<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 18 February 1999 to 18 June 1999
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. Year End Result to 31 March 1999
1.1 Condensed Financial Statements
1.2 Management Discussion & Analysis
1.3 Media Release - 18 May 1999
2. Miscellaneous Media Releases
2.1 Telecom announces Board Changes - 18 May 1999
2.2 Telecom director resigns - 18 May 1999
2.3 Telecom confirms AAPT shareholding - 18 May 1999
2.4 Telecom increases AAPT shareholding - 4 June 1999
_____________________________________
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: 18 June 1999
<PAGE>
Telecom Corporation of New Zealand Limited and Subsidiaries
Consolidated Statement of Financial Performance
For the years ended 31 March
Extracted from Audited Financial Statements
<TABLE>
<CAPTION>
1997 1998 1999 1999
- ----------------------------------------------------------------------------------------------------
(Dollars in millions, except per share amounts) notes NZ$ NZ$ NZ$ US$
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating revenues
Local service 959 1,025 1,059 565
Calling 2 1,176 1,253 1,166 623
Interconnection 66 71 86 46
Cellular and other mobile services 316 424 480 256
Data 256 295 336 179
Other operating revenues 2 310 330 307 164
Abnormal revenue 3 - - 16 9
-----------------------------------
3,083 3,398 3,450 1,842
-----------------------------------
Operating expenses
Net personnel costs 347 383 358 191
Depreciation 544 564 553 295
Cost of sales 405 515 575 307
Maintenance 201 171 166 89
Other operating expenses 355 388 383 205
Abnormal expenses 3 152 37 15 8
-----------------------------------
2,004 2,058 2,050 1,095
-----------------------------------
Surplus from continuing operations 1,079 1,340 1,400 747
Investment income 27 28 49 26
Interest expense (126) (155) (159) (85)
-----------------------------------
Surplus from continuing operations before
income tax 980 1,213 1,290 688
Income tax expense (311) (397) (411) (219)
-----------------------------------
Surplus from continuing operations after
income tax 669 816 879 469
Discontinued operations: 4
Loss from operations of Pacific Star Group
after income tax (50) - - -
Provision for loss on disposal of Pacific
Star Group (37) 30 - -
-----------------------------------
(87) 30 - -
-----------------------------------
Surplus after income tax 582 846 879 469
Minority interests in profits of subsidiaries (1) - (2) (1)
-----------------------------------
Net surplus 581 846 877 468
Capital note distribution costs after income tax - (26) (55) (29)
-----------------------------------
Net earnings attributable to shareholders 581 820 822 439
===================================
Earnings per share from continuing operations $0.355 $0.443 $0.469 $0.251
===================================
Net earnings per share $0.308 $0.459 $0.469 $0.251
===================================
Weighted average number of ordinary
shares outstanding (in millions) 1,887 1,786 1,752 1,752
===================================
</TABLE>
The accompanying notes form part of and are to be read in conjunction
with these financial statements.
1
<PAGE>
Telecom Corporation of New Zealand Limited and Subsidiaries
Consolidated Statement of Financial Position
As at 31 March
Extracted from Audited Financial Statements
<TABLE>
<CAPTION>
1998 1999 1999
- ---------------------------------------------------------------------------------------------------
(Dollars in millions) notes NZ$ NZ$ US$
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash 13 21 11
Short-term investments 430 673 359
Receivables and prepayments 747 754 403
Inventories 45 42 22
------------------------------------
Total current assets 1,235 1,490 795
Future tax benefit 23 - -
Investments 63 47 25
Other assets 7 51 58 31
Fixed assets 3,793 3,780 2,019
------------------------------------
Total assets 5,165 5,375 2,870
====================================
LIABILITIES AND CAPITAL FUNDS
Current liabilities:
Bank overdraft 1 9 5
Accounts payable and accruals 768 801 427
Provisions - current 5 89 58 31
Debt due within one year 746 1,130 603
Provision for dividend 6 228 228 122
------------------------------------
Total current liabilities 1,832 2,226 1,188
Provisions - non-current 5 31 3 2
Long-term debt 1,292 1,112 594
------------------------------------
Total liabilities 3,155 3,341 1,784
------------------------------------
Commitments and contingent liabilities 8,9
Capital funds:
Shareholders' funds 1,063 1,085 579
Capital notes 941 942 503
Minority interests 6 7 4
------------------------------------
Total capital funds 2,010 2,034 1,086
------------------------------------
Total liabilities and capital funds 5,165 5,375 2,870
====================================
</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 Movements in
Capital Funds
For the years ended 31 March
Extracted from Audited Financial Statements
<TABLE>
<CAPTION>
1997 1998 1999 1999
- --------------------------------------------------------------------------------------------
(Dollars in millions) notes NZ$ NZ$ NZ$ US$
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Capital funds at the beginning of the year 2,148 1,642 2,010 1,073
Net earnings attributable to shareholders 581 820 822 439
Movement in foreign currency translation reserve - 1 - -
---------------------------------
Total recognised revenues and expenses for the year 581 821 822 439
Movement in minority interests - 4 1 1
Dividends 6 (831) (859) (910) (486)
Tax credit on supplementary dividends 6 100 103 104 55
Issue of capital notes - 946 - -
Discount on capital notes amortised - 1 1 1
Redemption of capital notes - (6) - -
Capital contributed 1 2 6 3
Share repurchase (357) (644) - -
---------------------------------
Capital funds at the end of the year 1,642 2,010 2,034 1,086
=================================
Represented by:
Contributed capital 1,545 903 909 485
Foreign currency translation reserve (1) - - -
Minority interests 2 6 7 4
Retained earnings 96 160 176 94
Capital notes - 941 942 503
---------------------------------
1,642 2,010 2,034 1,086
=================================
</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 Cash Flows
For the years ended 31 March
Extracted from Audited Financial Statements
<TABLE>
<CAPTION>
1997 1998 1999 1999
- -----------------------------------------------------------------------------------------------------------------------------
(Dollars in millions) NZ$ NZ$ NZ$ US$
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities
Cash was provided from/(applied to):
Cash received from customers 3,032 3,285 3,423 1,827
Proceeds from liquidation of Executive Plan - - 16 9
Interest income 35 23 45 24
Payments to suppliers and employees (1,249) (1,273) (1,380) (737)
Restructuring, redundancy and Year 2000 payments (14) (60) (65) (35)
Income tax paid (269) (289) (304) (162)
Interest paid on debt (116) (149) (161) (86)
---------------------------------------------------------------
Net cash flows from operating activities 1,419 1,537 1,574 840
---------------------------------------------------------------
Cash flows from investing activities
Cash was provided from/(applied to):
Sale of fixed assets 17 11 21 11
(Purchase)/sale of investments, net 4 (469) (236) (126)
Purchase of fixed assets (683) (559) (554) (295)
Capitalised interest paid (14) (14) (9) (5)
Redemption of notes receivable 41 46 - -
Net advances to discontinued operations (32) - - -
---------------------------------------------------------------
Net cash flows used in investing activities (667) (985) (778) (415)
---------------------------------------------------------------
Cash flows from financing activities
Cash was provided from/(applied to):
Proceeds from long-term debt 92 269 12 6
Repayment of long-term debt (135) (191) (199) (106)
Proceeds from short-term debt, net 298 102 378 202
Capital contributed 1 2 6 3
Dividends paid (809) (841) (914) (488)
Capital note distribution costs paid - (26) (79) (42)
Share repurchase (193) (808) - -
Proceeds from issue of capital notes, net - 940 - -
---------------------------------------------------------------
Net cash flows used in financing activities (746) (553) (796) (425)
---------------------------------------------------------------
Net cash flow 6 (1) - -
Opening cash position (including bank overdrafts) 7 13 12 6
Closing cash position (including bank overdrafts) 13 12 12 6
===============================================================
</TABLE>
.............................SUPPLEMENTARY CASH FLOW DATA.......................
<TABLE>
<CAPTION>
Reconciliation of net earnings attributable to shareholders
to net cash flows from operating activities
<S> <C> <C> <C> <C>
Net earnings attributable to shareholders 581 820 822 439
Adjustments to reconcile net earnings to net cash flows
from operating activities:
Depreciation 544 564 553 295
Bad and doubtful accounts 31 34 27 15
Deferred income tax (44) (2) 23 12
Minority interests 1 - 2 1
Capital note distribution costs - 26 55 29
Goodwill amortised 1 4 7 4
Discontinued operations 87 (30) - -
Other 13 1 14 8
Changes in assets and liabilities net of effects of
non-cash and investing and financing activities:
Decrease /(increase) in accounts receivable and related (83) (108) 23 12
items
(Increase)/decrease in inventories (3) 20 (1) (1)
Increase in current taxation 87 106 83 44
(Decrease)/increase in restructuring provisions 53 (39) (11) (6)
(Decrease)/increase in Year 2000 provision 86 (14) (48) (25)
Increase in accounts payable and related items 65 155 25 13
---------------------------------------------------------------
Net cash flows from operating activities 1,419 1,537 1,574 840
===============================================================
</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 have been extracted from
the audited financial statements of Telecom Corporation of New Zealand
Limited (the "Company") together with its subsidiaries ("Telecom") and 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 March 1999 of NZ$1.00 to US$0.5340. The
US dollar amounts should not be construed as representations that the New
Zealand dollars have been, could be, or could in the future be converted
into US dollars at this or any other rate. References in these financial
statements to "$" 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 year ended 31
March 1999 are consistent with those used in the preparation of the
published financial statements for the year ended 31 March 1998.
In the current year Telecom has adopted the policy of translating the
revenue and expenses of independent overseas subsidiaries 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 year 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. The effect of the change has not had a material
impact on the Group financial statements for the current year.
Reclassifications
Certain reclassifications of prior years' data have been made to conform to
current year classifications. Operating revenue has been reclassified to
reflect trends in the telecommunications industry. The main changes are the
creation of a data revenue category and the revision of the local service,
calling and other operating revenue categories. The hedging costs related
to the US capital notes have been reclassified from interest expense to
capital note distribution costs.
NOTE 2 CALLING AND OTHER OPERATING REVENUES
<TABLE>
<CAPTION>
-----------------------------------------------------
1997 1998 1999
(Dollars in millions) NZ$ NZ$ NZ$
-----------------------------------------------------
<S> <C> <C> <C> <C>
Calling
National 656 727 700
International 457 466 414
Other 63 60 52
--------------------------
1,176 1,253 1,166
==========================
Other operating revenues
Directories 136 147 160
Equipment revenue 157 144 109
Miscellaneous other services 17 39 38
--------------------------
310 330 307
==========================
</TABLE>
5
<PAGE>
Telecom Corporation of New Zealand Limited and Subsidiaries
Notes to the Condensed Financial Statements
continued
NOTE 3 ABNORMAL ITEMS
<TABLE>
<CAPTION>
1997 1998 1999
---------------------------------------------------
(Dollars in millions) NZ$ NZ$ NZ$
---------------------------------------------------
<S> <C> <C> <C> <C>
Abnormal expenses
Restructuring costs 65 - 15
Discontinuance of HFC roll-out
and reorganisation
of First Media Limited - 37 -
Year 2000 modification costs 87 - -
---------------------------
152 37 15
============================
Abnormal revenue
----------------------------
Liquidation of executive share ownership plan - - 16
============================
</TABLE>
Abnormal expenses
During the year ended 31 March 1999, Telecom announced it had reached an
agreement with specialist call centre operator SITEL Asia Pacific to contract
out the provision of operator services. Operator services manages directory
assistance, operator assistance and audio conferencing calls as well as passing
111 calls to emergency services. The decision to outsource operator services
resulted in approximately 560 redundancies at a cost of $15 million.
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 Limited ("First Media") were identified and provided for. The
decision to close First Media with effect from 31 July 1998 was announced on 4
June 1998. The costs associated with the decision to close First Media were
accommodated by the existing provision.
During the year ended 31 March 1997, provisions for restructuring costs and the
costs of making modifications to computer systems to maintain existing
functionality into the year 2000 and beyond were charged against earnings.
Abnormal revenue
The liquidation of Telecom's executive share ownership plan (the "Executive
Plan") was completed in March 1999. The Trustee of the Executive Plan had
disposed of the 1.9 million unallocated shares held on trust and remitted the
net proceeds to Telecom as the residuary beneficiary. The net proceeds received
were $16 million.
6
<PAGE>
Telecom Corporation of New Zealand Limited and Subsidiaries
Notes to the Condensed Financial Statements
continued
NOTE 4 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.
Operating losses for 1997 amounted to $50 million and further losses
expected to arise from the sale or winding down of the businesses amounting
to $37 million were charged to the Statement of Financial Performance
during the year to 31 March 1997.
The winding down of Pacific Star operations progressed satisfactorily
resulting in a reduction in the provision for loss on disposal of Pacific
Star by $30 million at 31 March 1998. The process of winding down the
discontinued Pacific Star operations continued during this financial year.
NOTE 5 PROVISIONS - RESTRUCTURING AND YEAR 2000
<TABLE>
<CAPTION>
1998 1999
--------------------------------------------
(Dollars in millions) NZ$ NZ$
--------------------------------------------
<S> <C> <C> <C>
Current:
Restructuring provisions 34 34
Year 2000 provision 55 24
--------------
89 58
==============
Non-current:
Restructuring provisions 14 3
Year 2000 provision 17 -
--------------
31 3
==============
</TABLE>
NOTE 6 DIVIDENDS
Total dividends for the year ended 31 March 1999 were $806 million (31
March 1998: $756 million), representing four quarterly dividends of 11.5
cents per share. In addition, and in accordance with the Income Tax Act
1994, supplementary dividends totalling $78 million were paid with the
first three quarterly dividends to shareholders who were not resident in
New Zealand, for which Telecom will receive an equivalent tax credit from
the Inland Revenue Department. Supplementary dividends of $26 million have
been provided for which will be payable with the fourth quarter dividend.
NOTE 7 OTHER ASSETS
Included within Other Assets is goodwill (net of amortisations) of $58
million (31 March 1998: $48 million).
7
<PAGE>
Telecom Corporation of New Zealand Limited and Subsidiaries
Notes to the Condensed Financial Statements
continued
NOTE 8 COMMITMENTS
Operating Leases
Operating lease commitments are mainly in respect of leases of land,
buildings and other telecommunications facilities. At 31 March 1999,
minimum rental commitments for all non-cancellable operating leases
(excluding amounts provided for in respect of restructuring) were $293
million (31 March 1998: $319 million).
Finance Leases
Telecom has entered into the sale and leaseback of certain assets. At 31
March 1999, the outstanding lease commitments were $99 million (31 March
1998: $140 million).
Capital Commitments
At 31 March 1999, capital expenditure amounting to $55 million (31 March
1998: $52 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 and New Zealand with Hawaii and the West Coast of the United
States. In March 1998, Telecom signed a capacity use agreement committing
Telecom to purchase total capacity on Southern Cross of approximately
US$140 million. The first payment of approximately US$70 million is due on
the first ready-for-service date ("RFS") in mid 2000. The second payment of
approximately US$57 million is due on the first anniversary of RFS with the
balance payable over the following two years. No payments will be due if
RFS does not occur by 31 March 2001, extendable (in certain circumstances)
by a period of up to 18 months.
In addition, the Board of Directors has approved a 50% equity investment in
Southern Cross Cables Limited. Pursuant to this a shareholders advance of
US$43 million was provided to Southern Cross Cables Limited on 12 April
1999. Telecom is committed to advancing further funds to bring the total to
US$75 million by way of equity or further shareholder advances.
8
<PAGE>
Telecom Corporation of New Zealand Limited and Subsidiaries
Notes to the Condensed Financial Statements
continued
NOTE 9 CONTINGENT LIABILITIES
Lawsuits and Other Claims
In proceedings commenced in November 1996, Clear alleges 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.
On 27 February 1998, Telstra Corporation Limited and Pacific Star announced
that they had reached a commercial settlement of their dispute over
outstanding payments (which Telstra Corporation Limited alleged it was due
from Pacific Star) and cross claims (by Pacific Star, in relation to
Telstra Corporation Limited's billing practices). 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 seeks 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
counterclaim allege that both its 1991 and 1996 interconnection agreements
are invalid and unenforceable because the interconnection terms (including
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, and incorporates other
allegations previously raised in separate proceedings.
In February 1999, Thorndon Antiques issued proceedings against Telecom
seeking declarations concerning Telecom's upgrading of its national
payphone system. The Attorney-General has given relator consent to the
action proceeding in his name.
In May 1999, Telstra NZ Limited ("Telstra NZ") commenced proceedings
against Telecom alleging that Telecom's cessation of certain carrier
rebilling arrangements with Telstra NZ breaches the Commerce Act and other
obligations owed by Telecom to Telstra NZ. Telstra NZ also alleges that
aspects of its interconnection agreement with Telecom breach the Commerce
Act. Telstra NZ seeks injunctive relief together with 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.
9
<PAGE>
Telecom Corporation of New Zealand Limited and Subsidiaries
Notes to the Condensed Financial Statements
continued
NOTE 10 QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Surplus from
Surplus continuing Net earnings
Net abnormal from operations attributable Net
Operating revenue/ continuing before income Discontinued to earnings
revenues (expense) operations tax operations shareholders per share
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(NZ dollars in millions,
except per share
amounts) NZ$
- ------------------------------------------------------------------------------------------------------------------------------------
Quarter ended:
30 June 1998 826 - 325 300 - 190 0.109
30 September 1998 869 - 359 328 - 206 0.118
31 December 1998 859 - 354 325 - 202 0.115
31 March 1999 896 1 362 337 - 224 0.128
-------------------------------------------------------------------------------------------------------
Year ended 31 March 1999 3,450 1 1,400 1,290 - 822 0.469
=======================================================================================================
Quarter ended:
30 June 1997 800 - 310 280 - 188 0.103
30 September 1997 865 - 353 320 - 211 0.117
31 December 1997 858 - 341 305 - 199 0.113
31 March 1998 875 (37) 336 308 30 222 0.126
-------------------------------------------------------------------------------------------------------
Year ended 31 March 1998 3,398 (37) 1,340 1,213 30 820 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.
NOTE 11 SIGNIFICANT DIFFERENCES BETWEEN NEW ZEALAND AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRACTICE
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles ("GAAP") applicable in New Zealand
("NZ") which differs in certain significant respects from those applicable
in the United States ("US"). These differences and the effect of the
adjustments necessary to restate earnings and shareholders' funds, are
detailed below.
EFFECT ON NET EARNINGS OF DIFFERENCES BETWEEN NZ GAAP AND US GAAP
<TABLE>
<CAPTION>
1997 1998 1999
- --------------------------------------------------------------------------------
(Dollars in millions, except per share amounts) NZ$ NZ$ NZ$
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net earnings in accordance with NZ GAAP 581 820 822
Add: Discontinued operations 87 (30) -
-------------------------
668 790 822
US GAAP adjustments:
Depreciation of interest costs
capitalised in prior years (9) (9) (9)
Deferred taxation (45) 28 19
Executive share ownership plan - - (16)
Provision for restructuring 62 (62) -
Provision for Year 2000 86 (14) (48)
-------------------------
Net surplus from continuing operations in
accordance with US GAAP 762 733 768
Discontinued operations (87) 30 -
-------------------------
Net earnings in accordance with US GAAP 675 763 768
=========================
Basic earnings per share from continuing
operations in accordance with US GAAP $ 0.404 $0.410 $0.438
Basic earnings per share from discontinued
operations in accordance with US GAAP $(0.046) $0.017 -
-------------------------
Basic net earnings per share in accordance
with US GAAP $ 0.358 $0.427 $0.438
=========================
Diluted earnings per share from continuing
operations in accordance with US GAAP $ 0.404 $0.410 $0.439
=========================
</TABLE>
10
<PAGE>
Telecom Corporation of New Zealand Limited and Subsidiaries
Notes to the Condensed Financial Statements
continued
NOTE 11 SIGNIFICANT DIFFERENCES BETWEEN NEW ZEALAND AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRACTICE (continued)
CUMULATIVE EFFECT ON SHAREHOLDERS' FUNDS OF DIFFERENCES BETWEEN NZ GAAP
AND US GAAP
<TABLE>
<CAPTION>
1997 1998 1999
-------------------------------------------------------------
(Dollars in millions) NZ$ NZ$ NZ$
-------------------------------------------------------------
<S> <C> <C> <C>
Shareholders' funds in accordance with NZ GAAP 1,640 1,063 1,085
Capitalisation of interest costs, net
of accumulated depreciation 59 50 41
Deferred taxation (74) (46) (27)
Provision for dividend 193 140 202
Executive share ownership plan (6) (3) -
Provision for restructuring 63 - -
Provision for Year 2000 86 72 24
--------------------------------
Shareholders' funds in accordance with US GAAP 1,961 1,276 1,325
================================
</TABLE>
11
<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 1999 ("1999") were
NZ$822 million compared with NZ$820 million for the year ended 31 March 1998
("1998"). Reported earnings per share ("EPS") increased by 2.2% to NZ46.9
cents, compared with NZ45.9 cents in 1998.
Normalised earnings (reported earnings excluding the effect of abnormal items
and discontinued operations) were NZ$816 million compared with NZ$815 million
for 1998, an increase of NZ$1 million, or 0.1%. Normalised EPS increased by
2.2% to NZ46.6 cents, compared with NZ45.6 cents in 1998.
1998 normalised earnings increased by NZ$45 million, or 5.8%, compared with
NZ$770 million for the year ended 31 March 1997 ("1997").
<TABLE>
<CAPTION>
======================================================================
Earnings Overview
Years Ended 31 March
-----------------------------------------
Change Change
1997 1998 1999 % %
NZ$M NZ$M NZ$M 98:97 99:98
-----------------------------------------
<S> <C> <C> <C> <C> <C>
Operating revenues # 3,083 3,398 3,434 10.2 1.1
(before abnormals)
Net earnings (reported) 581 820 822 41.1 0.2
Abnormal revenue - - (16) - -
Abnormal expenses 102 25 10 - -
(after tax)
Discontinued operations 87 (30) - - -
---------------------------------------
Normalised earnings 770 815 816 5.8 0.1
---------------------------------------
Reported earnings per
share (cents) 30.8 45.9 46.9 49.0 2.2
Normalised earnings per 40.8 45.6 46.6 11.8 2.2
share (cents)
Dividends per share 39.0 43.0 46.0 10.3 7.0
(cents)
Weighted average number 1,887 1,786 1,752 - -
of shares outstanding
(millions)
# Excluding accounting changes (see "National") and allowing for
cellular revenue adjustments in 1997, growth was 8.2% for 1998.
======================================================================
</TABLE>
EPS growth is greater than net earnings growth because Telecom's share
repurchase programme, which was completed in December 1997, has reduced the
average number of shares on issue. The effect on EPS of the lower number of
issued shares is partly offset by additional funding costs of the shares
repurchased.
Telecom's result for 1999 was adversely affected by price declines in the face
of intense competition, particularly in the tolls market, and the weak New
Zealand economy.
Net cash flows from operating activities increased by NZ$37 million, or 2.4%,
from NZ$1,537 million in 1998 (see "Liquidity").
Dividends
Telecom has declared a fourth quarter dividend of NZ11.5 cents per ordinary
share. Total dividends for the year were NZ46 cents, compared with NZ43 cents
for 1998, an increase of 7%. Total dividends for the year represented 98.1% of
reported earnings for 1999.
<TABLE>
<CAPTION>
===============================================================
Dividends
<S> <C>
Q4 dividends
Ordinary shares NZ 11.5 cents
American Depositary Shares *US 49.13 cents
Supplementary dividend (to non-resident
shareholders)
Per ordinary share NZ 2.03 cents
Per American Depositary Share *US 8.67 cents
Books closing dates
NZ, Australia Stock Exchanges 4 June 1999
New York Stock Exchange 3 June 1999
Payment dates
NZ, Australia 16 June 1999
New York 23 June 1999
===============================================================
</TABLE>
* Based on an exchange rate at 31 March 1999 of NZ$1.00 to US$0.5340.
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%. Telecom currently intends
to maintain total dividends at not less than the same total cents per share
level of the preceding year.
-1-
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
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
impact of year 2000, the outcome of litigation pending between Telecom and
certain of its competitors, the impact of current or future government
regulation, technological change in the telecommunications industry, and the
state of the New Zealand economy.
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 New Zealand economy.
Production based Gross Domestic Product ("GDP") increased 0.7 percent in the
three months to 31 December 1998, the second successive quarter of economic
growth. However, GDP shrank 0.3 percent in the year to 31 December 1998 because
of two quarters of contraction from 1 January to 30 June 1998.
When releasing the latest economic growth figures, the New Zealand Government
("Government") Statistician said GDP growth had been lifted by both internal
demand and exports.
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 past
two decades, being supplemented by tourism, manufacturing and services. Further,
a lower exchange rate is resulting in increased tourism and exports to the
United States and Europe. Growth in export volumes continued for a second
consecutive quarter, rising 2.5 percent in the three months to 31 December 1998
and 1.3 percent in the year to 31 December 1998.
The balance of payments current account deficit for the year ended 31 December
1998 was NZ$5,909 million, or 6.0% of GDP, compared with a deficit of NZ$6,870
million, or 7.1% of GDP, for the year ended 31 December 1997.
Inflation measured by the Consumers' Price Index fell 0.3 percent in the March
1999 quarter. This was the second consecutive quarter of lower prices and
resulted in an annual inflation rate of negative 0.1 percent. The Government
Statistician said the quarterly fall reflected lower interest rates, housing and
transport costs.
Consensus forecasts are for a continued steady recovery from New Zealand's
current period of slow annualised GDP growth and for a gradual improvement in
the external current account deficit. Inflationary pressures are expected to be
constrained by significant spare capacity in the New Zealand economy.
COMPETITIVE FRAMEWORK
The Telecommunications Act 1987 allows the establishment and maintenance of
telecommunications networks by any person. There have been no statutory entry
barriers to any part of the New Zealand telecommunications industry since 1989,
with all telecommunications companies subject to ordinary commercial law (e.g.
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, Internet services and mobile trunked radio services. Telecom has
interconnection agreements with 12 other parties including large multi-national
corporations, or affiliates thereof, with substantial resources, including
Telstra Corporation Limited, British Telecom and Vodafone New Zealand
("Vodafone"). Nine of these interconnection agreements include local service.
Telecom also has eight number portability agreements enabling carriers to
provide customers with the option of changing carriers without changing numbers.
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. Several
Internet service providers based in New Zealand operate networks and offer
telecommunications services. Telecom also faces competition in leased-line
services, paging, directory publishing and supply, and installation and
maintenance
2
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
of customer premises equipment ("CPE"). 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.
The Government has recently reviewed telephone numbering issues and in December
1998 an agreement was reached between the Government and some industry
participants (including Telecom) for independent administration and allocation
of numbers. The final steps towards implementation of this agreement are now
being taken.
The Government is currently reviewing two areas that affect the
telecommunications industry. The New Zealand Ministry of Commerce has indicated
it will review regulations related to disclosure issues, focusing on disclosure
of costs involved in providing local access. The Government is also reviewing
the penalties regime under the Commerce Act. Telecom has made submissions as
part of both reviews.
LITIGATION
The Company is currently involved in a number of legal proceedings, including
lawsuits brought by and against Clear Communications ("Clear") relating to a
variety of issues, including 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. In addition, Telstra NZ Limited has
commenced proceedings against Telecom relating to Telecom's cessation of certain
carrier rebilling arrangements and the terms on which Telecom provides
interconnection.
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 Note 9 to the condensed financial statements.
OVERVIEW OF SURPLUS FROM CONTINUING OPERATIONS
The table on page 19 shows the major components of Telecom's operating revenues
and expenses for 1997, 1998 and 1999.
Surplus from continuing operations before abnormal items as a percentage of
revenue was 39.9%, 40.5% and 40.7% for 1997, 1998 and 1999, respectively.
Revenue Reclassifications
Telecom has enhanced its revenue reporting through reclassifications of certain
revenue items. Reclassified revenues are set out in the table on page 19. The
key changes are as follows:
. Local service revenue now includes revenue from connections, maintenance and
wiring (previously included as equipment revenue) and Smartphone, messaging
and call track revenues (previously included as enhanced network services
revenue).
. A new revenue category "Calling", comprising national, international and
other calling revenues (including PayPhones, 0900 and Teleconferencing), has
been established.
. Centrex and Virtual Private Networks ("VPN") call revenues (previously
included as enhanced network services revenue) are now included in local
calls (within local service) and national revenue respectively.
. A new revenue category "Data", including Internet access and broadcasting
revenues (previously included as miscellaneous other services revenue), has
been established. Data revenue also includes revenue from data transmission
services, dedicated leased lines and value-added services provided by Netway
and the use of Integrated Services Digital Networks ("ISDN") (all previously
included as enhanced network services revenue).
. Enhanced network services no longer exists as a separate revenue category
with much of this revenue now included as "Data", and the remaining enhanced
services (comprising Smartphone, messaging and call track) now in local
service.
Volumes and prior years' revenue have been restated for the revenue
reclassifications.
3
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Abnormal Items
<TABLE>
<CAPTION>
1997 1998 1999
NZ$M NZ$M NZ$M
- ------------------------------------------------------------------
<S> <C> <C> <C>
Abnormal costs
Restructuring costs 65 - 15
Reorganisation of First Media
Limited - 37 -
Year 2000 modification costs 87 - -
----------------------------------
152 37 15
==================================
Abnormal Revenue
Liquidation of executive share
ownership plan - - 16
==================================
</TABLE>
Restructuring
During 1999, Telecom announced it had reached an agreement with specialist call
centre operator SITEL Asia Pacific to contract out the provision of operator
services. Operator services manages directory assistance, operator assistance
and audio conferencing calls as well as passing 111 calls to emergency services.
The decision to outsource operator services resulted in approximately 560
redundancies (total severance costs of NZ$15 million) at the Auckland,
Palmerston North and Christchurch call centres. Of the NZ$15 million, NZ$7
million is still to be paid.
Restructuring costs of NZ$65 million aimed at substantially reducing Telecom's
operating costs and the strategic restructuring of ConnecTel, formerly the
Design, Build and Maintenance division, were identified and provided against
earnings for the year ended 31 March 1997.
Redundancy and other restructuring costs of NZ$11 million and NZ$33 million
incurred during 1999 and 1998 respectively have been charged against the
restructuring provision.
Reorganisation of First Media Limited ("First Media")
The estimated costs (NZ$37 million) associated with the termination of the
residential hybrid fibre/coax cable roll-out and the reorganisation of First
Media were identified and provided for at 31 March 1998.
The decision to close First Media with effect from 31 July 1998 was announced on
4 June 1998. The costs associated with this decision were accommodated by the
existing provision.
Liquidation of the Executive Share Ownership Plan
Liquidation of Telecom's executive share ownership plan was completed in March
1999. The Trustee of the plan had disposed of the 1.9 million unallocated shares
on trust and remitted the net proceeds to Telecom as the residuary beneficiary.
The net proceeds received were NZ$16 million.
Telecom continues to operate an executive share option scheme whereby certain
key executives are granted a number of options to purchase ordinary shares in
the Company.
Operating Revenues (Before Abnormals)
<TABLE>
<CAPTION>
Variation -- Increase NZ$ millions %
- -------------------------------------------------------------
<S> <C> <C>
1999:1998 36 1.1
1998:1997 315 10.2
- -------------------------------------------------------------
</TABLE>
Revenue growth for 1999 was driven largely by growth in cellular connections,
access lines, data and Internet revenue. Growth in national and international
call volumes did not fully offset large price reductions, resulting in a decline
in national and international revenues.
Excluding the effect of the change in accounting for calls from Telecom's fixed
line network to BellSouth's (now Vodafone's) cellular network in 1998 (see
"National") and cellular revenue adjustments in 1997 (see "Cellular and Other
Mobile Services"), revenue would have increased in 1998 by NZ$255 million, or
8.2%.
Revenue growth for 1998 was driven largely by growth in access lines and call
volumes and increased usage of data and cellular services.
4
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Volume Growth
<TABLE>
<CAPTION>
As at and for the year ended Change Change
31 March % %
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 1998 1999 98:97 99:98
--------------------------------------------------
Access Lines 1,782,000 1,840,000 1,868,000 3.3 1.5
Centrex 48,800 65,800 74,600 34.8 13.4
lines
ISDN lines 18,000 28,400 43,500 57.8 53.2
Call minutes (millions)
Local calls* 2,858.3 3,088.6 3,177.7 8.1 2.9
National
calls # 1,901.8 1,966.2 2,018.2 3.4 2.6
Fixed line
to cellular
calls** 313.1 356.5 404.8 13.9 13.5
National 0800
calls 357.4 453.4 526.7 26.9 16.2
International
outward calls 265.6 304.0 439.4 14.5 44.5
International
inward calls 279.2 322.1 333.0 15.4 3.4
Cellular calls 508.7 614.0 744.0 20.7 21.2
Cellular connections
Total at end
year 422,800 476,200 608,900 12.6 27.9
Average during 382,370 453,720 529,440 18.7 16.7
the year
Call minder
mailboxes 180,200 228,700 269,900 26.9 18.0
Registered XTRA
customers 46,300 107,000 180,300 131.1 68.5
* Includes business local calls, residential calls under the
NZ20 cents local calling option and Centrex and VPN local calls.
# Includes Centrex and VPN national calls. Excludes calls
from Telecom's fixed line to cellular network.
**Includes calls to Vodafone's cellular network.
Certain reclassifications of prior years' data have been made
to conform to current year classifications.
==================================================================
</TABLE>
Local Service
Local service revenues consist of business and residential access, local call
charges (predominantly paid by business customers) including Centrex and VPN,
and enhanced network services products (Smartphone, messaging and call track).
<TABLE>
<CAPTION>
- -----------------------------------------------------------
Variation -- Increase NZ$ millions %
- -----------------------------------------------------------
<S> <C> <C>
1999:1998 34 3.3
1998:1997 66 6.9
- -----------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C>
- -------------------------------------------------------------
Local Service Growth Change % Change %
98:97 99:98
- -------------------------------------------------------------
Business & residential access
- Revenue 4.7 0.5
- Access lines 3.3 1.5
Local calls
- Revenue 16.4 18.0
- Call minutes 8.1 2.9
- -------------------------------------------------------------
</TABLE>
Business and residential access revenue for 1999 increased by NZ$4 million, or
0.5%, which reflected an increase in access lines, partially offset by the net
effect of pricing changes.
Local service revenue and access line growth have been affected by the entry of
Saturn Communications into the local service market and increased use of
cellular phones.
[GRAPH GOES HERE]
Pricing changes that have affected the year on year comparisons include:
. Increases in residential line rental of 2.9% and 1.9% which took effect from
1 August 1997 and 1 October 1998 respectively, consistent with the provisions
of the Kiwi Share.
. The option, since August 1997, for residential customers 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 31 March 1999, approximately
67,000 residential customers had switched to the new pricing option.
. Operator services charges introduced in December 1997 for residential
customers. The monthly residential line rental was reduced by NZ$1.25 to
NZ$35.66 at the same time.
. A reduction in business line rentals of 3.3% in December 1997 in conjunction
with an increase in business local call prices.
. A reduction in the monthly rental for new second line connections by NZ$5.71
to NZ$29.95 from 1 July 1998.
1998 business and residential access revenue increased NZ$38 million, or 4.7%,
as a result of growth in customer access lines partially offset by the net
effect of pricing changes.
Revenue from local calls increased by NZ$20 million, or 18.0%, for 1999 due to
growth in call volumes and the full year effect of the price increase for
business local
5
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
calls, which took place in December 1997. Revenue from local calls increased by
NZ$15 million, or 16.4% for 1998 due to growth in call volumes and the effect in
the last quarter of the price increase for business local calls from December
1997.
Revenue from Smartphone, messaging and call track increased by NZ$10 million, or
16.7%, for 1999 and increased by NZ$13 million, or 29.8%, for 1998.
National
National revenue includes calls to a location outside the caller's local calling
area including Centrex and VPN, calls to the cellular network originating within
the fixed line network, National 0800 calls and operator services charges.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Variation - Increase/(decrease) NZ$ millions %
- --------------------------------------------------------------------------------
<S> <C> <C>
1999:1998 (27) (3.7)
1998:1997 71 10.8
- --------------------------------------------------------------------------------
</TABLE>
The decrease for 1999 was largely due 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 and the migration of
calls into Telecom's cellular network. The effect of national toll price
reductions was partially offset by increased revenue from calls from the fixed
line to the cellular network and National 0800.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
National Growth Change % Change %
98:97 99:98
- --------------------------------------------------------------------------------
<S> <C> <C>
National calls*
- Revenue - (11.9)
- Call minutes 3.4 2.6
Calls to cellular networks**
- Revenue 40.8# 10.9
- Call minutes 13.9 13.5
National 0800
- Revenue 21.2 5.7
- Call minutes 26.9 16.2
- --------------------------------------------------------------------------------
</TABLE>
# Excluding the effect of a change in accounting for calls to BellSouth's
cellular network in 1998, growth for 1998 was 4.8%.
* Includes national VPN and Centrex calls.
** Includes calls to Vodafone's cellular network.
- --------------------------------------------------------------------------------
Compared with last year, the annual average per minute price of national calls,
excluding National 0800 and those made to cellular networks, declined by
approximately 14% to around NZ18 cents. During 1998, the average price declined
by approximately 3%.
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 August 1998, business national toll prices were reduced on average by 16%
for both peak and off peak calling on key routes.
Two new calling packages (HomeFree 200 and HomeFree 400) were launched in
December 1998 for residential customers in seven geographic areas. These
packages combine a low access charge, either 200 or 400 peak/off-peak free
minutes and a low flat rate (NZ15 cents per minute) for all local and national
calls once the free minutes have been used.
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 31 March 1999,
approximately 34,000 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 653,000
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 599,000 customers.
Revenue from calls to cellular networks grew by 10.9% in 1999, with a high
proportion of this growth in the last quarter of 1999. Strong growth in the last
quarter reflects the significant increase in cellular connections during the
last four months of 1999.
National revenue for 1998 included the effect of a change in accounting for
calls from Telecom's fixed line network to BellSouth's (now Vodafone'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 revenue,
with the termination payment included in cost of sales.
6
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Previously, national revenue included this revenue net of payments to BellSouth.
Excluding the effect of this change, national revenue for 1998 increased by
NZ$23 million, or 3.5%.
International
International revenue includes outgoing international calls made in New Zealand,
collect, credit card and "New Zealand Direct" calls to New Zealand, receipts
from overseas telecommunications administrations and companies for calls to New
Zealand that use Telecom's facilities, and calls from international switched
traffic transiting Telecom's facilities.
<TABLE>
<CAPTION>
- -------------------------------------------------------------
Variation - Increase/(decrease) NZ$ millions %
- -------------------------------------------------------------
<S> <C> <C>
1999:1998 (52) (11.2)
1998:1997 9 2.0
- -------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------
International Growth Change % Change %
98:97 99:98
- ------------------------------------------------------------
<S> <C> <C>
Outward calls
- Revenue (3.0) (24.0)
- Call minutes 14.5 44.5
Inward calls
- Revenue (4.4) 7.0
- Call minutes 15.4 3.4
Transit call margin
- Margin 128.1 31.3
- Call minutes 200.0 50.1
- ------------------------------------------------------------
</TABLE>
Growth in outward call minutes reflected the volume stimulation from price
specials offered to New Zealand customers and significant price reductions over
the past year. The annual average per minute charge for outward calls of around
NZ52 cents was approximately 47% lower than in 1998, reflecting price reductions
and frequent weekend specials.
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. Further significant price reductions reducing the average price
of outward international tolls by 20% were announced in July 1998.
During May and June 1998 Telecom offered "talk for as long as you like"
residential promotions of NZ$10 to Australia and NZ$15 to UK, US, Canada and
Ireland. This offer has been extended to the end of calendar 1999. For the last
weekend in November 1998, four weekends in December 1998 and three weekends in
March 1999, the rates were reduced further to NZ$4.99 to Australia and NZ$9.99
to UK, US, Canada and Ireland.
Growth in inward call revenue for 1999 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 3.5% for 1999 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 1999
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;
. The weakening of the New Zealand dollar which increases the New Zealand
dollar equivalent of the foreign margin; and
. Increased revenue from transit calls for information services.
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 has recently commissioned
its own switch in the US and continues to expand 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.
In 1998 decreases in outward and inward call revenue were more than offset by an
increase in net revenue from transit services.
7
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The rate of growth in outward call minutes reflected market growth and volume
stimulation from price specials offered to New Zealand customers and
significant price reductions which took place in the fourth quarter of 1998.
Outward call revenue and volumes were affected by competitive pressures,
including increased activity by new players, and the slow-down in the domestic
economy.
The average per minute charge in 1998 for inward calls decreased by
approximately 17% compared with 1997, reflecting significant reductions in call
rates agreed with foreign carriers partly offset by the effect of the weakening
New Zealand dollar.
The increase in net revenue earned from transit services in 1998 was largely
attributable to strong growth in calls from international switched traffic
transiting Telecom's facilities and the effective management of the outpayment
through use of lower cost routing options.
Other Calling
Other calling revenue is derived principally from Payphones, National 0900,
Teleconference and analogue and dedicated digital voice service.
<TABLE>
<CAPTION>
- -------------------------------------------------------------
Variation - Decrease NZ$ millions %
- -------------------------------------------------------------
<S> <C> <C>
1999:1998 (8) (13.3)
1998:1997 (3) (4.8)
- -------------------------------------------------------------
</TABLE>
The decreases for 1999 and 1998 were due largely to a reduction in Payphone
revenue as the use of cellular phones increases.
Interconnect
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.
<TABLE>
<CAPTION>
- ------------------------------------------------------------
Variation - Increase NZ$ millions %
- ------------------------------------------------------------
<S> <C> <C>
1999:1998 15 21.1
1998:1997 5 7.6
- ------------------------------------------------------------
</TABLE>
The increase for 1999 is largely due to new interconnect carriers (eg. Compass
Communications and WorldxChange) and increased activity with existing carriers,
partly offset by reductions in the average charge per call.
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 NZ$ millions %
- ------------------------------------------------------------
<S> <C> <C>
1999:1998 56 13.2
1998:1997 108 34.2
- ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------
Cellular Growth Change % Change %
98:97 99:98
- -------------------------------------------------------------
<S> <C> <C>
Revenue 37.4 * 14.6
Call minutes 20.7 21.2
Connections
Total at period end 12.6 27.9
Average during the period 18.7 16.7
* Allowing for revenue adjustments in 1997, growth would
have been 31.8% for 1998.
- -------------------------------------------------------------
</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 had 608,900 cellular connections at 31 March 1999 compared with 476,200
at 31 March 1998, an increase of 27.9%. The continued strong growth in
connections is largely due to the introduction of prepaid cellular (including
the Freedom connections sold through The Warehouse), and the "Telecom 2 GO"
promotion. The total number of active prepaid customers (including Freedom
connections) at 31 March 1999 was 112,700. Approximately 46% of total
connections are connected to the Telecom 2 GO rate plans (excluding GO Prepaid
connections).
8
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
[GRAPH GOES HERE]
Average revenue per customer decreased by approximately 2% compared to last
year, reflecting the recent high number of prepaid connections. Average revenue
per prepaid connection is initially lower as customers utilise their free
airtime minutes. Average revenue per customer in 1998 increased by approximately
16% compared to 1997.
The total number of cellular connections in New Zealand, including Vodafone's
connections, is currently estimated to represent approximately 21% of the New
Zealand population. This penetration level, when compared with other relevant
countries, suggests scope for continued expansion of this market.
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 (now
Vodafone). 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.
As a result of a 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$12 million.
Excluding these adjustments, the increase in cellular and other mobile services
revenue would have been 29.3% for 1998. The increase includes the impact of the
acquisition of Motorola's and Ericsson's cellular reselling businesses in June
and October 1997 respectively.
Data
Data revenue consists principally of revenue from data transmission services,
dedicated leased lines and Internet access.
<TABLE>
<CAPTION>
- ------------------------------------------------------------
Variation - Increase NZ$ millions %
- ------------------------------------------------------------
<S> <C> <C>
1999:1998 41 13.9
1998:1997 39 15.2
- ------------------------------------------------------------
</TABLE>
Data revenue growth for 1999 is driven by demand for bandwidth to support
business networking and the increased penetration of the Internet.
Telecom's Internet service provider "XTRA" had approximately 180,300 registered
customers at 31 March 1999, compared with 107,000 at 31 March 1998. Of the
registered customers, 81% were active within the last month of 1999.
ISDN revenues increased by 37.4% for 1999 partly reflecting migration from basic
access services. The number of ISDN lines increased by 53.2%.
The increase in data revenue for 1998 was largely due to growth in XTRA.
Registered customers increased 131% from 46,300 at 31 March 1997. ISDN revenue
and lines increased by 63.9% and 57.8% respectively in 1998.
In February 1999 Telecom introduced a series of data pricing initiatives aimed
at stimulating data growth by making greater bandwidth more affordable. The
initiatives, which have been targeted at key corporate and business data users,
aim to simplify the data pricing structure, by reducing the number of distance
steps, and make wide-area networking more affordable.
Directories
Directories revenue is derived largely from local advertising by businesses in
both The Telephone Book and YELLOW PAGES(R) directories and various database
services.
<TABLE>
<CAPTION>
- ------------------------------------------------------------
Variation Increase NZ$ millions %
- ------------------------------------------------------------
<S> <C> <C>
1999:1998 13 8.8
1998:1997 11 8.1
- ------------------------------------------------------------
</TABLE>
9
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Revenue from regional directories increased by 8.5% in 1999 as a result of both
tariff and volume growth in both The Telephone Book and YELLOW PAGES/R/
products. Revenues from specialised and LOCAL DIRECTORIES/TM/ increased by
19.3%.
In 1998, revenue from regional directories increased by 7.3%, and from
specialised and LOCAL DIRECTORIES/TM/ by 50.8%.
Equipment Revenue
Equipment revenue includes equipment sales and installation, and CPE rental.
<TABLE>
<CAPTION>
- -------------------------------------------------------------
Variation - Decrease NZ$ millions %
- -------------------------------------------------------------
<S> <C> <C>
1999:1998 (35) (24.3)
1998:1997 (13) (8.3)
- -------------------------------------------------------------
</TABLE>
The decreases for 1999 and 1998 reflected lower CPE rental and the outsourcing
of cellular equipment sales in November 1997.
Miscellaneous Other Services
Miscellaneous other services revenue is derived principally from an
international outside plant project and software development.
<TABLE>
<CAPTION>
- --------------------------------------------------------------
Variation - Increase/(decrease) NZ$ millions %
- --------------------------------------------------------------
<S> <C> <C>
1999:1998 (1) (2.6)
1998:1997 22 129.4
- --------------------------------------------------------------
</TABLE>
The reduction in revenue from the winding down of the international outside
plant project in the 1999 year was largely offset by a one-off receipt from
Ameritech to cover costs incurred by Telecom in the sale by Ameritech of its
Telecom shareholding, completed in April 1998.
The increase in revenue for 1998 was due principally to revenue from the
international outside plant project.
Operating Expenses (Before Abnormals)
<TABLE>
<CAPTION>
Variation - Increase NZ$ millions %
- ------------------------------------------------------------
<S> <C> <C>
1999:1998 14 0.7
1998:1997 169 9.1
- ------------------------------------------------------------
</TABLE>
Operating expenses (excluding abnormal costs) for 1999 remained relatively
stable. An increase in cost of sales was largely offset by reductions in other
cost lines.
The increase in 1998 reflected volume growth in Telecom's various markets.
Operating expenses excluding abnormal costs as a percentage of revenue were
60.1%, 59.5% and 59.3% for 1997, 1998 and 1999, respectively.
Personnel Costs
Gross Personnel Costs
<TABLE>
<CAPTION>
Variation - Increase/(decrease) NZ$ millions %
- --------------------------------------------------------------
<S> <C> <C>
1999:1998 (19) (3.5)
1998:1997 17 3.3
- --------------------------------------------------------------
</TABLE>
The decrease in gross personnel costs for 1999 reflected a reduction of 337 in
personnel numbers between 31 March 1998 and 1999.
The effect of this decrease on gross personnel costs was partly offset by
increases arising from the following factors:
. Salary increases for personnel on individual contracts;
. Negotiated settlements for personnel covered by collective contracts; and
. The acquisition of Motorola's, Ericsson's and Cellnet's cellular reselling
businesses, and the associated staff increases.
<TABLE>
<CAPTION>
Personnel Numbers
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Decrease 99:98
----------------------------------------------------------------
1997 1998 1999 Number %
----------------------------------------------------------------
Operations 6,882 6,551 6,289 (262) (4.0)
Other 1,828 1,585 1,510 (75) (4.7)
----------------------------------------------------------------
8,710 8,136 7,799 (337) (4.1)
----------------------------------------------------------------
</TABLE>
Net personnel costs in 1999, after capitalisation and other labour recoveries,
decreased by NZ$25 million, or 6.5%.
10
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Labour capitalised, which is the reallocation of personnel costs incurred in
capital projects to fixed assets, remained relatively stable.
Other labour recoveries, which 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 increased by NZ$9
million, or 7.9%.
Access lines per operations employee, have increased from 259 to 281 and 297 at
31 March 1997, 1998 and 1999 respectively.
The increase in gross personnel costs in 1998 reflected:
. Salary increases for personnel on individual contracts;
. Negotiated settlements for personnel covered by collective contracts; and
. The acquisition of Motorola's and Ericsson's cellular reselling businesses,
and the associated staff increases.
The increases were partly offset by lower staff numbers.
Depreciation
<TABLE>
<CAPTION>
- ------------------------------------------------------------
Variation - Increase/(decrease) NZ$ millions %
- -------------------------------------------------------------
<S> <C> <C>
1999:1998 (11) (2.0)
1998:1997 20 3.7
- -------------------------------------------------------------
</TABLE>
The decrease in depreciation expense for 1999 was largely due to high
depreciation in 1998 following a fixed asset review which identified a number of
under-depreciated assets.
This decrease was partially offset by the impact of 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.
Excluding a one-off charge in 1997 for a change in useful lives of certain
information technology and network assets, 1998 depreciation expense increased
by NZ$34 million, or 6.4%.
Cost of Sales
Cost of sales are costs directly attributable to revenue earned from
international outward calls and leased circuits, product sales and
installations, cellular services, directories and miscellaneous other services.
<TABLE>
<CAPTION>
- ------------------------------------------------------------
Variation - Increase NZ$ millions %
- ------------------------------------------------------------
<S> <C> <C>
1999:1998 60 11.7
1998:1997 110 27.2
- ------------------------------------------------------------
</TABLE>
The increase for 1999 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 23.3% for 1999,
primarily due to significantly higher outbound minutes. International outward
minutes increased by 44.5% reflecting the volume stimulation created by price
specials offered to New Zealand customers.
The proportionally lower increase in international cost of sales (relative to
the increase in outward minutes) reflects the negotiation of favourable
outpayment terms for the short period of price specials, partially offset by the
effect of the weakening New Zealand dollar.
As stated under "National", cost of sales for 1998 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 16.2%
in 1998.
The increase was largely due to growth in the cellular business, including the
acquisition of Motorola's and Ericsson's cellular reselling businesses, costs
related to an international outside plant project, higher equipment cost of
sales and the cost of new international leased circuit services which are
largely related to growth in Internet access.
11
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Maintenance
<TABLE>
<CAPTION>
- ---------------------------------------------------------
Variation - Decrease NZ$ millions %
- ---------------------------------------------------------
<S> <C> <C>
1999:1998 (5) (2.9)
1998:1997 (30) (14.9)
- ---------------------------------------------------------
</TABLE>
This decrease for 1999 reflected the following:
. Improved prices from external contractors;
. A significant increase in efficiency; and
. Significant sub-contractor costs incurred in the first quarter of 1998 as a
result of industrial disputes involving ConnecTel personnel.
The decrease in maintenance costs for 1998 also reflected improved prices from
external contractors, a significant increase in efficiency and productivity, and
a change in the treatment of unproductive time which was previously re-allocated
as labour recovered to maintenance and is now reflected in net personnel costs.
Other Operating Expenses
Other operating expenses include occupancy, advertising, computer costs, bad
debts, vehicle costs, 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>
1999:1998 (5) (1.3)
1998:1997 33 9.3
- --------------------------------------------------------
</TABLE>
The decrease in other operating expenses for 1999 was largely due to lower bad
debts and legal expenses. The reduction in legal expenses was due to an
allowance for certain litigation costs which increased expenses in the first
half of 1998.
This decrease was partially offset by increased outsourcing expenses and a lower
level of overhead recoveries relating to capital and maintenance work.
The increase in other operating expenses for 1998 was largely due to the
allowance for litigation costs in the first half of 1998 and a lower level of
overhead recoveries relating to capital and maintenance work.
Net Interest Expense
<TABLE>
<CAPTION>
- ---------------------------------------------------------
Variation - Increase/(decrease) NZ$ millions %
- ---------------------------------------------------------
1999:1998
<S> <C> <C>
Interest expense 4 2.6
Investment income 21 75.0
--------------------------
Net interest expense (17) (13.4)
--------------------------
1998:1997
Interest expense 29 23.0
Investment income 1 3.7
--------------------------
Net interest expense 28 28.3
- ---------------------------------------------------------
</TABLE>
The decrease in net interest expense for 1999 was largely due to a lower average
level of net debt this year compared to last year. Average debt was higher in
1998 as short-term debt was used to fund the share repurchase programme for
parts of the year prior to the issue of capital notes and restricted capital
securities.
The hedging costs related to the US capital notes have been reclassified from
interest expense to capital note distribution costs.
The surplus from continuing operations before abnormals covered net interest
(after investment income but before interest capitalised) and capital note costs
6.9 times, compared with 7.6 times in 1998 and 10.9 times in 1997.
Taxation
<TABLE>
<CAPTION>
- ---------------------------------------------------------
Variation - Increase NZ$ millions %
- ---------------------------------------------------------
<S> <C> <C>
1999:1998 14 3.5
1998:1997 86 27.7
- ---------------------------------------------------------
</TABLE>
The increase in income tax expense for 1999 was largely due to the NZ$77
million, or 6.3%, increase in the surplus from continuing operations before
income tax. The effective tax rate was 31.9% compared with 32.7% for 1998, 31.7%
for 1997 and a statutory rate of 33%.
Income tax expense for 1998 increased due to higher before tax earnings which
included the impact of lower abnormal costs.
A periodic review by the Inland Revenue Department is in progress, the likely
outcome of which is not known.
12
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
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$1,574 million for 1999, an
increase of NZ$37 million, due principally to higher receipts from customers
partly offset by higher payments to suppliers and employees, interest and tax.
Cash flows from operating activities were NZ$1,537 million in 1998 and NZ$1,419
million in 1997.
Cash Flows from Investing Activities
Net cash flows used in investing activities amounted to NZ$778 million, compared
with NZ$985 million in 1998 and NZ$667 million in 1997. The decrease in 1999 was
due principally to a decrease in cash applied to the purchase of investments.
Cash Flows from Financing Activities
Net cash flows used in financing activities were NZ$796 million, compared with
NZ$553 million in 1998 and NZ$746 million in 1997. The increase in 1999 was due
to an increase in cash applied to dividends and capital note distribution costs,
and lower than usual cash outflows in 1998, due to the proceeds from the issue
of capital notes which more than offset cash used for the share repurchase
programme in 1998.
Telecom has declared a fully imputed fourth quarter dividend for 1999 of NZ11.5
cents per share, a total of NZ$202 million, to be paid in June 1999.
A supplementary fourth quarter dividend of NZ$26 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$694 million at 31 March 1999,
an increase of NZ$251 million. The increase is due to Telecom's recapitalising a
subsidiary company that has a retained earnings deficit. These funds have been
invested by the subsidiary to generate investment income. Telecom has available
unutilised committed facilities of NZ$20 million and US$150 million, as well as
other substantial uncommitted borrowing capacity.
Debt
Total interest-bearing long-term and short-term liabilities amounted to NZ$2,251
million, compared with NZ$2,039 million at 31 March 1998.
Net debt amounted to NZ$1,531 million at 31 March 1999, compared with NZ$1,554
million at 31 March 1998. The net debt to net debt plus capital funds ratio was
42.9% at 31 March 1999, compared with 43.6% at 31 March 1998. 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$26 million at 31 March 1999 (NZ$42 million
at 31 March 1998). Capital funds include shareholders' funds, capital notes
(TeleNotes and Restricted Capital Securities) and minority interests.
The estimated fair value of Telecom's long-term debt at 31 March 1999 was
NZ$1,389 million compared with its carrying amount of NZ$1,289 million (stated
inclusive of the effect of hedging transactions). The estimated fair value of
long-term debt at 31 March 1998 was NZ$1,461 million, compared with its carrying
amount of NZ$1,464 million. The fair values are based on Telecom's fixed rates
of interest on debt in comparison to the prevailing market rates in effect at 31
March 1999 and 1998 for instruments of a similar maturity.
TeleNotes and Restricted Capital Securities
TCNZ Finance Limited ("the Issuer"), Telecom's main financing subsidiary, issued
during 1998 capital notes known as "TeleNotes".
13
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
TeleNotes are an unsecured subordinated issue which pay a fixed coupon rate to
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.
Telecom New Zealand Finance Limited ("TNZFL"), another Telecom financing
subsidiary, issued in February 1998 US$300 million worth of Restricted Capital
Securities ("Capital Securities") to United States based institutional
investors. Such securities are similar to TeleNotes. 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 cross currency interest rate swaps
to remove the exposure to exchange rate fluctuations that would otherwise result
from the issue of the Capital Securities. On the redemption dates of 2003 and
2008, also referred to as election dates, holders may elect to retain some or
all of their Capital Securities for a further period on terms specified by TNZFL
or require redemption. TNZFL has the option to redeem the Capital Securities
including any unpaid interest for cash and/or by procuring the issue of American
Depositary Receipts representing ordinary shares of Telecom (valued at 90% of
the-then current market value) to the holders of the Capital Securities.
Market Risk
Telecom is exposed to market risks primarily from changes in interest rates and
foreign currency exchange rates. Telecom employs risk management strategies
including the use of derivatives such as interest rate swaps, interest rate
options, foreign currency forwards, foreign currency swaps and cross currency
interest rate swaps to manage these exposures. Any gains or losses on these
hedging financial instruments are generally offset 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. Telecom does not hold or issue
derivative financial instruments for trading purposes.
The analysis below presents the hypothetical changes in fair values related to
the financial instruments held as at 31 March 1999, which are subject to these
market risks.
Interest Rate Risk Management
The objectives of interest rate risk management are to minimise the cost of net
borrowings and to minimise the impact of interest rate movements on Telecom's
interest expense/net earnings.
As at 31 March 1999, Telecom had hedged approximately NZ$60 million of projected
short-term debt through the use of an interest rate swap and forward rate
agreement. Interest rate swaps have also been used to convert Telecom's floating
rate obligations on term funding into fixed rate obligations.
As at 31 March 1999, the fair value of long-term debt, capital notes and
interest rate derivatives was approximately NZ$2.4 billion. The aggregate
hypothetical fair value of these financial instruments, assuming a 100-basis-
point upward shift in the yield curve, is estimated to be NZ$2.3 billion. The
aggregate hypothetical fair value of these financial instruments, assuming a
100-basis-point downward parallel shift in the yield curve, is estimated to be
NZ$2.5 billion.
Foreign Exchange Risk Management
The objective in managing foreign exchange risk is to protect against 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 foreign currency exchange rates.
As at 31 March 1999, Telecom had used cross currency interest rate swaps with a
contract value of NZ$413 million to hedge long-term debt denominated in US
dollars and Swiss francs. Such swaps were also used to hedge the issue of NZ$512
million equivalent of US denominated Restricted Capital Securities. Telecom has
also used foreign currency swaps and foreign exchange forwards with contract
values of NZ$1,430 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 1999
is not significant.
14
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
The aggregate hypothetical change in the fair value of Telecom's foreign
currency contracts from a 10% increase or a 10% decrease in the value of the NZ
dollar against the various currencies to which Telecom is exposed to at 31 March
1999 was not material.
Capital Expenditure
Capital expenditure amounted to NZ$564 million, a decrease of NZ$23 million, or
3.9%, compared to 1998, where capital expenditure decreased NZ$108 million, or
15.5%, compared to 1997. Cash applied to capital expenditure amounted to NZ$554
million, a decrease of NZ$5 million, or 0.9%.
Approximately 65% of 1999 capital expenditure was 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 was incurred in enhancing network capability to accommodate the
increasing demand for data services, and in the development of new products and
services.
Telecom currently expects to spend approximately NZ$150 million on capital
equipment in the 3 months to 30 June 1999 and approximately NZ$600 million in
the 12 months to 30 June 2000. This excludes any purchase of capacity from
Southern Cross Cables Limited and any potential acquisition of spectrum that may
be available to purchase from the Government.
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, its suppliers 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 high speed 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 now launching Rate-Adaptive Asymmetric
Digital Subscriber Line (R-ADSL) technology to residential and business
customers. R-ADSL can be used to deliver fast data and voice using existing
copper wiring. The use of R-ADSL will be progressively expanded within Telecom's
network but this technology has distance limitations. 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 and R-ADSL will not be
deployed to all customers.
Year 2000 Costs
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 operate.
Telecom's Year 2000 ("Y2K") programme is a top priority of the company and
Telecom 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.
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,
including mitigation of Telecom-wide Y2K risks. The business unit group general
managers and equivalent positions are accountable for the completion of all Y2K
remedial, maintenance and business continuity 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,
15
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
network infrastructure, financial structure and support services, building
security and supplies, supplier Y2K status, availability of staff, customer
communications and a review of existing business continuity plans.
The Information Systems ("IS") remediation phase of the Telecom Y2K programme
was substantially completed in December 1998 with a large number of systems and
changes having already been successfully Y2K tested and back in production. The
testing of the network infrastructure is well advanced, with the majority of
this work completed by March 1999. A small number of network suppliers are still
to deliver compliant components.
Processes are being developed and implemented to ensure that Telecom's ongoing
strategic and discretionary programmes protect the Y2K readiness status already
achieved for many components. Concurrently Telecom is focussed on its
relationships with third parties and their ability to continue in business into
the year 2000. This work will continue up to and beyond 1 January 2000 to ensure
that firstly, any potential impact on Telecom customers (resulting from third
party relationships) is avoided or where appropriate the effect is minimised to
the lowest possible level.
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.
Dress rehearsals for Y2K business continuity scenarios have already commenced in
Telecom with several more planned throughout the year.
Ongoing Y2K IS status management, third party relationships and business
continuity planning initiatives will continue beyond 1 January 2000. Telecom
also maintains regular internal management reviews and has engaged the services
of external Y2K quality assurance reviewers to provide independent advice on
Telecom's progress and state of preparedness for the year 2000.
A provision of NZ$87 million was established at 31 March 1997 to cover the
operational costs of the Y2K programme. A further NZ$20 million was budgeted for
capital expenditure. Costs of NZ$14 million incurred in the year to 31 March
1998, together with costs of NZ$48 million incurred in the year to 31 March
1999, have been charged to the provision. To 31 March 1999 the Company had
incurred NZ$12 million of capital expenditure in connection with this issue.
There can be no assurance that Telecom's established provisions will be
sufficient to cover all Y2K expenditure that may be incurred.
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
During 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. SCCL will build,
own, operate and maintain the network as well as market capacity on the cable.
Telecom, Cable & Wireless Optus and MCI WorldCom are the shareholders in SCCL
with Telecom holding a 50% equity stake in the Company. Telecom's Board of
Directors has approved a US$75 million investment in SCCL. Pursuant to this a
shareholders advance of US$43 million was provided to SCCL on 12 April 1999.
Telecom is committed to advancing further funds to bring the total to US$75
million by way of equity or further shareholder advances.
The Southern Cross Cable 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, 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 in the middle of
calendar 2000. The second phase routing the cable back to Australia via Fiji is
due for completion late in 2000.
16
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
US GAAP RECONCILIATION
The consolidated financial statements are prepared in accordance with NZ
generally accepted accounting practice ("GAAP"), which differ in certain
significant respects from US GAAP. These differences, and the effect of the
adjustments necessary to restate net earnings and shareholders' funds, are
detailed in Note 11 to the condensed financial statements.
As a result of these differences, Telecom's US GAAP net earnings were lower than
its NZ GAAP net earnings by NZ$54 million (6.6%) for 1999, and lower by NZ$57
million (7.0%) for 1998 and higher by NZ$94 million (16.2%) for 1997.
For 1999 US GAAP earnings were lower due principally to the recognition of Year
2000 costs of NZ$48 million. For 1998 US GAAP earnings were lower due
principally to the recognition of restructuring costs of NZ$62 million and Year
2000 costs of NZ$14 million. These costs were recognised for NZ GAAP purposes in
1997.
Total shareholders' funds at the end of each year were greater under US GAAP by
approximately NZ$240 million (22.1%), NZ$213 million (20.0%), and NZ$321 million
(19.6%) for 1999, 1998 and 1997 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.
New Authoritative Pronouncements
In March 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use".
SOP 98-1 requires the capitalisation of certain direct costs and interest costs
related to computer software developed or obtained for internal applications,
which are incurred after preliminary development efforts have been made. Costs
incurred during the preliminary project stage, as well as training and data
conversion costs, are to be expensed as incurred.
SOP 98-1 is effective for fiscal years beginning after December 1998. As SOP
98-1 is consistent with Telecom's existing software capitalisation policy the
adoption of this standard had no impact on Telecom's financial statements.
In June 1998, FASB issued Statement of Financial Accounting Standard ("SFAS")
No. 133, "Accounting for Derivative Instruments and Hedging Activities".
SFAS No. 133 provides standardised accounting and disclosure guidance for
derivative instruments and the derivative portion of certain similar contracts.
It amends SFAS 52, "Foreign Currency Translation," and SFAS 107, "Disclosures
about Fair Values of Financial Instruments," and it supersedes a number of other
financial accounting standards.
The statement requires entities that use derivative instruments to measure these
instruments at fair value and record them as assets or liabilities on the
balance sheet. It also requires entities to reflect the gains or losses
associated with changes in the fair value of these derivatives, either in
earnings or as a separate component of capital funds, depending on the nature of
the underlying contract or transaction.
At the time of adoption, all derivative instruments are to be measured at fair
value and recorded on the balance sheet. Any differences between fair value and
carrying amount at that time will be recorded as a cumulative effect of a change
in accounting principle, in either net income or other comprehensive income, as
appropriate.
SFAS No. 133 becomes effective for fiscal years beginning after 15 June 1999.
Telecom management is currently evaluating the new Statement's provisions to
determine the effect, if any, of the adoption of SFAS No. 133 on the financial
statements.
17
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
GLOSSARY
ADSL (Asymmetric Digital Subscriber Line) - Technology using compression and
filtering to enable broadband transmission down copper wires. ADSL is generally
limited to 3-5 kilometres.
ATM (Asynchronous Transfer Mode) - Data transfer technique in which
transmissions are encoded into fixed-length packets and routed through ATM
switches. Each ATM link supplies a constant stream of ATM packet slots, which
can be either filled or left idle. ATM handles numerous services well by
combining the best of both circuit-switching technology (for constant-bit rate
services such as voice and graphics) and packet-switching (for variable-bit rate
services such as data and full-motion video).
Bandwidth - Transmission capacity. The larger the bandwidth, the greater the
capacity of voice, video, or data that can be carried.
Centrex - A service that provides PBX capabilities to customers using Telecom's
network. Centrex is offered to businesses as an alternative to buying or leasing
their own PBXs.
CPE (Customer Premises Equipment) - Equipment, such as phones, fax machines and
modems that connect with the network at the customer's premises.
Frame relay - Packet switched data communication that is very good at
efficiently handling high-speed, bursty data over wide area networks. Packets
are routed or "relayed" directly to their destination, rather than terminating
at each switching node. This eliminates processing overheads and increases
throughput speed.
IPNet (Internet Protocol Network) - Telecom's network that removes Internet
traffic from the PSTN network at each exchange and sends it to its destination
(usually an Internet Service Provider) via an Internet optimised backbone.
ISDN (Integrated Services Digital Network) - Switched digital transmission
system that can carry a range of digitised voice, data and images. Basic Rate
Access offers 128 Kbit/s capacity on two channels and Primary Rate Access offers
2 Mbit/s capacity on 30 channels.
PBX (Private Branch Exchange) - Customer premises switch, connected to the PSTN,
that operates as a private local exchange, typically providing reduced-digit
dialing for internal calls.
PSTN - Public Switched Telephone Network. The nationwide fixed line voice
telephone network accessible to anyone who has a telephone and an account with a
phone company.
VPN - Virtual Private Network. A carrier provided service in which the public
switched network provides the equivalent of a privately established customer
network.
18
<PAGE>
OVERVIEW OF SURPLUS FROM CONTINUING OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED 31 MARCH VARIATION
99:98
- ------------------------------------------------------------------------------------------------------------------------------
(in NZ$ millions, except percentages) 1997 % 1998 % 1999 % $ %
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenues
Local service 959 31.1 1,025 30.2 1,059 30.8 34 3.3
Calling
National 656 21.3 727 21.4 700 20.4 (27) (3.7)
International 457 14.8 466 13.7 414 12.1 (52) (11.2)
Other 63 2.0 60 1.8 52 1.5 (8) (13.3)
------------------------------------------------------------------------------
1,176 38.1 1,253 36.9 1,166 34.0 (87) (6.9)
Interconnection 66 2.1 71 2.1 86 2.5 15 21.1
Cellular and other mobile services 316 10.3 424 12.5 480 14.0 56 13.2
Data 256 8.3 295 8.7 336 9.8 41 13.9
Other operating revenues
Directories 136 4.4 147 4.3 160 4.6 13 8.8
Equipment revenue 157 5.1 144 4.2 109 3.2 (35) (24.3)
Miscellaneous other services 17 0.6 39 1.1 38 1.1 (1) (2.6)
------------------------------------------------------------------------------
310 10.1 330 9.6 307 8.9 (23) (7.0)
------------------------------------------------------------------------------
Total operating revenues (before abnormals) 3,083 100.0 3,398 100.0 3,434 100.0 36 1.1
------------------------------------------------------------------------------
Operating expenses
Gross personnel costs 522 16.9 539 15.9 520 15.1 (19) (3.5)
Labour capitalised (49) (1.6) (42) (1.2) (39) (1.1) 3 7.1
Labour recovered (126) (4.0) (114) (3.4) (123) (3.6) (9) (7.9)
------------------------------------------------------------------------------
Net personnel costs 347 11.3 383 11.3 358 10.4 (25) (6.5)
Depreciation 544 17.7 564 16.6 553 16.1 (11) (2.0)
Cost of sales 405 13.1 515 15.2 575 16.8 60 11.7
Maintenance 201 6.5 171 5.0 166 4.8 (5) (2.9)
Other operating expenses 355 11.5 388 11.4 383 11.2 (5) (1.3)
------------------------------------------------------------------------------
Total operating expenses (before abnormals) 1,852 60.1 2,021 59.5 2,035 59.3 14 0.7
------------------------------------------------------------------------------
Surplus from continuing operations (before
abnormals) 1,231 39.9 1,377 40.5 1,399 40.7 22 1.6
Abnormal revenue - - - - 16 0.5 16 -
Abnormal costs (152) (4.9) (37) (1.1) (15) (0.4) 22 59.5
------------------------------------------------------------------------------
Surplus from continuing operations 1,079 35.0 1,340 39.4 1,400 40.8 60 4.5
------------------------------------------------------------------------------
</TABLE>
KEY PERFORMANCE INDICATORS
<TABLE>
<CAPTION>
1997 1998 1999
<S> <C> <C> <C>
Operating Margin (%) * 39.9 40.5 40.7
Asset Utilisation (%) # 68.3 73.0 73.0
Net Interest Cover (times) . 10.9 7.6 6.9
Return on Average Total Assets (%) ~ 27.3 29.6 29.8
Net Debt/Net Debt plus Capital Funds (%) 51.4 43.6 42.9
</TABLE>
* Normalised surplus from continuing operations/operating revenue (before
abnormals)
# Operating revenue (before abnormals)/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
~ Normalised surplus from continuing operations/average total assets (net of
cash and short-term investments)
19
<PAGE>
[TELECOM LOGO]
18 May 1999
MEDIA RELEASE
Telecom reports flat $822 million full-year profit
(Embargoed until 9.00am, 18 May 1999)
Telecom today reported after-tax earnings of $822 million for the year to 31
March 1999. Reported earnings per share increased 2.2 percent to 46.9 cents.
Normalised earnings (excluding abnormal items) were $816 million, while
normalised earnings per share increased 2.2 percent to 46.6 cents. Telecom
increased total dividends for the year by seven percent to 46 cents per share.
Chairman Peter Shirtcliffe said the big features of the past year had been the
excellent performance of Telecom's cellular business, continued intense
competition in the tolls business and rapid progress in implementing Telecom's
online strategy.
"Telecom's cellular business now drives a substantial portion of overall
revenues and much of the growth was a direct result of our own efforts to
stimulate the market," Mr Shirtcliffe said.
Chief Executive Roderick Deane said Telecom's earnings performance was affected
by continued intense competition and a year of almost no economic growth. Price
competition in the tolls business had directly affected pre-tax earnings by an
estimated $150 million, he said.
Overview
--------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Result % change
<S> <C> <C>
Operating revenue before abnormal items (1) $3,434m up 1.1%
Operating expenses before abnormal items (1) $2,035m up 0.7%
Net earnings from operations $822m up 0.2%
Normalised net earnings (2) $816m up 0.1%
Earnings per share 46.9 cents up 2.2%
Dividends per share 46.0 cents up 7.0%
- --------------------------------------------------------------------
</TABLE>
1 - excludes abnormal revenue of $16 million and abnormal expenses of $15
million.
2 - normalised to exclude the effect of abnormal items.
<PAGE>
"Telecom reduced prices more vigorously than ever before. We have been very
competitive on pricing and our customers have been the big winners," Dr Deane
said.
"This positions us strongly in the market to benefit from future economic
upturns," he said.
The average price of an international phone call had fallen 45 percent to about
42 cents a minute in March and the average national toll call cost 14 percent
less at 17 cents a minute, Dr Deane said.
Volume growth
-------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
% change Total
Access lines up 1.5% 1.87 million
Cellular connections up 27.9% 608,900
National call minutes (1) up 5.2% 2,544.9 million
Cellular call minutes up 21.2% 744.0 million
International outward call minutes up 44.5% 439.4 million
International inward call minutes up 3.4% 333.0 million
</TABLE>
1 - includes 0800 national calls
Dr Deane said the launch of pre-paid mobile phones had helped drive very strong
growth in the cellular business and that more than one in five New Zealanders
now have a mobile phone.
Dr Deane also outlined progress on achieving Telecom's strategic goals, with
particular emphasis on Telecom's move to lead New Zealand on-line.
"Our Internet flagship, XTRA, celebrated its third birthday at the end of last
week and now has almost 200,000 customers. Furthermore, XTRA was profitable in
March, which is quite an achievement for a new and high growth business to
achieve in such a short period of time," Dr Deane said.
Telecom had established an Online Solutions Group to meet the e-commerce needs
of large businesses and corporate customers and was helping other businesses
online with products and services such as EFTPOS in a box and the Xshop Internet
shopping mall.
<PAGE>
[TELECOM LOGO]
18 May 1999
MEDIA RELEASE
Telecom announces Board changes
As foreshadowed in February 1998 at the time of the Bell Atlantic exchangeable
notes issue, the two Bell Atlantic directors John Killian and Robert Levetown
have resigned from the Telecom Board.
Chairman Peter Shirtcliffe said he was pleased to announce the appointment of Mr
Michael Tyler.
Mr Tyler, who will take up his appointment on 1 June, is Managing Director and
Senior Partner of London-based consulting firm Tyler & Company, that operates in
the telecommunications, media and electronic commerce fields. The firm provides
consulting expertise in business, technology and public policy as well as high
level financial transaction analysis and advice and investment in development-
stage companies.
Mr Tyler has led the telecommunications practice, as a Partner and Vice-
President, at Booz, Allen & Hamilton Inc, one of the world's largest
international professional service firms with more than $US1 Billion in revenues
and 3000 employees. He was later a Senior Partner and Director at Putnam, Hayes
& Bartlett Inc, where he headed the telecommunications consulting business which
included working closely with Telecom New Zealand.
Since 1976 he has worked as a consultant and advisor on projects ranging from
leasing and financial restructuring for telecommunications companies through to
business planning for fixed and satellite telephony operations and the launch of
satellite TV broadcasting in Europe.
"Michael Tyler's extensive experience in the converging telecommunications and
media industries will prove invaluable to Telecom's Board," Chairman Peter
Shirtcliffe said.
Mr Tyler started his telecommunications career in 1972 as manager of a British
Telecom unit responsible for business analysis and strategy development.
<PAGE>
Educated at Cambridge University and The London School of Economics, Mr Tyler
has also taught at The Massachusetts Institute of Technology and New York
University. Mr Tyler is also a Director of Swedish software, systems integrator
and operations support company ConNova AB.
The resignations of Mr Killian and Mr Levetown are part of the process of Bell
Atlantic undertaking to disaffiliate from Telecom whereby Bell Atlantic appoints
a proxy to vote Bell Atlantic's shares at future shareholder meetings. The proxy
holder will vote Bell Atlantic's shares in proportion to all other votes cast.
For further information please contact:
Angus Barclay, Financial Communications Manager
Phone 04-498-9372, Pager 026-103-029, Email [email protected]
Recent media releases can be found at the Telecom Home Page which is at
http://www.telecom.co.nz Click on "Media" under the "Key Links" heading.
<PAGE>
[TELECOM LOGO]
18 May 1999
MEDIA RELEASE
Telecom director resigns
(Embargoed until 11am, 20 May 1999)
Telecom today announced the resignation of Alan Gibbs as a Director of the
company. Mr Gibbs has been a director of Telecom since September 1990.
Mr Gibbs indicated that he preferred to avoid the possibility that the expanding
Internet investment activities of Sky Network Television might lead to a
possible conflict of interest with his role as a Director of Telecom. Mr Gibbs
has an indirect association with Sky Network Television through a family
shareholding.
Telecom Chairman Peter Shirtcliffe expressed the gratitude of the company for
the wide business acumen, insight and commitment which Mr Gibbs had brought to
the Board during his term as a Director. He also acknowledged Mr Gibbs'
significant contribution to the very substantial increase in shareholder value
Telecom has delivered over the past nine years.
"As the market has been advised, discussions on the future composition of the
Board are ongoing," Mr Shirtcliffe said.
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 "Media" under the "Key Links" heading.
<PAGE>
[TELECOM LOGO]
18 May 1999
MEDIA RELEASE
Telecom confirms AAPT shareholding
(Embargoed until 9.00am, 18 May 1999)
Telecom moved on Monday to acquire a 9.9 percent shareholding in AAPT.
Telecom said it had taken an interest in the Australian telecommunications
marketplace for some time and has worked closely with both AAPT and Optus.
"AAPT has been one of the key companies on which we have focused. We believe
this company has done a very good job in creating value for its shareholders,"
Chief Financial Officer Jeff White said.
Given Optus's bid for AAPT, Telecom felt it prudent to take a minority position
in order to preserve its strategic options.
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 "Media" under the "Key Links" heading.
<PAGE>
[TELECOM LOGO]
4 June 1999
MEDIA RELEASE
TELECOM INCREASES AAPT SHAREHOLDING
Telecom New Zealand today bought a further stake of almost 10 percent of AAPT at
an average price of just under A $5.00 per share in transactions on the
Australian Stock Exchange, increasing its shareholding in the Australian
telecommunications company to almost 20 percent. Telecom bought 9.9 percent of
AAPT on 17 May.
"As a major shareholder in AAPT we look forward to holding discussions with the
AAPT board and management in the near to medium term," said Telecom's Chief
Financial Officer, Jeff White.
"We believe that Telecom does not necessarily need full ownership of AAPT to
achieve its goals and that a lesser degree of ownership may offer considerable
benefits to both companies," Mr. White said.
"Our objective is to see whether a proposal can be developed which allows both
Telecom and AAPT a win-win outcome and allows AAPT to focus on growing
shareholder value - something in which it has been very successful to date."
"We believe management has done an excellent job in positioning AAPT in the
Australian market and that the development of closer ties between our two
companies will enhance the service offering of both AAPT and Telecom, and
generate shareholder value growth for both sets of shareholders", Mr. White
said.
