------
Capital funds at the end of the period 2,010.2 1,705.3 2,004.8 1,005.0
========== =============================
Represented by:
Contributed capital 1,904.2 1,902.9 1,905.0 955.0
Foreign currency reserve and minority interests 6.3 5.9 6.5 3.3
Retained earnings 160.0 121.4 152.9 76.6
Capital notes 941.0 436.4 941.7 472.1
Share repurchase (1,001.3) (761.3) (1,001.3) (502.0)
----------- -----------------------------
2,010.2 1,705.3 2,004.8 1,005.0
========== =============================
</TABLE>
The accompanying notes form part of and are to be read in conjunction with
these financial statements.
4
<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 Financial Reporting Standard ("FRS") No. 24:
Interim Financial Statements, issued by the Institute of Chartered Accountants
of New Zealand. These financial statements should be read in conjunction with
the financial statements and related notes included in the Company's 1998 Annual
Report.
The financial statements for the six months ended 30 September 1998 and 30
September 1997 are unaudited. The financial information for the year ended 31
March 1998 has been extracted from the audited financial statements of Telecom
for that year.
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 30 September 1998 of NZ$1.00 to US$0.5013. The US dollar
amounts should not be construed as representations that the New Zealand dollars
have been, could be, or could in the future be converted into US dollars at this
or any other rate. References in these financial statements to "$" and "NZ$" are
to New Zealand dollars and references to "US$" are to US dollars.
Accounting Policies
With the exception of the change outlined below, the accounting policies used in
the preparation of the financial statements for the period ended 30 September
1998 are consistent with those used in the preparation of the published
financial statements for the year ended 31 March 1998.
In the current period Telecom has adopted a policy of translating revenue and
expenses of independent foreign operations at rates approximating the exchange
rates ruling at the dates of the transactions. Previously the revenues and
expenses were translated at the exchange rates ruling at period end. This change
has been made in accordance with the requirements of FRS No. 21: Accounting for
the Effects of Changes in Foreign Currency Exchange Rates, issued by the
Institute of Chartered Accountants of New Zealand.
Reclassifications
Certain reclassifications of prior periods' data have been made to conform to
current period classifications.
NOTE 2 ABNORMAL COSTS
The decision to close First Media with effect from 31 July 1998 was announced on
4 June 1998. During the year ended 31 March 1998, the estimated costs associated
with the termination of the hybrid fibre/coax cable rollout and the
reorganisation of First Media were identified and provided for. The estimate
included the write-down of inventories, work in progress, and deferred
programming costs together with provision for other costs associated with the
termination and reorganisation.
The costs associated with the decision to close First Media will be accommodated
by the existing provision.
5
<PAGE>
TELECOM CORPORATION OF NEW ZEALAND LIMITED AND SUBSIDIARIES
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
continued
NOTE 3 DISCONTINUED OPERATIONS
Telecom announced on 22 July 1996 that it was reviewing the operations of those
of its Australian subsidiaries which formed the Pacific Star Group ("Pacific
Star"), at which time a formal plan of disposal or wind-down of the Pacific Star
businesses was approved by the Board.
The winding down of Pacific Star operations progressed satisfactorily resulting
in a reduction in the provision for loss on disposal of Pacific Star by $30
million at 31 March 1998.
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. Successful implementation and finalisation of this commercial settlement
will result in all existing legal proceedings between the parties being
discontinued. There are residual contractual disputes with the Queensland State
Government. Currently no further material losses are expected to arise from this
dispute.
The process of winding down the discontinued Pacific Star operations is
continuing.
NOTE 4 RESTRUCTURING & YEAR 2000 PROVISIONS
Redundancy and other restructuring costs incurred during the six months ended 30
September 1998 of $8.7 million (30 September 1997: $19.3 million, 31 March 1998:
$39.5 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.
Year 2000 costs incurred during the six months ended 30 September 1998 of $22.5
million (30 September 1997: $3.7 million, 31 March 1998: $13.8 million) have
been charged against the Year 2000 provision created in the fourth quarter of
the year ended 31 March 1997.
NOTE 5 CAPITAL FUNDS
Contributed Capital
Movements in the Company's issued ordinary shares during the period were as
follows:
Number
----------------
At 1 April 1998 1,751,976,069
Issue of new shares upon exercise of options 113,689
----------------
At 30 September 1998 1,752,089,758
================
NOTE 6 DIVIDENDS
Total dividends for the quarter of $201.5 million have been provided for,
representing a quarterly dividend of 11.5 cents per share. In addition, and in
accordance with the Income Tax Act 1994, a supplementary dividend of $25.6
million has been provided for which will be payable to shareholders who are not
resident in New Zealand, for which Telecom will receive an equivalent tax credit
from the Inland Revenue Department. Dividends and supplementary dividends are
provided for based on the number of shares outstanding as at 30 September 1998.
6
<PAGE>
TELECOM CORPORATION OF NEW ZEALAND LIMITED AND SUBSIDIARIES
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
continued
NOTE 7 OTHER ASSETS
Included within Other Assets is goodwill (net of amortisations) of $60.7 million
(30 September 1997: $26.8 million, 31 March 1998: $48.2 million).
NOTE 8 CONTINGENT LIABILITIES
Lawsuits and Other Claims
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. In January
1997, BellSouth 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. Unspecified damages are sought in these proceedings and
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,
totalling Australian $98.6 million, alleging non-payment of outstanding debts
for telecommunication services provided by Telstra, together with interest to
the date of judgement. 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 27 February 1998, Telstra and Pacific Star announced that they
had reached a commercial settlement of their dispute over outstanding payments
and cross claims. Successful implementation and finalisation of this commercial
settlement will result in all existing legal proceedings between the parties
being discontinued.
In April 1997, Telecom issued proceedings against Clear for withholding certain
payments for services 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 defence and counter claim 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 for unspecified damages based on breach of
"undertakings" allegedly given by Telecom in the late 1980s regarding the
provision of interconnection. No trial date has yet been set.
In April 1998, Clear issued proceedings claiming that Telecom is deliberately
preventing Clear from offering the retail service of calling line identification
and that such conduct breaches the Commerce Act. Clear seeks unspecified
damages.
Various other lawsuits, claims and investigations have been brought or are
pending against Telecom.
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 proceedings could,
if resolved against Telecom, affect the manner in which Telecom conducts its
business.
7
<PAGE>
TELECOM CORPORATION OF NEW ZEALAND LIMITED AND SUBSIDIARIES
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
continued
NOTE 9 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 $291.9 million (31 March 1998: $318.6 million).
Finance Leases
Telecom has entered into the sale and leaseback of certain assets. At 30
September 1998, the outstanding lease commitments were $135.7 million (31 March
1998: $142 million).
Capital Commitments
At 30 September 1998 capital expenditure amounting to $95.9 million (31 March
1998: $51.7 million), principally relating to telecommunications network and
international cable assets, had been committed under contractual arrangements,
with substantially all payments due within two years.
Telecom has signed an agreement 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, New Zealand, Fiji, Hawaii and the West Coast of the United States. In
March 1998 Telecom signed a capacity use agreement committing the Company to
purchase total capacity on Southern Cross of approximately US$140 million. The
first payment of US$70 million is due on the first ready for service date
("RFS") in December 1999. The second payment of US$57 million is due in on the
first anniversary of RFS with the balance payable over the following two years.
No payments will be due in the event that the project is terminated prior to
RFS. The Board of Directors has approved a 50% equity investment in Southern
Cross Cables Limited. The equity investment of US$75 million is due on the
earlier of RFS or early termination of the project.
NOTE 10 QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Surplus from Net
Surplus continuing earnings
from operations attributable
Operating Abnormal continuing before income Discontinued to Earnings
revenues costs operations tax Operations shareholders per share
--------------------------------------------------------------------------------------------------------------
(NZ dollars in millions NZ$
except per share amounts)
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Quarter ended:
30 June 1998 826.0 - 325.0 297.7 - 190.1 0.109
30 September 1998 868.9 - 359.3 326.4 - 206.2 0.118
-------------------------------------------------------------------------------------------
Six months ended 30 September 1998 1,694.9 - 684.3 624.1 - 396.3 0.226
===========================================================================================
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
31 March 1998 874.7 37.3 335.7 305.9 30.0 222.3 0.126
-------------------------------------------------------------------------------------------
Year ended 31 March 1998 3,398.0 37.3 1,340.2 1,211.6 30.0 820.3 0.459
===========================================================================================
</TABLE>
Earnings per share is computed independently for each of the quarters presented.
Consequently, the sum of the quarters does not necessarily equal total earnings
per share.
8
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
continued
NOTE 11 SIGNIFICANT DIFFERENCES BETWEEN NEW ZEALAND AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRACTICE
EFFECT ON NET EARNINGS OF DIFFERENCES BETWEEN NZ GAAP AND US GAAP
<TABLE>
<CAPTION>
Year
ended Six months ended
31 March 30 September
-------- -----------------------------
1998 1997 1998 1998
---------------------------------------------------- -----------------------------
(Dollars in millions, except per share
amounts) NZ$ NZ$ NZ$ US$
---------------------------------------------------- -----------------------------
<S> <C> <C> <C> <C>
Net earnings in accordance with NZ GAAP 820.3 398.8 396.3 198.7
Add: Discontinued operations (30.0) - - -
-------- -----------------------------
790.3 398.8 396.3 198.7
US GAAP adjustments:
Depreciation of interest costs capitalised in prior years (9.3) (4.7) (4.7) (2.4)
Deferred taxation 28.3 23.5 9.0 4.5
Executive share ownership plan (0.3) (0.4) - -
Provision for restructuring (62.7) (62.7) - -
Provision for Year 2000 (13.8) (3.7) (22.5) (11.3)
-------- -----------------------------
Net surplus from continuing operations in
accordance with US GAAP 732.5 350.8 378.1 189.5
Discontinued operations 30.0 - - -
-------- -----------------------------
Net earnings in accordance with US GAAP 762.5 350.8 378.1 189.5
======== =============================
Basic earnings per share from continuing
operations in accordance with US GAAP $0.410 $0.194 $0.216 $0.108
Basic earnings per share from discontinued operations
in accordance with US GAAP $0.017 - - -
-------- -----------------------------
Basic net earnings per share in accordance
with US GAAP $0.427 $0.194 $0.216 $0.108
======== =============================
Diluted earnings per share from continuing operations
in accordance with US GAAP $0.409 $0.193 $0.215 $0.108
======== =============================
</TABLE>
CUMULATIVE EFFECT ON SHAREHOLDERS' FUNDS OF DIFFERENCES BETWEEN NZ GAAP AND US
GAAP
<TABLE>
<CAPTION>
As at As at
31 March 30 September
--------- ----------------------------------
1998 1997 1998 1998
---------------------------------------------- ----------------------------------
(Dollars in millions) NZ$ NZ$ NZ$ US$
---------------------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Shareholders' funds in accordance with NZ GAAP 1,062.7 1,262.4 1,057.3 530.0
Capitalisation of interest costs, net of accumulated depreciation 49.3 53.9 44.6 22.4
Deferred taxation (45.7) (50.5) (36.7) (18.4)
Executive share ownership plan (2.8) (5.3) (2.8) (1.4)
Provision for Year 2000 72.1 82.2 49.6 24.9
Provision for dividend 140.2 186.9 201.5 101.0
--------- ----------------------------------
Shareholders' funds in accordance with US GAAP 1,275.8 1,529.6 1,313.5 658.5
========= ===================================
</TABLE>
9
<PAGE>
[TELECOM LOGO]
MANAGEMENT COMMENTARY
17 November 1998
First Half and Second Quarter Results to 30 September 1998
Telecom's net earnings of NZ$396.3 million for the first half of 1998-99 and
NZ$206.2 million for the second quarter ("Q2 1998-99") represented earnings per
share ("EPS") of NZ22.6 cents and NZ11.8 cents respectively. EPS increased 2.7%
for the half year and 0.9% for Q2 1998-99, compared with the same periods last
year.
Telecom will pay a fully imputed Q2 1998-99 dividend of NZ11.5 cents per
ordinary share in December 1998, an increase of 9.5% compared with NZ10.5 cents
per share for the second quarter of last year ("Q2 1997-98").
Net earnings for the half year decreased by NZ$2.5 million, or 0.6%, from
NZ$398.8 million for the same period last year. Net earnings for Q2 1998-99
decreased by NZ$4.6 million, or 2.2%, compared with the same quarter last year.
EPS grew in contrast to net earnings because Telecom's share repurchase
programme, which was completed in December 1997, has reduced the number of
shares on issue. The decline in net earnings is attributable to the funding
costs of the shares repurchased.
The cost of funding the share repurchase was approximately NZ$27 million for the
half year and NZ$14 million in Q2 1998-99, compared with NZ$14 million and
NZ$8.5 million for the same periods last year when the share repurchase was only
partially complete (all costs after tax).
Telecom's result for the half year was adversely affected by the contraction of
the New Zealand economy and by the intense competition faced by Telecom in all
areas of its business, particularly in the tolls market.
<PAGE>
2
Revenue rose by 1.8% in the half year to 30 September 1998 and by 0.4% in Q2
1998-99 compared with the same periods last year. Strong growth in Cellular and
Enhanced Network Services revenue was largely offset by lower revenue from
National calls and International outward calls. Significant price reductions
implemented in the half year to 30 September 1998 affected National calls and
International revenues.
Operating expenses increased by 0.9% in the half year to 30 September 1998 and
decreased by 0.4% for Q2 1998-99. Despite large increases in international cost
of sales for outward calls (owing to significantly higher outward call minutes),
the rate of expense growth has slowed reflecting the benefits of various cost
containment initiatives (eg. the Performance 2000 project).
Net cash flows from operating activities increased by NZ$44.4 million, or 5.7%,
for the half year. (See "Liquidity and Capital Resources").
<TABLE>
<CAPTION>
===============================================================================================
EARNINGS OVERVIEW
Half Year Ended 30 September
--------------------------------------------
1997 1998 Change
NZ$m NZ$m %
--------------------------------------------
<S> <C> <C> <C>
Operating revenues 1,665.7 1,694.9 1.8
Operating expenses 1,001.9 1,010.6 0.9
Net earnings 398.8 396.3 (0.6)
EPS (cents) 22.0 22.6 2.7
Dividends per share (cents) 21.0 23.0 9.5
===============================================================================================
</TABLE>
<TABLE>
<CAPTION>
===============================================================================================
EARNINGS OVERVIEW
Quarter Ended 30 September
--------------------------------------------
1997 1998 Change
NZ$m NZ$m %
--------------------------------------------
<S> <C> <C> <C>
Operating revenues 865.1 868.9 0.4
Operating expenses 511.7 509.6 (0.4)
Net earnings 210.8 206.2 (2.2)
EPS (cents) 11.7 11.8 0.9
Dividends per share (cents) 10.5 11.5 9.5
================================================================================================
</TABLE>
<PAGE>
3
DIVIDENDS
The quarterly dividend of NZ11.5 cents per share represents a distribution of
approximately 98% of second quarter net earnings.
Owing to seasonality and other factors Telecom's earnings are not distributed
evenly throughout the year. The dividend payout percentage for the second
quarter, therefore, is not necessarily indicative of distribution levels for the
remainder of the year.
<TABLE>
<CAPTION>
==========================================================================================
<S> <C>
Q2 dividends
Ordinary shares NZ11.5 cents
American Depositary Shares US46.12 cents *
Supplementary dividend (to non-resident holders)
Per ordinary share NZ2.03 cents
Per American Depositary Share US8.14 cents *
Books closing dates
New Zealand, Australia Stock Exchanges 4 December 1998
New York Stock Exchange 3 December 1998
Payment dates
New Zealand, Australia 16 December 1998
New York 23 December 1998
* Based on an exchange rate at 30 September 1998 of NZ$1.00 to US$0.5013.
==========================================================================================
</TABLE>
FORWARD-LOOKING STATEMENTS
This management commentary contains forward-looking statements. 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. Actual results could differ materially
from those projected in the forward-looking statements as a result of the
matters discussed herein and certain economic and business factors, some of
which may be beyond the control of the Company. Such factors include, but are
not limited to, competition in the New Zealand telecommunications market, the
outcome of litigation pending between Telecom and certain of its competition,
the impact of current or future Government regulation, technological change in
the telecommunications industry, and the state of the New Zealand economy.
<PAGE>
4
THE NEW ZEALAND ECONOMY
The bulk of Telecom's operations are in New Zealand and growth in Telecom's
business is affected by the state of the economy. Weakness in the economy tends
to have an adverse effect on Telecom's revenue growth.
GDP contracted 0.8 percent in the three months to 30 June 1998, compared with
the same period a year previously. This was the second successive quarter of
negative growth. Growth for the year to 30 June 1998 slowed to 1.2 percent.
Official GDP growth statistics for the three months to 30 September 1998 are due
to be released in late December 1998. The consensus of economists' forecasts for
the three months to 30 September 1998 is a 0.3 percent contraction in GDP,
followed by zero growth in the three months to 31 December 1998 and a return to
growth in the three months to 31 March 1999.
Growth in New Zealand's economy has been adversely affected this year by several
factors, the most significant being the difficulties experienced in Asia, which
accounts for approximately 30% of New Zealand exports. Factors compounding this
difficulty include the slow down in the United States ("US") economy and the
economic contractions in Russia and South America and the flow on effects on
other economies, as well as a prolonged drought that affected New Zealand's
agricultural production. The New Zealand dollar has also been significantly
impacted by New Zealand's significant current account deficit (6.7% of GDP at 30
June 1998).
While New Zealand will continue to be reliant on exports for a material portion
of its GDP, dependence on commodity products has slowly declined over the last
two decades, being supplemented by tourism, manufacturing and services. Further,
the lower exchange rate is resulting in increased tourism and exports to the US
and Europe. Hence, consensus forecasts project New Zealand's current recession
to be short lived.
COMPETITIVE FRAMEWORK
There have been no statutory entry barriers to any part of the New Zealand
telecommunications industry since 1989. All telecommunications companies are
subject to ordinary commercial law (i.e. Companies Act, Fair Trading Act,
Commerce Act).
Competitors with whom Telecom has interconnection agreements offer business and
residential international, national and local voice services, cellular services,
data services and mobile trunked radio services. As at 30 September 1998,
Telecom had interconnection agreements with Vodafone New Zealand ("Vodafone"),
Clear Communications, Compass Communications, Global One (New Zealand), Newcall
Communications, Saturn Communications, Superway Investments, Teamtalk, Telstra
NZ, and WorldxChange (New Zealand).
<PAGE>
5
In addition to the companies with which Telecom has interconnection agreements,
numerous other organisations offer voice calling services from overseas or by
re-selling services provided by New Zealand's network operators. There are
approximately 60 Internet Service Providers in New Zealand, several of which
operate networks and offer telecommunications services. Telecom also faces
competition in leased-line services, paging, directory publishing and supply,
installation and maintenance of customer premises equipment.
Competition in New Zealand's telecommunications markets is expected to remain
intense, with the prospect of existing participants extending their activities
and new competitors entering the market.
Clear Communications commissioned consultant Jeff Todd to produce a report on
the telecommunications industry in New Zealand (the Clear Report, published 9
November 1998). This report alleges that Telecom has made monopoly profits from
its local network infrastructure. Independent analysis has rejected the
methodology and conclusions of the Clear Report. Telecom has also rejected the
methodology and conclusions of the Clear Report.
The Government is reviewing three areas that affect the telecommunications
industry; numbering, disclosure regulations and penalties under the Commerce
Act.
Telecom is working with the Ministry of Commerce to address a range of telephone
numbering issues. This process is due to be concluded on 30 November 1998. The
Government has indicated that if satisfactory conclusion is not reached, it will
review the regulatory framework. The Ministry of Commerce has indicated it will
review regulations related to disclosure issues and Telecom will be making a
submission as part of this review. The Government is also reviewing the
penalties regime under the Commerce Act.
Overview of Results
Revenue
Revenue growth for the half year to 30 September 1998 was driven largely by
growth in cellular connections, access lines and increased usage of enhanced
network services. Growth in national and international call volumes did not
fully offset large price reductions, resulting in a decline in national calls
and international revenues.
<PAGE>
6
Volume Growth
<TABLE>
<CAPTION>
=================================================================================================
As at and for the half year Variation
ended 30 September 98:97
------------------------------------------------
1997 1998 %
------------------------------------------------
<S> <C> <C> <C>
Access lines 1,814,000 1,856,000 2.3
Call minutes (millions)
Local calls * 1,594.5 1,616.0 1.3
National calls # 981.6 987.7 0.6
Fixed line to cellular calls ** 173.5 188.6 8.7
International outward calls 147.4 200.4 36.0
International inward calls (excluding
transits) 157.6 163.9 4.0
Cellular calls 298.6 339.6 13.7
National 0800 calls 215.9 256.0 18.6
VPN national calls 29.3 47.1 60.8
Cellular connections at end of period 456,300 504,800 10.6
Centrex lines 58,300 68,900 18.2
ISDN lines 28,700 46,500 62.0
Call minder mailboxes 204,100 260,400 27.6
Registered XTRA customers 72,000 139,900 94.3
* Represents business local calls and residential calls under the NZ20 cents
local calling option.
# Excludes calls from Telecom's fixed line to cellular networks. Including
fixed line to cellular calls and other products which are direct substitutes,
Home 0800 and VPN, call minutes growth would have been 3.5% for the half
year.
** Includes calls to Vodafone's cellular network.
=================================================================================================
</TABLE>
<TABLE>
<CAPTION>
=================================================================================================
For the second quarter Variation
ended 30 September 98:97
------------------------------------------------
1997 1998 %
------------------------------------------------
<S> <C> <C> <C>
Call minutes (millions)
Local calls * 817.1 823.6 0.8
National calls # 489.5 492.0 0.5
Fixed line to cellular calls ** 88.0 97.6 10.9
International outward calls 73.8 108.5 47.0
International inward calls (excluding
transits) 81.5 82.1 0.7
Cellular calls 150.9 173.6 15.0
National 0800 calls 107.8 128.1 18.8
VPN national calls 16.3 24.5 50.3
* Represents business local calls and residential calls under the NZ20 cents
local calling option.
# Excludes calls from Telecom's fixed line to cellular networks. Including
fixed line to cellular calls and other products which are direct substitutes,
Home 0800 and VPN, call minutes growth would have been 3.6% for the second
quarter.
** Includes calls to Vodafone's cellular network.
================================================================================================
</TABLE>
<PAGE>
7
Local Service
Local service revenues increased by NZ$2.1 million, or 0.5%, for the half year
and decreased by NZ$0.4 million, or 0.2%, for the second quarter compared with
the same periods last year.
Business and residential line rental revenue decreased by NZ$10.5 million, or
2.8%, for the half year and NZ$6.8 million, or 3.6%, for the second quarter.
These decreases reflected the net effect of a number of pricing changes,
partially offset by a 2.3% increase in access lines.
Pricing changes since last year include:
. A 2.9% increase in residential line rental took effect from 1 August 1997,
consistent with the provisions of the Kiwi Share.
. Since August 1997, residential customers have had the option to continue with
the standard monthly line rental and unlimited free local calling or pay a
lower monthly rental and NZ20 cents per local call. At the end of Q2 1998-99,
approximately 70,000 residential customers had switched to the new pricing
option.
. In December 1997, operator services charges were introduced for residential
customers. The monthly residential line rental was reduced by NZ$1.25 to
NZ$35.66 at the same time.
. In December 1997, there was a reduction in business line rentals of 3.3% in
conjunction with an increase in business local call prices.
. From 1 July 1998 the monthly rental for new second line connections was
reduced by $NZ5.71 to $NZ29.95.
Revenue from local calls increased by NZ$12.6 million, or 23.9%, for the half
year, and NZ$6.4 million, or 23.9%, for the second quarter. This was largely
owing to the price increase for business local calls (which took place in
conjunction with the price reduction in business line rentals) and the new
residential pricing option, where customers can opt to pay a lower monthly
rental and NZ20 cents per local call.
Local call minutes (including call minutes under the new residential pricing
option) increased by 1.3% for the half year, and 0.8% for the second quarter.
Local call minute growth was adversely affected by the migration of local calls
to Virtual Private Networks ("VPN").
<PAGE>
8
National Calls
National call revenue decreased by NZ$22.4 million, or 7.4%, for the half year
and NZ$11.9 million or 7.7%, for the second quarter. 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 may be regarded as direct substitutes for
residential and business tolls. Including the increases in Home 0800 and VPN
revenue from national calls, the decrease in national call revenue was 5.3% for
the half year and 6.3% for the second quarter.
The decrease for the quarter and the half year was largely owing to national
toll price reductions. While price reductions resulted in higher call volumes,
volume growth rates have been affected by the slower growth of the New Zealand
economy, continued growth in the cellular market and the migration of calls to
Home 0800 and VPN.
<TABLE>
<CAPTION>
============================================================================================
Half Second
National Call Minutes Growth (Variation 98:97) Year Quarter
% %
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Call minutes (including calls to cellular networks) # 1.8* 2.1*
Call minutes (excluding calls to cellular networks) 0.6 0.5
Call minutes to cellular networks # 8.7 10.9
# Includes calls to Vodafone's cellular network.
* Including products which are direct substitutes, Home 0800 and VPN, call
minutes growth would have been 3.5% for the half year and 3.6% for the 2nd
quarter.
============================================================================================
</TABLE>
The average per minute charge for national calls, excluding those made to
cellular networks, was approximately 15% and 16% lower for the half year and
second quarter respectively compared with the same periods last year.
During the period from 1 April to 30 June 1998, Telecom's NZ$5 cap on national
calls for residential customers, offered through the NZ$5 Weeknights and NZ$5
Weekends, was extended to apply all day on weekdays. Since 1 February 1998, the
NZ$5 caps have been available only to those residential customers who choose
Telecom as their preferred tolls provider.
From 3 August 1998, business national toll prices were reduced on average by 16%
for both peak and off peak calling on key routes.
<PAGE>
9
Further initiatives include Favourite Place New Zealand and Favourite Place
Neighbouring Area which provide a flat fee option for unlimited off-peak calling
to another area in New Zealand chosen by the customer. As at 30 September 1998,
approximately 32,000 customers were enrolled in these plans.
A Talking Points loyalty programme which rewards residential customers for using
Telecom's services was introduced in May 1996. Approximately 561,000 customers
have joined the programme. The School Connection loyalty programme, where
residential customers nominate schools to receive sponsorships from Telecom
based on customers' usage of Telecom's services, has 616,000 customers.
International
Total international revenue decreased by NZ$16.7 million, or 6.6%, for the half
year, and NZ$10.3 million, or 7.8%, for the second quarter compared with the
same periods last year. Decreases in outward call revenue were partially offset
by increases in revenue from inward calls and the margin from transit calls.
<TABLE>
<CAPTION>
==============================================================================================
Half Second
International Growth Year Quarter
% %
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Outward calls
- - Revenue (25.2) (27.6)
- - Call minutes 36.0 47.0
Inward calls
- - Revenue 11.7 16.7
- - Call minutes 4.0 0.7
Transit call margin
- - Margin 88.5 43.0
- - Call minutes 191.9 178.0
==============================================================================================
</TABLE>
Growth in outward call minutes of 36% for the half year and 47% for the second
quarter reflected the volume stimulation from price specials offered to New
Zealand customers and significant price reductions over the past three quarters.
The average per minute charge for outward calls was approximately 45% lower for
the half year and 51% lower for the second quarter compared with the same
periods last year.
<PAGE>
10
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. From 1 January 1998, international toll prices for
residential customers fell by an average of almost 20%. Further price reductions
took place for residential customers to over 30 destinations from 1 April 1998.
International toll calling prices for Telecom business customers decreased on
average by 15% from 1 February 1998.
During May and June of this year Telecom offered "talk for as long as you like"
residential promotions of NZ$10 to Australia and NZ$15 to UK, USA, Canada and
Ireland. This offer has been extended to the end of the calendar year.
Further significant price reductions reducing the average price of outward
international tolls by 20% were announced in July 1998.
Growth in inward call revenue of 11.7% for the half year and 16.7% for Q2 1998-
99 resulted from increased volumes and increases in the average price per inward
call minute.
The average price per minute for inward calls increased by approximately 7% for
the half year and 16% for the second quarter, primarily as a result of the
weakening New Zealand dollar. The impact of the weaker New Zealand dollar was
partly offset by a reduction in the rates negotiated for incoming calls. In
response to intense competition in the international market, Telecom has
negotiated agreements with the major foreign carriers which, while reducing
rates, have improved inward volumes.
The increase in the transit call margin (revenue net of outpayments) for the
half year and second quarter was largely attributable to:
. Strong growth in calls from international switched traffic transiting
Telecom's facilities, reflecting intensive efforts to utilise Telecom's lower
cost outward routes to win new refile business; and
. The weakening of the New Zealand dollar which increases the New Zealand dollar
equivalent of the foreign margin.
<PAGE>
11
Telecom's point of presence ("POP") in the US continues to demonstrate the value
in participating in the world's most competitive wholesale International market.
The low cost routing option provided by the US POP has enabled Telecom to become
more competitive in the transit call business. Telecom is now expanding its role
in this dynamic market by interconnecting with an increasing number of partner
carriers in order to secure additional volumes and further reduce costs.
Cellular and Other Mobile Services
Revenue from cellular and other mobile services grew by NZ$30.0 million, or
15.2%, for the half year and NZ$12.6 million, or 12.2%, for the second quarter
compared with the same periods last year. Cellular revenue grew by 16.7% for the
half year and 13.3% for the second quarter.
<TABLE>
<CAPTION>
===============================================================================================
Half Second
Cellular Growth (excluding other mobile services) Year Quarter
(Variation 98:97) % %
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue 16.7 13.3
Connections (at period end) 10.6 10.6
Call minutes 13.7 15.0
=============================================================================================
</TABLE>
The increased revenue includes the impact of the acquisition of Motorola's,
Ericsson's and Cellnet's cellular reselling businesses in June 1997, October
1997 and April 1998 respectively. Telecom believes these acquisitions offer
significant opportunities in directly servicing customers connected to its
network.
Telecom had 504,800 cellular connections at 30 September 1998, compared with
456,300 at 30 September 1997. Total connections grew by 28,600 in the half year
to 30 September 1998. The continued strong growth in connections is largely
owing to the "Telecom 2 GO" promotion launched in November 1996, and the
introduction of prepaid cellular. Approximately 42% of total connections are
connected to the Telecom 2 GO rate plans. The total number of active prepaid
customers at 30 September 1998 was 12,000.
The total number of cellular connections in New Zealand, including Vodafone's
connections, is currently estimated to represent approximately 17% of the New
Zealand population. This penetration level, when compared with other relevant
countries, suggests scope for continued expansion of this market.
<PAGE>
12
In March 1998, Telecom cut call prices and introduced new call pricing plans for
mobile phone business customers in response to similar moves by BellSouth.
Existing business call pricing plans were replaced with five new plans to cover
the needs of business customers - from those who use mobile phones only
occasionally through to high-volume business customers.
Interconnect
Interconnect revenue is derived from charges for delivering to and accepting
from other service providers local, national, international, cellular and 0800
calls. Installation charges and rental of interconnecting links and service
delivery point charges are also included.
Interconnect revenue increased by NZ$10.3 million, or 32.2%, for the half year,
and NZ$9.1 million, or 66.9%, for the second quarter compared with the same
periods last year. Increases in revenue owing to new interconnect carriers (eg.
Compass and WorldxChange) and increased activity with existing carriers, were
partially offset by reductions in the average charge per call.
Enhanced Network Services
Enhanced network services revenue increased by NZ$21.0 million, or 11.7%, for
the half year and NZ$9.2 million, or 10.0%, for the second quarter compared with
the same periods last year.
Enhanced network services revenue represented 11.8% of total revenue for the
half year and 11.7% of total revenue for Q2 1998-99, compared with 10.8% and
10.6% for the same periods last year. The revenue increase was largely owing to
the growth in 0800 and VPN revenues.
Increased revenues also reflected growth in the value-added services provided by
Netway, voice messaging, and the use of Centrex, VPN and ISDN. These services
provide individual business customers with voice and data network capabilities
to meet their specific needs.
<PAGE>
13
<TABLE>
<CAPTION>
===============================================================================
Half Second
Enhanced Network Services Growth Year Quarter
(Variation 98:97) % %
- -------------------------------------------------------------------------------
National 0800 services
<S> <C> <C>
- - Revenue 8.7 9.2
- - Call minutes 18.6 18.8
VPN
- - Revenue 69.8 42.2
- - VPN national call minutes 60.8 50.3
ISDN
- - Revenue 59.7 52.8
- - ISDN lines 62.0 62.0
Centrex
- - Revenue 19.4 17.3
- - Centrex lines 18.2 18.2
Call minder
- - Revenue 19.5 16.2
- - Call minder mailboxes 27.6 27.6
===============================================================================
</TABLE>
Directories
Total directories revenue increased by NZ$6.0 million, or 10.0%, for the half
year and NZ$4.1 million, or 9.4%, for the second quarter compared with the same
periods last year. Revenue from regional directories increased by 9.4% for the
half year and by 9.1% for the second quarter as a result of tariff and volume
growth in both The Telephone Book and YELLOW PAGES/R/ products. Revenue from
LOCAL DIRECTORIES/R/ also increased for the half year due largely to the
publication of two additional Auckland Central directories in the first quarter
of this year.
Miscellaneous Other Services
Miscellaneous other services revenue which is derived largely from Payphones, an
international outside plant project and Internet access and value-added services
("XTRA"), increased by NZ$12.0 million, or 25.4% for the half year, and NZ$1.1
million, or 4.3%, for the second quarter.
Higher revenue growth in the first quarter reflected a one-off receipt from
Ameritech to cover costs incurred by Telecom in the Ameritech share sale
process, completed in April 1998. The increase in revenue for Q2 1998-99
largely reflects growth in XTRA.
<PAGE>
14
XTRA had approximately 139,900 registered customers at 30 September 1998,
compared with 72,000 at 30 September 1997. Of the registered customers, 81%
were active within the last month of Q2 1998-99.
Expenses
Operating expenses increased by NZ$8.7 million, or 0.9%, for the half year and
decreased by NZ$2.1 million, or 0.4%, for the second quarter. For the second
quarter, decreases in personnel costs, maintenance and other operating expenses
were partly offset by increases in cost of sales. Operating expenses as a
percentage of revenue have decreased from 60.1% to 59.6% for the half year and
decreased from 59.1% to 58.6% for Q2 1998-99, compared with the same periods
last year.
Personnel Costs
Gross personnel costs decreased by 2.6% for the half year and 1.5% for the
second quarter compared with the same periods last year. The decrease reflected
a reduction of 397 in personnel numbers between Q2 1997-98 and Q2 1998-99. The
affect of this decrease on gross personnel costs was partly offset by increases
arising from the following factors:
. Salary increases for personnel on individual contracts; and
. Negotiated settlements for personnel covered by collective contracts.
<TABLE>
<CAPTION>
========================================================================================
Personnel Numbers
Variation to
September 1998
-----------------------------------------------------------------------
September March September September March
1997 1998 1998 1997 1998
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operations 6,730 6,551 6,632 (98) 81
Other 1,813 1,585 1,514 (299) (71)
-----------------------------------------------------------------------
Total 8,543 8,136 8,146 (397) 10
-----------------------------------------------------------------------
========================================================================================
</TABLE>
<PAGE>
15
Depreciation
Depreciation expense decreased by 0.6% for the half year and 3.6% for the second
quarter compared with the same periods last year. The year-on-year decrease is
due largely to an increase in depreciation expense in Q2 1997-98 following a
fixed asset review which identified a number of under-depreciated assets. This
decrease was partly offset by the impact of the higher fixed asset base
resulting from capital expenditure.
Cost of Sales
Cost of sales increased by 16.0% in the half year and 11.0% in the second
quarter compared with the same periods last year.
The increase was largely due to growth in the cellular business, including the
acquisition of the cellular reselling businesses. Special promotions to attract
new connections and encourage existing customers to upgrade their mobile phones
also contributed to the increase in cost of sales.
International cost of sales for outbound calls increased by 30.9% for the half
year and 33.8% for the second quarter, primarily due to significantly higher
outbound minutes. International outward minutes increased by 36.0% for the half
year and 47.0% for the second quarter, reflecting market growth and the volume
stimulation created by price specials offered to New Zealand customers.
Maintenance
Maintenance costs decreased by 11.5% for the half year and 7.6% for the second
quarter compared with the same periods last year.
This decrease reflected the following:
. Improved prices from external contractors;
. A significant increase in efficiency; and
. Significant sub-contractor costs incurred in Q1 1997-98 as a result of
industrial disputes involving ConnecTel personnel.
<PAGE>
16
Other Operating Expenses
Other operating expenses decreased by 6.2% for the half year and 4.7% for the
second quarter compared with the same periods last year.
The decrease in other operating expenses was largely owing to lower legal
expenses, including the impact of an allowance for certain litigation costs
which increased expenses in Q2 1997-98.
Net Interest Expense and Taxation
Net interest expense decreased by NZ$2.9 million, or 4.6%, for the half year and
NZ$0.2 million, or 0.6%, for the second quarter compared with the same periods
last year. Capital note coupons (after tax) increased to NZ$24.8 million from
NZ$7.4 million for the half year and to NZ$12.8 million from NZ$4.8 million for
the second quarter, reflecting the issue of capital notes to fund the share
repurchase programme.
Income tax expense increased by NZ$7.5 million, or 3.9%, for the half year and
NZ$2.2 million, or 2.1%, for the second quarter compared with the same periods
last year. These increases were largely owing to the 3.1% and 1.7% increases in
the surplus from continuing operations before income tax for the half year and
second quarter respectively. The effective tax rates for the half year and
second quarter were 32.4% and 32.8% respectively compared with 32.4% and 32.7%
for the same periods last year, 32.7% for fiscal 1998 and a statutory rate of
33%. A periodic review by the Inland Revenue Department is in progress, the
likely outcome of which is not known.
The surplus from continuing operations covered net interest expense (after
investment income but before interest capitalised) and capital note coupons 6.7
times for the half year and 6.6 times for the second quarter, compared with 8.1
times for both the same periods last year.
CAPITAL EXPENDITURE
Capital expenditure for the half year amounted to NZ$194.7 million (including
NZ$35.8 million on information technology assets), a decrease of NZ$60.6
million, or 23.7%, compared with the same period last year. Cash applied to
capital expenditure amounted to NZ$225.8 million, a decrease of NZ$19.4 million,
or 7.9%.
<PAGE>
17
Capital expenditure for the year ending 31 March 1999 is expected to amount to
approximately NZ$650 million. This excludes any potential acquisition of
spectrum that may be available to purchase from the Government. Approximately
60% of 1998-99 capital expenditure is expected to be spent on baseline
investment including expenditure for renewal and growth of Telecom's core
network (including the international and mobile networks). The remaining
capital expenditure is expected to be incurred in enhancing network capability
to achieve Telecom's on-line vision, and in the development of new products and
services.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows from operating activities for the half year were NZ$819.4
million, an increase of NZ$44.4 million. This increase resulted from higher
receipts from customers and increased interest income partially offset by
increased Year 2000 payments and higher interest expense.
A decrease in cash applied to the purchase of fixed assets was more than offset
by an increase in net investments purchased which led to net cash flows used in
investing activities increasing by NZ$63.6 million.
Net cash used in financing activities amounted to NZ$378.4 million compared with
NZ$406.6 million for the half year to 30 September 1997.
The net debt to net debt plus capital funds ratio was 42.3% at 30 September 1998
compared with 43.6% at 31 March 1998. 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$46.4 million. Capital funds include
shareholders' funds, capital notes (TeleNotes and Restricted Capital Securities)
and minority interests.
Cash and short-term investments were NZ$632.9 million at 30 September 1998
compared with NZ$441.5 million at 31 March 1998. As at 30 September 1998
Telecom had available unutilised committed facilities of NZ$20 million and
US$150 million, as well as substantial uncommitted other borrowing capacity.
<PAGE>
18
As at 30 September 1998 total interest-bearing long-term and short-term
liabilities amounted to NZ$2,150.3 million, compared with NZ$1,971.6 million at
30 September 1997. Capital notes at 30 September 1998 totalled NZ$941.7 million
compared with NZ$436.4 million at 30 September 1997. The increase in capital
notes reflects the issue of US$300 million Restricted Capital Securities in
February 1998.
OTHER MATTERS
Broadband Strategy
The continuing development of Internet-based online technologies and services
has created demand for access to very high capacity (broadband) networks.
Telecom's broadband strategy aims to open opportunities to create and sell
innovative services and products to meet this demand and lead the New Zealand
economy online. Telecom is committed to an online future. This commitment will
have substantial effects on Telecom's networks, the services that Telecom sells
and on interactions between Telecom and its customers.
Telecom has a strategy to develop all of its networks from an infrastructure
designed primarily to support narrowband telephony to infrastructure capable of
delivering sophisticated broadband services. Telecom's existing fibre-optic
network forms the basis of this developing broadband network.
Telecom is already delivering high-capacity ATM, Frame Relay and IPNet services
to support the broadband strategy and is currently conducting a trial among some
residential and business customers in the Wellington region to determine the
suitability of Asymmetric Digital Subscriber Line (ADSL) technology for delivery
of fast data and voice using existing copper wiring. Telecom has signed
agreements with suppliers for ADSL equipment and may start offering ADSL
services to customers in December or January. Because of New Zealand's varied
terrain and scattered population centres, there is no single technology that can
be used for provision of broadband services. A decision has not yet been made
regarding the extent to which ADSL may be commercially deployed.
Telecom announced the decision to close its First Media business on 4 June 1998.
The broadcasting of First Media service ceased on 31 July 1998.
<PAGE>
19
First Media was established when Telecom was considering how best to provide
broadband services to residential and smaller customers. During the hybrid
fibre/coax ("HFC") cable roll-out programme, it became clear that alternative
technologies may be more cost effective as a way of delivering broadband
services.
The estimated costs (NZ$25 million after tax) associated with the termination of
the HFC rollout and reorganisation of First Media were identified and provided
for at 31 March 1998. The provision is sufficient to cover the additional costs
arising from the subsequent decision to close First Media. Costs amounting to
approximately NZ$12.2 million (after tax) were incurred and charged to the
provision in the first half of 1998-99.
Restructuring and Performance 2000
Restructuring costs totalling NZ$64.5 million relating to the Performance 2000
Project and the strategic restructuring of ConnecTel, formerly the Design, Build
and Maintenance division, were identified and provided against 1997 earnings.
Redundancy and other restructuring costs of NZ$8.7 million incurred during the
first half of 1998-99, including amounts relating to an earlier restructuring
programme, have been charged against the restructuring provision. Also included
in the operating expenses for the first half of 1998-99 were redundancy and
other costs of NZ$1.0 million relating to Performance 2000 initiatives which
were not provided for at 31 March 1997.
Year 2000
Until recently the majority of computer software worldwide was programmed to
process transactions using only two digits to identify a year (e.g. "98" for
1998) rather than four digits. As a result computer systems which process dates
in the year 2000 and beyond may encounter significant processing inaccuracies
and may not be able to operate.
Telecom has declared Year 2000 ("Y2K") as a top priority for the Company and has
assigned significant resources to address it. Almost all of the services and
solutions that Telecom provides to customers are based on technology-driven
systems, including the exchanges and other components in Telecom's fixed line,
cellular, paging, mobile and data networks. The Y2K issue may also affect many
of Telecom's internal information systems.
<PAGE>
20
Telecom has established a Y2K Programme structure comprising a Y2K Programme
Office and Y2K teams within Business Units. The Y2K Programme Office provides
the framework for monitoring and reporting progress across the Programme, and
manages mitigation of Telecom-wide Y2K risks. The Business Units are
accountable for the completion of all Y2K remedial work. They have several
hundred people working across the Y2K Programme.
Telecom's Y2K Programme has identified and is addressing a broad spectrum of
internal and external items which include embedded business support systems,
network infrastructure, financial structure and support services, building
security and supplies, supplier Y2K status, availability of staff, and a review
of existing business continuity plans.
Within the Company's Y2K Programme, much of the information systems work is
expected to be substantially completed by the end of December 1998 with some
remedial action extending into early 1999.
The testing of network infrastructure is well advanced, with the majority of
this work expected to be complete by the end of March 1999. A small number of
network suppliers are currently planning to deliver compliant components after
this date.
Y2K testing is now part of our "business as usual" activity. Processes are in
place aimed at preventing any non compliant components or programming code being
introduced to our networks, systems and products. In preparation for dealing
with unexpected Y2K issues, Telecom's Y2K Programme includes a review of
Business Continuity status and processes. This is designed to ensure that in
the event of unplanned outages or disruption to services, Telecom is able to
respond rapidly to customer needs.
A provision of $NZ87 million was established at 31 March 1997 to cover the
operational costs of the Y2K Programme. A further $NZ20 million has been
budgeted for capital expenditure. Costs of $NZ13.8 million incurred in the year
to 31 March 1998, together with costs of $NZ22.5 million incurred in the six
months to 30 September 1998, have been charged to the provision. To 30
September 1998 the Company had incurred $NZ7.0 million of capital expenditure in
connection with this issue. There can be no assurance that Telecom's established
reserves will be sufficient to cover all Y2K expenditure that may be incurred.
<PAGE>
21
The above information is based on Telecom's current best estimates and planning
assumptions. Given the complexity of Telecom's business activities and numerous
dependencies on suppliers, expert staff, extensive internal systems and the
success of remedial efforts, the actual results of Telecom's Y2K Programme have
yet to be determined, and may differ from the discussion above. There can be no
absolute assurance that all issues regarding Y2K will have been completed prior
to the Year 2000.
Southern Cross
On 6 October 1998 the Southern Cross shareholders agreement was signed marking
the official commencement of the Southern Cross cable project. A separate
project company, Southern Cross Cables Limited ("SCCL") has been established
with the signing of the shareholders agreement. Telecom, Optus and WorldCom,
are the shareholders in SCCL with Telecom holding a 50% equity stake in the
Company. SCCL will build, own, operate and maintain the network as well as
market capacity on the cable.
The Southern Cross Cable Network, driven by the huge increase in customer demand
for data and internet services, will be the largest and most direct cable link
to the US from Australia and New Zealand. The Network is expected to cost US$1
billion in total. The 29,000 kilometre high capacity fibre optic submarine
cable loop will link New Zealand and Australia with Hawaii, the mainland United
States and Fiji. To date 30 international based companies, including phone
carriers and Internet Service Providers, have signed up for a share of capacity
in the Southern Cross cable.
The first phase of the Southern Cross Cable Network, linking Australia and New
Zealand to the United States is expected to be completed at the end of calendar
1999. The second phase routing the cable back to Australia via Fiji is due for
completion in 2000. Work on the marine build component of the project is
expected to commence later this year.
<PAGE>
22
OVERVIEW OF SURPLUS FROM CONTINUING OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended Variation
30 September 98:97
- ---------------------------------------------------------------------------------------------------------
(in NZ$ millions, except percentages)
1997 % 1998 % $ %
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues
Local service 426.9 25.6 429.0 25.3 2.1 0.5
National calls 302.6 18.2 280.2 16.5 (22.4) (7.4)
International 251.5 15.1 234.8 13.9 (16.7) (6.6)
Interconnection 32.0 1.9 42.3 2.5 10.3 32.2
Cellular and other mobile services 197.6 11.9 227.6 13.4 30.0 15.2
Enhanced network services 179.5 10.8 200.5 11.8 21.0 11.7
Other operating revenues
Directories 59.8 3.6 65.8 3.9 6.0 10.0
Leased services 65.5 3.9 63.1 3.7 (2.4) (3.7)
Equipment revenue 103.1 6.2 92.4 5.5 (10.7) (10.4)
Miscellaneous other services 47.2 2.8 59.2 3.5 12.0 25.4
-------------------------------------------------------------------
275.6 16.5 280.5 16.6 4.9 1.8
-------------------------------------------------------------------
Total operating revenues 1,665.7 100.0 1,694.9 100.0 29.2 1.8
-------------------------------------------------------------------
Operating expenses
Gross personnel costs 275.1 16.5 267.9 15.8 (7.2) (2.6)
Labour capitalised (23.6) (1.4) (18.9) (1.1) 4.7 19.9
Labour recovered (59.6) (3.6) (63.4) (3.8) (3.8) (6.4)
-------------------------------------------------------------------
Net personnel costs 191.9 11.5 185.6 10.9 (6.3) (3.3)
Depreciation 278.9 16.7 277.3 16.4 (1.6) (0.6)
Cost of sales 246.4 14.8 285.8 16.8 39.4 16.0
Maintenance 95.3 5.7 84.3 5.0 (11.0) (11.5)
Other operating expenses 189.4 11.4 177.6 10.5 (11.8) (6.2)
-------------------------------------------------------------------
Total operating expenses 1,001.9 60.1 1,010.6 59.6 8.7 0.9
-------------------------------------------------------------------
Surplus from continuing operations 663.8 39.9 684.3 40.4 20.5 3.1
===================================================================
</TABLE>
KEY PERFORMANCE INDICATORS
<TABLE>
<CAPTION>
Six Months Ended
Full Year Full Year 30 September
1997 1998 1997-98 1998-99
<S> <C> <C> <C> <C>
Operating Margin (%) . 39.9 40.5 39.9 40.4
Asset Utilisation (%) # 68.3 73.0 72.7 - 73.1 -
Net Interest Cover (times) * 10.9 7.6 8.1 6.7
Return on Average Total Assets (%) 27.3 29.6 29.0 - 29.5 -
Net Debt/Net Debt plus Capital Funds (%) 51.4 43.6 51.5 42.3
</TABLE>
. Normalised surplus from continuing operations/operating revenue
# Operating revenue/average total assets (net of cash and short-term
investments)
* Normalised surplus from continuing operations/net interest expense (before
interest capitalised) inclusive of capital note coupons
- - Annualised
<PAGE>
23
OVERVIEW OF SURPLUS FROM CONTINUING OPERATIONS
<TABLE>
Quarter Ended Variation
30 September 98:97
- -------------------------------------------------------------------------------------------------------------------------
(in NZ$ millions, except percentages)
1997 % 1998 % $ %
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues
Local service 215.1 24.9 214.7 24.7 (0.4) (0.2)
National calls 153.9 17.8 142.0 16.3 (11.9) (7.7)
International 131.4 15.2 121.1 13.9 (10.3) (7.8)
Interconnection 13.6 1.6 22.7 2.6 9.1 66.9
Cellular and other mobile services 103.0 11.9 115.6 13.3 12.6 12.2
Enhanced network services 92.1 10.6 101.3 11.7 9.2 10.0
Other operating revenues
Directories 43.5 5.0 47.6 5.5 4.1 9.4
Leased services 32.8 3.8 31.2 3.6 (1.6) (4.9)
Equipment revenue 54.1 6.3 46.0 5.3 (8.1) (15.0)
Miscellaneous other services 25.6 2.9 26.7 3.1 1.1 4.3
-------------------------------------------------------------------------------
156.0 18.0 151.5 17.5 (4.5) (2.9)
-------------------------------------------------------------------------------
Total operating revenues 865.1 100.0 868.9 100.0 3.8 0.4
-------------------------------------------------------------------------------
Operating expenses
Gross personnel costs 136.1 15.7 134.0 15.4 (2.1) (1.5)
Labour capitalised (11.9) (1.4) (10.1) (1.2) 1.8 15.1
Labour recovered (31.5) (3.6) (34.2) (3.9) (2.7) (8.6)
-------------------------------------------------------------------------------
Net personnel costs 92.7 10.7 89.7 10.3 (3.0) (3.2)
Depreciation 143.6 16.6 138.4 15.9 (5.2) (3.6)
Cost of sales 129.8 15.0 144.1 16.6 14.3 11.0
Maintenance 46.0 5.3 42.5 4.9 (3.5) (7.6)
Other operating expenses 99.6 11.5 94.9 10.9 (4.7) (4.7)
-------------------------------------------------------------------------------
Total operating expenses 511.7 59.1 509.6 58.6 (2.1) (0.4)
-------------------------------------------------------------------------------
Surplus from continuing operations 353.4 40.9 359.3 41.4 5.9 1.7
===============================================================================
</TABLE>
<TABLE>
<CAPTION>
KEY PERFORMANCE INDICATORS
Q1 Q2 Q1 Q2
1997-98 1997-98 1998-99 1998-99
<S> <C> <C> <C> <C>
Operating Margin (%) . 38.8 40.9 39.3 41.4
Asset Utilisation (%) # 70.3 - 76.0 - 71.1 - 76.1 -
Net Interest Cover (times) * 8.2 8.1 6.8 6.6
Return on Average Total Assets (%) 27.3 - 31.0 - 28.0 - 31.5 -
Net Debt/Net Debt plus Capital Funds (%) 50.7 51.5 42.3 42.3
</TABLE>
. Normalised surplus from continuing operations/operating revenue
# Operating revenue/average total assets (net of cash and short-term
investments)
* Normalised surplus from continuing operations/net interest expense
(before interest capitalised) inclusive of capital note coupons
- - Annualised
<PAGE>
[TELECOM LOGO]
17 November 1998
Telecom New Zealand Limited
MEDIA RELEASE
TELECOM RESULT FLAT IN STATIC ECONOMY
(Embargoed until 9.00am, 17 November 1998)
Telecom today reported after-tax earnings of $206.2 million for the three months
to 30 September 1998, down 2.2 percent from the same time last year. After-tax
earnings for the six month period to 30 September 1998 eased 0.6 percent to
$396.3 million.
"Competition is biting hard and volume increases have not kept pace with
substantial price cuts in the past six months. This, combined with economic
recession, has kept our profit flat," Chairman Peter Shirtcliffe said.
Chief Executive Roderick Deane said that despite the flat result, the share
repurchase completed last year meant that earnings per share increased 0.9% to
11.8 cents per share. Telecom will pay a second quarter dividend of 11.5 cents
per share, up 9.5 percent on last year's second quarter dividend.
Earnings Overview
-----------------
<TABLE>
<CAPTION>
2nd Quarter Half Year
% change result % change result
<S> <C> <C> <C> <C>
Earnings per share + 0.9% 11.8 cents + 2.7% 22.6 cents
Revenue + 0.4% $868.9m + 1.8% $1,694.9m
Operating expenses - 0.4% $509.6m + 0.9% $1,010.6m
Net earnings - 2.2% $206.2m - 0.6% $396.3m
</TABLE>
Dr Deane said that international and national call prices had fallen steeply
under the pressure of intense competition, which had stimulated a huge increase
in call volumes, despite the static economy.
[TEAM NEW ZEALAND LOGO] [AMERICA'S CUP LOGO]
Telecom is a proud sponsor and official supplier of communications to Team NZ
and the America's Cup 2000
<PAGE>
Calling Growth
--------------
<TABLE>
<CAPTION>
2nd Quarter Half Year
% change % change
<S> <C> <C>
Local call minutes + 0.8% + 1.3%
(excluding uncharged residential)
National call minutes + 0.5% + 0.6%
International Inward call minutes + 0.7% + 4.0%
(excluding transits)
International Outward call minutes + 47.0% + 36.0%
National 0800 call minutes + 18.8% + 18.6%
Mobile phone calls + 15.0% + 13.7%
</TABLE>
Local (uncharged) call minutes per month per residential line increased 9.1%
over the year to 30 Sept 1998.
"Competition has been great for our customers, who are getting excellent value
for money. They are making more and longer calls, both voice and Internet data,
as they realise how cheap a phone call has become," Dr Deane said.
He said that future growth for Telecom would come from mobile and enhanced
services and from the Internet. New Zealanders had shown great enthusiasm for
these new and innovative services, demonstrated this quarter by strong growth in
mobile phone connections, XTRA Internet subscribers and enhanced services such
as Call Minder on their phone line.
Customer Growth
---------------
<TABLE>
<CAPTION>
Customer %
numbers change
<S> <C> <C>
Fixed access lines 1.856 m + 2.3%
Mobile phone connections 504,800 + 10.6%
XTRA customers 139,900 + 94.3%
Call Minder voice-mail boxes 260,400 + 27.6%
</TABLE>
Telecom was a company in transition from being a telephone company to an online
organisation, he said.
Page 2
<PAGE>
"We are undergoing huge competitive and technological changes, in transition to
an online world, where the Internet will dominate. While the transition is hard,
the future looks exciting," Dr Deane said.
Mr Shirtcliffe said the transition to an online world offered huge potential to
radically change New Zealanders' lifestyles and to greatly improve the economy
by removing factors such as distance, cost and small size.
"The move online has the potential to give someone in Taihape or Timaru some of
the same opportunities and lifestyle choices as someone living in Auckland," Mr
Shirtcliffe said.
For further information please call:
Angus Barclay, Financial Communications Manager
Phone 04-498-9372 Pager 026-103-029 [email protected]
Recent media releases can be found at the Telecom Home Page which is at
http://www.telecom.co.nz Click on 'About Telecom' then 'News Booth.'
This media release contains forward looking statements about Telecom and the
environment in which the company operates. Because these statements are forward
looking, Telecom's actual results could differ materially. The second quarter
management commentary and various documents filed with the US Securities &
Exchange Commission, including the Annual Report on Form 20-F, contain
additional information about matters which could cause Telecom's performance to
differ from any of these forward looking statements. Please read this release in
the wider context of associated material published by Telecom.
Page 3
<PAGE>
MEDIA RELEASE October 6, 1998
Southern Cross Cable Network awards
Alcatel/Fujitsu US$ 800 million supply contract
The Southern Cross Cable Network to go ahead
The sponsors of the Southern Cross Cable Network, Telecom New Zealand, Optus,
and WorldCom, have awarded the Southern Cross Cable project supply contract to
Alcatel and Fujitsu, with Alcatel being the major supplier.
The US$ 800 million contract coincides with the signing today of the Southern
Cross sponsors agreement, marking the official commencement of the Southern
Cross cable project.
The Southern Cross Cable Network, driven by the huge increase in customer demand
for data and Internet services, will be the largest and most direct cable link
to the US from Australia and New Zealand.
The network is expected to cost in excess of US$1 billion in total. The 29,000
kilometre high capacity fibre optic submarine cable loop will link New Zealand
and Australia with Hawaii, the mainland United States and Fiji.
Initial capacity on the Southern Cross cable network will be 40 gigabits, making
it one of the largest systems in commercial operation in the world when it
starts carrying traffic in 1999.
Telecom New Zealand Chief Executive Dr Roderick Deane said the cable project was
critical to New Zealand's future economic wellbeing in an increasingly global
online economy.
"This project is a key part of our strategy to lead the New Zealand economy on-
line through the Internet and part of the roll out of our broadband capability
for data delivery. New Zealanders are demonstrating an enormous appetite for all
of the benefits that telecommunications technology can provide. One of the
major reasons is that such technology enables New Zealand to counter the
disadvantages of distance that have always bedevilled us."
Optus' Chief Executive, Chris Anderson, said his company's involvement in the
Southern Cross project highlights its focus on ensuring quality networks for the
future.
"Southern Cross supports our strategy to deliver integrated communications
solutions to our customers. Data and Internet services are increasingly a major
part of this strategy and for this we need excellent international links.
<PAGE>
"The growth in demand not only for telecommunications, but for new services such
as Internet, multi-media and compressed TV has been phenomenal. The introduction
of new carriers and telecommunications companies in Australia has resulted in
further demand for international cable capacity," Mr Anderson said.
Managing Director of WorldCom Australia, Ms Suzanne Campbell said the project
was part of WorldCom's strategy to provide customers in the Asia Pacific region
with end to end seamless service.
"WorldCom's investment in the Southern Cross Cable Network highlights our
commitment to bringing our customers in Australia top end voice, data and
Internet services over our own fully-owned end-to-end network. It is a strategy
that we are following throughout the world because of the benefits that this
brings to customers," Ms Campbell said.
Alcatel's South Asia Pacific President, Mr Ron Spithill, said the emergence of
ventures such as Southern Cross was completely changing the face of
international connectivity, with competition and the demand for greater data
capacity, such as Internet, driving growth.
"The project is a huge boost for our Australian plant at Port Botany where most
of the cable will be produced. We will be investing an additional A$25 million
to increase significantly the volume of cable produced," Mr Spithill said.
Fujitsu's General Manager of International Telecommunications Business Group,
Katsutoshi Tamura said, "It is a great honour for us to be involved in the
Southern Cross Cable project and Fujitsu's advanced technology will contribute
to a complete ring of digital highway in the Pacific-rim."
A separate project company, Southern Cross Cables Limited (SCCL), has also been
established with the signing of a shareholders agreement.
Telecom New Zealand, Optus and WorldCom, are the shareholders in Southern Cross
Cable Limited. SCCL will build, own, operate and maintain the network as well
as market capacity on the cable.
So far 30 international and Australian-based companies, including phone carriers
and Internet Service Providers, have signed up for a share of capacity in the
Southern Cross cable.
Southern Cross participants purchase capacity directly from the SCCN. The terms
of the agreement enable flexible capacity transfer between carriers and
stipulates that one customer cannot restrict the commercial activities of
another within SCCN. These provisions ensure SCCN offers fair opportunities to
all industry participants who wish to use the system.
Alcatel has commenced production of the high capacity fibre at their Port Botany
plant in Sydney, Australia.
<PAGE>
The first phase of the Southern Cross Cable Network, linking Australia and New
Zealand to the United States is expected to be complete at the end of 1999. The
second phase routing the cable back to Australia via Fiji is due for completion
in 2000. Once complete, the system will provide network security and redundancy
through the completed loop structure.
The cable will link two landing points in Australia, two in New Zealand, two in
Hawaii, two in the US and one in Fiji. Work on the marine build component of
the project is expected to commence later this year.
Southern Cross which will initially provide 40 gigabits of capacity and can be
expanded for future demand. It will be a third generation optical fibre
amplified submarine cable system supporting Synchronous Digital Hierarchy
transmission and Wave Division Multiplexing (WDM).
In May, Deutsche Bank AG, Barclays Capital and ABN AMRO, were appointed as lead
arrangers and underwriters to fund US$900 million of debt for the limited
recourse financing of the project. Funding has now been secured.
Glossary of terms
SDH a family of fibre-optic transmissions rates from 51.84Mbps to
13.22Gbps created to provide the flexibility needed to transport many
different digital signals with different capacities.
WDM a way increasing the capacity of optical fibre by simultaneously
operating at more than one wavelength. Signals can be multiplexed by
transmitting at different wavelengths down the same fibre.
Ends
<PAGE>
6 November 1998
TELECOM CHANGES BALANCE DATE
Telecom Group, including parent company Telecom Corporation of New Zealand
Limited and all operational and financing subsidiaries, is changing its
accounting balance date to 30 June from 31 March.
Telecom will report consolidated earnings results for the current financial year
to 31 March 1999, then for a transitional three-month period to 30 June 1999.
The first new full financial year will be from 1 July 1999 to 30 June 2000.
Telecom will continue to report consolidated earnings results on a quarterly
basis.
"Changing the date will enable our planning and budgeting to move as close as
possible to the start of the new financial year. This will condense the annual
planning and budgeting process by avoiding the Christmas period. Given the
increasingly rapid pace at which our industry is changing, we felt it important
that we move our accounting balance date as close to the beginning of the new
year as possible," Chief Financial Officer Jeff White said.
For further information please call:
Angus Barclay, Financial Communications Manager
Phone 04-498-9372 Pager 026-103-029 [email protected]
Recent media releases can be found at the Telecom Home Page which is at
http://www.telecom.co.nz Click on 'About Telecom' then 'News Booth.'
