<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 7 September 1999 to 16 September 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. First Quarter Result to 30 September 1999
-----------------------------------------
1.1 Condensed Financial Statements
1.2 Management Commentary
1.3 Media Release dated 16 November 1999
2. Miscellaneous Media Releases
----------------------------
2.1 Telecom Appoints Theresa Gattung to Board of Directors
_____________________________________
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/ Malcolm Ross Gillespie
---------------------------
Malcolm Ross Gillespie
Company Secretary
Dated: 17 September 1999
<PAGE>
TELECOM CORPORATION OF NEW ZEALAND LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL PERFORMANCE
For the three months ended 30 September 1999 (Unaudited)
<TABLE>
<CAPTION>
Year ended Three months ended
30 June 30 September
---------- ----------------------------------------
1999 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 1,059 263 266 137
Calling 2 1,135 299 274 142
Interconnection 93 23 28 15
Cellular and other mobile services 496 115 134 69
Data 346 82 99 51
Other operating revenues 2 327 87 86 44
Abnormal revenues 3 31 - - -
--------- --------------------------------------------
3,487 869 887 458
--------- --------------------------------------------
Operating expenses
Labour 467 124 113 58
Depreciation 551 138 137 71
Cost of sales 459 110 135 70
Other operating expenses 556 138 137 71
Abnormal expenses 3 37 - - -
--------- --------------------------------------------
2,070 510 522 270
--------- --------------------------------------------
Surplus from operations 1,417 359 365 188
Investment income 45 12 4 2
Interest expense (152) (43) (32) (16)
--------- --------------------------------------------
Surplus from operations before income tax 1,310 328 337 174
Income tax expense (412) (107) (110) (57)
--------- --------------------------------------------
Surplus from operations after income tax 898 221 227 117
Share of losses of associate company
after income tax (7) - (4) (2)
Minority interests in profits of
subsidiaries (2) (1) (1) -
--------- --------------------------------------------
Net surplus 889 220 222 115
Capital note distribution costs
after income tax (55) (14) (13) (7)
--------- --------------------------------------------
Net earnings attributable to
shareholders 834 206 209 108
========= ============================================
Net earnings per share $0.476 $0.118 $0.119 $0.062
========= ============================================
Weighted average number of ordinary
shares outstanding (in millions) 1,752 1,752 1,753 1,753
========= ============================================
</TABLE>
1
<PAGE>
TELECOM CORPORATION OF NEW ZEALAND LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL
POSITION
As at 30 September 1999 (Unaudited)
<TABLE>
<CAPTION>
30 June 30 September
---------------- ---------------------------------------
1999 1998 1999 1999
- ---------------------------------------------------------------------------------- ---------------------------------------
(Dollars in millions) notes NZ$ NZ$ NZ$ US$
- ---------------------------------------------------------------------------------- ---------------------------------------
ASSETS
Current assets:
<S> <C> <C> <C> <C> <C>
Cash 29 27 39 20
Short-term investments 114 606 107 55
Receivables and prepayments 691 664 704 364
Inventories 48 47 42 22
---------------- ---------------------------------------
Total current assets 882 1,344 892 461
Investments 4 530 79 540 279
Other assets 5 56 63 61 31
Fixed assets 3,774 3,701 3,765 1,944
---------------- ---------------------------------------
Total assets 5,242 5,187 5,258 2,715
================ =======================================
LIABILITIES AND CAPITAL FUNDS
Current liabilities:
Accounts payable and accruals 821 697 757 391
Provisions - current 6 64 72 47 24
Debt due within one year 1,064 1,013 1,197 618
Provision for dividend 7 227 227 227 117
---------------- ---------------------------------------
Total current liabilities 2,176 2,009 2,228 1,150
Deferred taxation 25 18 25 13
Provisions - non-current 6 3 17 3 2
Long-term debt 1,003 1,138 959 495
---------------- ---------------------------------------
Total liabilities 3,207 3,182 3,215 1,660
---------------- ---------------------------------------
Commitments and contingent liabilities 8,9
Capital funds:
Shareholders' funds 1,086 1,057 1,094 565
Capital notes 942 942 943 487
Minority interests 7 6 6 3
---------------- ---------------------------------------
Total capital funds 2,035 2,005 2,043 1,055
---------------- ---------------------------------------
Total liabilities and capital funds 5,242 5,187 5,258 2,715
================ =======================================
</TABLE>
2
<PAGE>
TELECOM CORPORATION OF NEW ZEALAND LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF MOVEMENTS IN CAPITAL FUNDS
For the three months ended 30 September 1999 (Unaudited)
<TABLE>
<CAPTION>
Year ended 30 Three months ended
June 30 September
----------------- -------------------------
1999 1998 1999 1999
----------------- -------------------------
(Dollars in millions) notes NZ$ NZ$ NZ$ US$
- ------------------------------------------------------------------------------ -------------------------
<S> <C> <C> <C> <C> <C>
Capital funds at the beginning of the period 1,999 1,999 2,035 1,051
Net earnings attributable to shareholders 834 206 209 108
Movement in foreign currency translation reserve 1 - 1 -
----------------- -------------------------
Total recognised revenues and expenses for the period 835 206 210 108
Movement in minority interests - - (1) -
Dividends 7 (909) (227) (227) (117)
Tax credit on supplementary dividends 7 103 26 25 13
Discount on capital notes amortised 1 1 1 -
Contributed capital 6 - - -
----------------- -------------------------
Capital funds at the end of the period 2,035 2,005 2,043 1,055
================= =========================
Represented by:
Contributed capital 909 903 909 469
Foreign currency translation reserve 1 1 2 1
Minority interests 7 6 6 3
Retained earnings 176 153 183 95
Capital notes 942 942 943 487
----------------- -------------------------
2,035 2,005 2,043 1,055
================= =========================
</TABLE>
3
<PAGE>
TELECOM CORPORATION OF NEW ZEALAND LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the three months ended 30 September 1999 (Unaudited)
<TABLE>
<CAPTION>
Year ended Three months ended
30 June 30 September
---------------- ----------------------
1999 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 3,433 871 861 444
Proceeds from cross border lease 15 - - -
Proceeds from liquidation of Executive Plan, net 16 - - -
Interest income 41 11 3 2
Payments to suppliers and employees (1,410) (334) (377) (195)
Restructuring, redundancy and Year 2000 payments (64) (15) (17) (9)
Income tax paid (254) (103) (101) (52)
Interest paid on debt (160) (57) (41) (21)
---------------- ----------------------
Net cash flows from operating activities 1,617 373 328 169
---------------- ----------------------
Cash flows from investing activities
Cash was provided from/(applied to):
Sale of fixed assets 18 5 11 6
(Purchase)/sale of long-term investments (460) 28 (4) (2)
Sale/(purchase) of short-term investments, net 490 (37) 7 4
Purchase of fixed assets (585) (115) (149) (77)
Capitalised interest paid (9) (2) (3) (2)
---------------- ----------------------
Net cash flows used in investing activities (546) (121) (138) (71)
---------------- ----------------------
Cash flows from financing activities
Cash was provided from/(applied to):
Proceeds from long-term debt 17 2 25 13
Repayment of long-term debt (201) (104) (112) (58)
Proceeds from short-term debt, net 107 120 172 89
Contributed capital 5 - - -
Dividends paid (912) (226) (226) (117)
Dividends paid to minority interests (1) - - -
Capital note distribution costs paid (79) (39) (39) (20)
---------------- ----------------------
Net cash flows used in financing activities (1,064) (247) (180) (93)
---------------- ----------------------
Net cash flow 7 5 10 5
Opening cash position (including bank overdrafts) 22 22 29 15
---------------- ----------------------
Closing cash position (including bank overdrafts) 29 27 39 20
================ ======================
.....................................SUPPLEMENTARY CASH FLOW DATA........................................
Reconciliation of net earnings attributable to shareholders to net cash flows from operating activities
Net earnings attributable to shareholders 834 206 209 108
Adjustments to reconcile net earnings to net cash flows
from operating activities:
Depreciation 551 138 137 71
Bad and doubtful accounts 25 6 4 2
Deferred income tax 10 3 - -
Share of losses of associate company 7 - 4 2
Minority interests 2 1 1 -
Capital note distribution costs 55 14 13 7
Goodwill amortised 7 2 2 1
Other 12 (1) (2) (1)
Changes in assets and liabilities net of effects of
non-cash and investing and financing activities:
(Increase)/decrease in accounts receivable and related
items (54) 8 (23) (12)
Decrease/(increase) in inventories (8) (3) 4 2
Increase in current taxation 153 3 9 5
Decrease in provisions (36) (14) (17) (9)
(Decrease)/increase in accounts payable and related items 59 10 (13) (7)
---------------- ----------------------
Net cash flows from operating activities 1,617 373 328 169
================ ======================
</TABLE>
4
<PAGE>
TELECOM CORPORATION OF NEW ZEALAND LIMITED AND SUBSIDIARIES
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
NOTE 1 FINANCIAL STATEMENTS
The condensed consolidated financial statements of Telecom Corporation of New
Zealand Limited (the "Company") together with its subsidiaries ("Telecom") have
been prepared in accordance with Financial Reporting Standard ("FRS") No.24:
Interim Financial Statements, issued by the Institute of Chartered Accountants
of New Zealand. These financial statements should be read in conjunction with
the financial statements and related notes included in the Company's Annual
Report for the three month period to 30 June 1999.
Effective 1 April 1999, the Company changed its annual balance date from 31
March to 30 June. The comparative periods presented in these financial
statements have been restated to facilitate meaningful comparisons with the
Company's new financial reporting periods.
The financial statements for the three months ended 30 September 1998 and 30
September 1999, and the year ended 30 June 1999 are unaudited.
The financial statements are expressed in New Zealand dollars. The amounts
pertaining to the most recent financial period are also expressed in United
States ("US") dollars, the latter being presented solely for convenience and
translated from New Zealand dollars, as a matter of arithmetical computation
only, at a rate on 30 September 1999 of NZ$1.00 to US$0.5164. The US dollar
amounts should not be construed as representations that the New Zealand dollars
have been, could be, or could in the future be converted into US dollars at this
or any other rate. References in these financial statements to "$" and "NZ$" are
to New Zealand dollars, references to "US$" are to US dollars and "AUD$" are to
Australian dollars.
Accounting Policies
The accounting policies used in the preparation of the financial statements for
the three months ended 30 September 1999 are consistent with those used in the
preparation of the published financial statements for the three month transition
period ended 30 June 1999.
Reclassifications
Certain reclassifications of prior periods' data have been made to conform to
current period classifications.
NOTE 2 CALLING AND OTHER OPERATING REVENUES
<TABLE>
<CAPTION>
Year ended Three months ended
30 June 30 September
----------------- ----------------------------------
1999 1998 1999
-------------------------------------------- ----------------------------------
(Dollars in millions) NZ$ NZ$ NZ$
-------------------------------------------- ----------------------------------
<S> <C> <C> <C>
Calling
National 695 178 170
International 389 108 92
Other 51 13 12
----------------- ----------------------------------
1,135 299 274
================= ==================================
Other operating revenues
Directories 161 48 52
Equipment revenue 109 28 24
Miscellaneous other services 57 11 10
----------------- ---------------------------------
327 87 86
================= ==================================
</TABLE>
5
<PAGE>
TELECOM CORPORATION OF NEW ZEALAND LIMITED AND SUBSIDIARIES
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
continued
NOTE 3 ABNORMAL ITEMS
<TABLE>
<CAPTION>
Year ended Three months ended
30 June 30 September
----------------- ----------------------------------
1999 1998 1999
-------------------------------------------- ----------------------------------
(Dollars in millions) NZ$ NZ$ NZ$
-------------------------------------------- ----------------------------------
<S> <C> <C> <C>
Abnormal Revenues
Cross border lease 15 - -
Liquidation of executive share ownership plan 16 - -
----------------- ----------------------------------
31 - -
================= ==================================
Abnormal Expenses
Onerous contract buy-out costs 22 - -
Restructuring costs 15 - -
----------------- ----------------------------------
37 - -
================= ==================================
</TABLE>
Abnormal Revenues
Cross Border Lease
During the year ended 30 June 1999, a gain of $15 million was recognised on the
prepayment and early extinguishment of Telecom's obligations relating to a cross
border finance lease.
Liquidation of the Executive Share Ownership Plan (the "Executive Plan")
The liquidation of Telecom's Executive Plan was completed in March 1999. The
Trustee of the Executive Plan 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.
Abnormal Expenses
Onerous Contract Buy-out Costs
During the year ended 30 June 1999, the costs of buying-out the terms of certain
onerous contracts were identified and provided for. The contracts are onerous as
the unavoidable costs of meeting the contractual obligations exceed their
economic benefits.
Restructuring Costs
During the year ended 30 June 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 audioconferencing 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 $15 million.
6
<PAGE>
TELECOM CORPORATION OF NEW ZEALAND LIMITED AND SUBSIDIARIES
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
continued
NOTE 4 INVESTMENTS
<TABLE>
<CAPTION>
30 June 30 September
----------------- ----------------------------------
1999 1998 1999
-------------------------------------------- ----------------------------------
(Dollars in millions) NZ$ NZ$ NZ$
-------------------------------------------- ----------------------------------
<S> <C> <C> <C>
Term deposits 26 58 30
International telecommunications investments 21 21 20
Associate company
Advance 104 - 113
Share of net losses (7) - (12)
Shares in listed company - AAPT Limited 386 - 389
----------------- ----------------------------------
530 79 540
================= =================================
</TABLE>
At 30 September 1999 the market value of Telecom's investment in AAPT Limited
("AAPT") was NZ$353 million (30 September 1998: Nil, 30 June 1999: NZ$337
million). The Directors do not consider there has been a permanent diminution in
the value of this investment.
NOTE 5 OTHER ASSETS
Included within Other Assets is goodwill (net of amortisations) of $54 million
(30 September 1998: $61 million, 30 June 1999: $56 million).
NOTE 6 PROVISIONS - ONEROUS CONTRACTS, RESTRUCTURING AND YEAR 2000
<TABLE>
<CAPTION>
30 June 30 September
----------------- ----------------------------------
1999 1998 1999
-------------------------------------------- ----------------------------------
(Dollars in millions) NZ$ NZ$ NZ$
-------------------------------------------- ----------------------------------
<S> <C> <C> <C>
Current:
Onerous contracts provision 22 - 22
Restructuring provisions 25 24 14
Year 2000 provision 17 48 11
----------------- ----------------------------------
64 72 47
================= ==================================
Non-current:
Restructuring provisions 3 15 3
Year 2000 provision - 2 -
------------------ ----------------------------------
3 17 3
================== ==================================
</TABLE>
NOTE 7 DIVIDENDS
Total dividends for the three months ended 30 September 1999 of $202 million
have been provided for, representing a dividend of 11.5 cents per share. In
addition, and in accordance with the Income Tax Act 1994, a supplementary
dividend totalling $25 million has been provided for which will be payable to
shareholders who are not resident in New Zealand, for which Telecom will receive
an equivalent tax credit from the Inland Revenue Department.
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 30 September 1999, minimum rental
commitments for all non-cancellable operating leases (excluding amounts provided
for in respect of restructuring) were $319 million (30 September 1998: $292
million, 30 June 1999: $322 million).
Finance Leases
Telecom has entered into the sale and leaseback of certain assets. At 30
September 1999, the outstanding lease commitments were $94 million (30 September
1998: $136 million, 30 June 1999: $95 million).
Capital Commitments
At 30 September 1999, capital expenditure amounting to $115 million (30
September 1998: $96 million, 30 June 1999: $65 million), principally relating to
telecommunications network and international cable assets, had been committed
under contractual arrangements, with substantially all payments due within one
year.
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, Fiji 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$57
million (excluding accrued interest) has been provided to Southern Cross Cables
Limited. Telecom is committed to advancing further funds to bring the total to
US$75 million by way of equity or further shareholder advances.
Funding the Construction of the Southern Cross Cable Network
The majority of the funding for the construction of the Southern Cross Cable was
to be provided directly to Southern Cross Cables Limited through a limited
recourse bank financing facility. However the facility required major
alterations to accommodate delays in obtaining Californian environmental permits
and recent changes in Southern Cross' marketing strategy. Following a Data
Gathering Meeting in August 1999, which resulted in significant additional
capacity purchase indications, the Shareholders have substituted the banks and
are providing interim funding prior to re-financing the project on a basis more
closely aligned to present capacity purchase indications and the advanced state
of the cable construction. It is expected that Southern Cross Cables Limited
will repay its borrowings in the first few years after the project completion.
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. Unspecified damages are sought.
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 proceedings commenced by Telstra NZ Limited ("Telstra") in May 1999, it is
alleged that Telecom's cessation of certain carrier rebilling arrangements with
Telstra breaches the Commerce Act. Telstra seeks injunctive relief together with
unspecified damages.
In June 1999 a claim was filed against Telecom in the Employment Court by
representative and individual plaintiffs. The plaintiffs allege breach of
various express and implied terms of their employment contracts. The claim is
not fully quantified.
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 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
<TABLE>
<CAPTION>
Surplus
from Net earnings
Net abnormal Surplus operations attributable Net
Operating revenues/ from before to earnings
revenues (expenses) operations income tax shareholders per share
---------------------------------------------------------------------------------------------------------
(NZ dollars in millions,
except per share amounts) NZ$
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Quarter ended:
30 September 1999 887 - 365 337 209 0.119
=============================================================================
Quarter ended:
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
30 June 1999 863 (7) 342 320 202 0.115
=============================================================================
Year ended 30 June 1999 3,487 (6) 1,417 1,310 834 0.476
=============================================================================
</TABLE>
NOTE 11 EVENTS SUBSEQUENT TO QUARTER END
AAPT Acquisition
On 5 October 1999 Telecom made an offer to purchase all remaining shares in
AAPT at AUD$5.10 per share. The offer closed on 6 November 1999 at which
time Telecom had received entitlements to purchase an additional
184,610,054 shares in AAPT at a cost of NZ$1,177 million. This will
increase Telecom's shareholding in AAPT to 81.5% (78.2% on a fully diluted
basis) at a total cost of NZ$1,564 million. The acquisition will be funded
by debt.
10
<PAGE>
[Logo of Telecom]
MANAGEMENT COMMENTARY
16 November 1999
First Quarter Results to 30 September 1999
Telecom's net earnings of NZ$209 million for the quarter ended 30 September 1999
("Q1 1999-2000") increased by NZ$3 million, or 1.5%, from NZ$206 million for the
same period last year. Net earnings for the quarter represented earnings per
share ("EPS") of NZ11.9 cents. EPS increased 1.4% for the quarter compared with
the same period last year.
Telecom has changed its balance date from 31 March to 30 June. This management
commentary compares the results of Q1 1999-2000 with those for the quarter ended
30 September 1998 ("Q1 1998-99").
Telecom will pay a fully imputed Q1 1999-2000 dividend of NZ11.5 cents per
ordinary share in December 1999. The dividend for Q1 1998-99 was also NZ11.5
cents per ordinary share.
If the equity accounted losses of Southern Cross and the costs of funding the
investment in AAPT Limited ("AAPT") totalling approximately NZ$7 million are
excluded, Telecom's net earnings for the quarter would have increased by NZ$10
million, or 4.9%.
Following the closure on 6 November 1999 of Telecom's offer to purchase all
remaining shares in AAPT, Telecom's shareholding in AAPT will increase to 81.5%
(78.2% on a fully diluted basis). In future periods, Telecom's result will be
affected by the consolidation of 81.5% of AAPT's earnings, the funding costs of
the investment in AAPT and the amortisation of associated goodwill.
Revenue rose by 2.1% in Q1 1999-2000 compared with the same period last year.
Strong growth in cellular and data revenue was partly offset by lower revenue
from national and international calls. Continued price reductions in the quarter
to 30 September 1999 affected national and international revenues.
<PAGE>
2
Operating expenses increased by 2.4% in Q1 1999-2000 largely due to higher cost
of sales. If cost of sales were excluded, expenses declined by 3.3% in Q1 1999-
2000.
<TABLE>
<CAPTION>
======================================================================================================
EARNINGS OVERVIEW
Quarter Ended 30 September
---------------------------------------------
1998 1999 Change
NZ$m NZ$m %
---------------------------------------------
<S> <C> <C> <C>
Operating revenues 869 887 2.1
Operating expenses 510 522 2.4
EBIT* 359 365 1.7
EBITDA# 499 504 1.0
Net earnings 206 209 1.5
Net earnings excluding equity accounted loss of
Southern Cross and AAPT funding costs 206 216 4.9
EPS (cents) 11.8 11.9 1.4
Dividends per share (cents) 11.5 11.5 -
*Earnings before interest and tax.
#Earnings before interest, tax, depreciation and amortisation.
======================================================================================================
</TABLE>
DIVIDENDS
The quarterly dividend of NZ11.5 cents per share represents a distribution of
approximately 96% of first quarter net earnings. Since Telecom's earnings vary
from quarter to quarter, owing to seasonality and other factors, the dividend
payout percentage resulting from the 11.5 cents dividend for the first quarter
is not necessarily indicative of distribution levels for the remainder of the
year.
<TABLE>
<CAPTION>
==============================================================================================
<S> <C>
Q1 dividends
Ordinary shares NZ11.5 cents
American Depositary Shares *US47.51 cents
Supplementary dividend (to non-resident holders)
Per ordinary share NZ2.03 cents
Per American Depositary Share *US8.39 cents
Books closing dates
New Zealand, Australia Stock Exchanges# 3 December 1999
New York Stock Exchange 2 December 1999
Payment dates
New Zealand, Australia 15 December 1999
New York 22 December 1999
* Based on an exchange rate at 30 September 1999 of NZ$1.00 to US$0.5164.
# Australian shares go `ex' dividend on 29 November 1999.
==============================================================================================
</TABLE>
<PAGE>
3
FORWARD-LOOKING STATEMENTS
This management commentary contains forward-looking statements. The words
"believe", "expect", "will", "estimate", "project", "forecast", "should",
"anticipate" and similar expressions may identify 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") decreased 0.3% in the three
months to 30 June 1999, after three successive quarters of economic growth. For
the year to 30 June 1999, the New Zealand economy grew 0.6%. The New Zealand
Government Statistician said a marked drop in export volumes, which fell 4.8%
during the quarter, combined with a 2.7% rise in imports during the quarter,
contributed to the quarterly downturn in GDP. The expenditure-based measure of
GDP was unchanged in the June quarter. 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. Inflation measured by the Consumers Price
Index rose 0.6% for the September 1999 quarter.
Despite a quarter of poor economic indicators, consensus forecasts are for a
continued steady recovery from New Zealand's current period of low GDP growth
and for a slight worsening in the external current account deficit in the
current year before an improvement the following year. Inflationary pressures
are expected to be constrained by spare capacity in the New Zealand economy.
<PAGE>
4
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 access, 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, British Telecom and 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 of customer premises equipment ("CPE"). Competition in New
Zealand's telecommunications market 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 has recently announced its intention to amend the Commerce Act
including changes to the provisions regarding penalties, indemnification of
officers and thresholds. An enhanced Telecommunications Disclosure Regime will
begin on 1 January 2000. The new regime will focus on disclosure of costs
involved in providing local access and KiwiShare services.
Telecom has recently initiated a new 0867 service designed to provide dedicated
network capability for local Internet traffic. Telecom has offered assurances to
the Government on specific aspects of service quality and price of access. At
the end of October 1999, Telecom announced that it had signed an Internet
Traffic Agreement with Saturn covering 0867 calls.
<PAGE>
5
OVERVIEW OF RESULTS
Revenue
Revenue growth for the quarter to 30 September 1999 was driven largely by
increased cellular and data revenue. Growth in national and international call
volumes did not fully offset large price reductions, resulting in a decline in
calling revenues.
Volume Growth
<TABLE>
<CAPTION>
=================================================================================================
As at and for the quarter Variation
ended 30 September 99:98
----------------------------------------------------
1998 1999 %
----------------------------------------------------
<S> <C> <C> <C>
Local Service
- -------------
Access lines 1,849,000 1,877,000 1.5
Local call minutes (millions) * 800.8 867.1 8.3
Centrex lines 70,800 77,400 9.3
Calling
- -------
Call minutes (millions)
National calls # 504.3 506.8 0.5
Fixed line to cellular calls 97.6 129.8 33.0
National 0800 calls 130.8 164.6 25.8
International outward calls 108.5 137.8 27.0
International inward calls (excluding
transits) 83.0 96.6 16.4
Cellular
- --------
Cellular call minutes (millions) 173.7 240.3 38.3
Cellular connections at end of period
Total at period end 504,800 760,800 50.7
Average during the period 498,650 718,950 44.2
Data
- ----
Registered XTRA customers 141,600 228,300 61.2
ISDN lines 37,900 60,700 60.2
* Represents business local calls and residential calls under the NZ20 cents local calling
option and Centrex and VPN calls.
# Includes Centrex and VPN calls. Excludes calls from Telecom's fixed line to cellular
networks.
Certain reclassifications of prior period's data have been made to conform to current period
classifications.
=================================================================================================
</TABLE>
<PAGE>
6
Local Service
Local service revenues increased by NZ$3 million, or 1.1%, for the quarter
compared with the same period last year.
<TABLE>
- -----------------------------------------------------------------------------------------------------------------
Local Service Change %
99:98
- -----------------------------------------------------------------------------------------------------------------
<S> <C>
Access
- Revenue (0.5)
- Access lines 1.5
Local calls
- Revenue 6.1
- Call minutes 8.3
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Lower revenue from maintenance/wiring and connection charges resulted in a
decrease in access revenue of NZ$1 million, or 0.5%, for the quarter. A decrease
in business access lines and the effect of price reductions for business
customers from January 1999 was offset by higher residential access revenue as a
result of the 1.9% increase in residential line rental from October 1998 and
residential access line growth.
Local service revenue and access line growth have been affected by the entry of
Saturn Communications into the local service market, the migration of local
access to ISDN and increased use of cellular phones.
Revenue from local calls increased by NZ$2 million, or 6.1%, for the quarter due
to increased call minutes. Revenue from Smartphone, messaging and Call Track
increased by NZ$2 million, or 11.5%, for the quarter.
National
National revenue decreased by NZ$8 million, or 4.5%, for the quarter, largely
due to national toll price reductions. 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.
<TABLE>
- -------------------------------------------------------------------------------------------------------------
National Change %
99:98
- -------------------------------------------------------------------------------------------------------------
<S> <C>
National calls *
- Revenue (21.3)
- Call minutes 0.5
- Price per minute (22.0)
Calls to cellular networks
- Revenue 25.7
- Call minutes 33.0
- Price per minute (6.0)
National 0800
- Revenue 8.0
- Call minutes 25.8
- Price per minute (14.0)
* Includes national VPN and Centrex calls.
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
7
Compared with Q1 1998-99, the average per minute price of national calls,
excluding National 0800 and those made to cellular networks, declined by
approximately 22% to NZ15 cents.
From August 1998, business national toll prices were reduced on average by 16%
for both peak and off peak calling on key routes. In addition, the BEST
(Business Enjoy Savings on Tolls) pricing option was launched in February 1999
and was open for enrolment until 30 April 1999. This plan provides a ceiling to
Business Market customers on the cost of their tolls until 31 March or 30 April
2000, depending on when they enrolled. The ceiling is 10% lower than the
customer's average monthly spend.
In May 1999, new calling plans for residential customers were introduced.
These plans offer different combinations of NZ$3 or NZ$5 capping and/or maximum
off-peak and peak calling rates.
The effect of national toll price reductions was partially offset by increased
revenue from calls from the fixed line to cellular networks and National 0800 as
a result of increased call volumes. The average price per minute for fixed line
to cellular calls has declined by approximately 6%.
International
Total international revenue decreased by NZ$16 million, or 14.8%, for the
quarter compared with the same period last year reflecting reduced prices for
outward calls, lower Trade Direct rates for inbound calls and lower margins on
transit traffic, partially offset by the effect of increased volumes.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
International Change %
99:98
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
Outward calls
- Revenue (9.3)
- Call minutes 27.0
- Price per minute (29.0)
Inward calls
- Revenue (16.1)
- Call minutes 16.4
- Price per minute (28.0)
Transit call margin
- Margin (32.3)
- Call minutes 74.5
- Margin per minute (61.0)
- ---------------------------------------------------------------------------------------------------------------
</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 average per minute charge for outward calls of NZ37 cents
was approximately 29% lower than in Q1 1998-99, reflecting price reductions and
frequent weekend specials.
<PAGE>
8
In April 1999, the weekend caps on consumer Talk All Day promotions were reduced
from NZ$10 to NZ$5 for Australia and from NZ$15 to NZ$10 for the UK, US, Canada
and Ireland. These two Talk All Day specials at the reduced rates are available
every weekend until the end of the calendar year.
The decrease in inward call revenue for the quarter resulted largely from
reduced Trade Direct rates negotiated with major foreign carriers and the effect
of the higher New Zealand dollar compared with that for the same period last
year, partially offset by the effect of increased call minutes.
The reduced Trade Direct rates and higher New Zealand dollar more than offset
the impact of the 27.0% increase in outward traffic on the international
outpayment in respect of these calls included in cost of sales. This outpayment
decreased by 16.1% for the quarter. The decrease also reflects Telecom's use of
lower cost routing options.
The net margin received from Telecom's international business, excluding
transits, (outward and inward call revenue less the international outpayment)
decreased by 8.6% (see "Tolls Margin"). This reduction reflected the increasing
competition in all areas of international business.
The decrease in the transit call margin (revenue net of outpayments) for the
quarter was largely due to lower margins, the higher New Zealand dollar compared
with the same period last year and reduced revenue from transit calls for
information services. The increased volumes from the transit business are
attributable to the utilisation of a variety of outward routing options and
Telecom's point of presence in the US to win new refile traffic.
Tolls Margin
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Tolls Margin
Quarter Ended 30 September
=============================================
1998 1999 Change
NZ$M NZ$M %
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
National calls * 94.0 74.0 (21.3)
---------------------------------------------
International Margin
- --------------------
International outwards revenue 56.7 51.4 (9.3)
International inwards revenue 37.8 31.7 (16.1)
International outpayment (43.5) (36.5) (16.1)
----------------------------------------------
Net international margin before
transits 51.0 46.6 (8.6)
----------------------------------------------
Total tolls margin 145.0 120.6 (16.8)
---------------------------------------------
* Excludes National 0800 and calls from fixed line to cellular networks.
===============================================================================================
</TABLE>
<PAGE>
9
The significant increase in the rate of price declines over the past several
quarters has seen the tolls margin decline significantly in the year to 30 June
1999 (by 20.0%) and in the current quarter (by 16.8%). Had Telecom not incurred
the decline in the tolls margin, EBIT growth in the current quarter would have
been approximately 8%, indicating that the future growth areas of Telecom's
business (eg. Cellular, Data and Internet) are performing well.
Telecom expects the decline in the tolls margin to continue but considers that
the absolute value of the decline is likely to diminish. While the tolls margin
decline will have a short-term impact on earnings it should not have a long-term
impact on the value of the Company as it is expected industry-wide that tolls
margins will not be a material part of the future telecommunications market
place.
Interconnect
Interconnect revenue is derived from charges for delivering to and accepting
from other service providers local, national, international, cellular and 0800
calls. Installation charges and rental of interconnecting links and service
delivery point charges are also included.
Interconnect revenue increased by NZ$5 million, or 21.7%, for the quarter
largely due to new interconnect carriers and increased activity with existing
carriers.
Cellular and Other Mobile Services
Revenue from cellular and other mobile services grew by NZ$19 million, or 16.5%,
for the first quarter compared with the same period last year. Cellular revenue
grew by 18.0% for the quarter.
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------------------------------
Cellular Change %
99:98
- --------------------------------------------------------------------------------------------------------------
Revenue 18.0
Call minutes 38.3
Connections
Total at period end 50.7
Average during the period 44.2
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Telecom had 760,800 cellular connections at 30 September 1999 compared with
504,800 at 30 September 1998, an increase of 50.7%. The continued strong growth
in connections is largely due to the introduction of prepaid cellular and the
"Telecom 2 GO" promotion.
<PAGE>
10
Prepaid phones have continued to be popular with consumers, but new pricing
plans for contract customers, which include free minutes and additional
services, have attracted large numbers of customers. The total number of active
prepaid customers at 30 September 1999 was 276,700, approximately 36% of total
connections.
Average revenue per customer decreased by approximately 18% compared to last
year, reflecting the recent high number of prepaid connections. Average revenue
per prepaid connection is generally lower than postpaid connections.
The total number of cellular connections in New Zealand, including Vodafone's
connections, now exceeds one million and represents approximately 27% of the New
Zealand population. This penetration level, when compared with other relevant
countries, suggests scope for continued expansion of this market.
On 21 October 1999, Telecom announced that it had purchased Ben Rumble
Communications Limited. There are 17 Ben Rumble Communications stores which sell
connections to Telecom's cellular network and equipment, including mobile
phones. Ben Rumble Communications is one of the largest dealerships selling
Telecom cellular connections.
Data
Data revenue increased by NZ$17 million, or 20.7%, for the quarter. This growth
for the quarter was driven by demand for bandwidth to support business
networking and the increased penetration of the Internet.
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------------------------------
Data Change %
99:98
- --------------------------------------------------------------------------------------------------------------
XTRA revenue 65.2
XTRA registered customers 61.2
ISDN revenue 49.0
ISDN lines 60.2
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Telecom's Internet service provider "XTRA" had approximately 228,300 registered
customers at 30 September 1999, compared with 141,600 at 30 September 1998, an
increase of 61.2%. Of the registered customers, 80% were active during the last
month of the quarter.
The increase in ISDN revenues for the quarter partly reflected migration from
basic access services. The number of ISDN lines increased by 60.2%.
<PAGE>
11
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
Total directories revenue increased by NZ$4 million, or 8.3%, for the quarter
compared with the same period last year.
Revenue from regional directories increased by 8.3% for the quarter as a result
of tariff and volume growth in both The Telephone Book and YELLOW PAGES
products. The increase in directories revenue for the quarter also reflected
the publication of three more LOCAL DIRECTORIES compared with the same period
last year.
Miscellaneous Other Services
Miscellaneous other services revenue decreased by NZ$1 million, or 9.1% for the
quarter. This revenue is derived principally from software development and
telecommunications services provided in the Cook Islands and Samoa. Q1 1998-99
included revenue from an international outside plant project.
Expenses
Operating expenses increased by NZ$12 million, or 2.4%, for the quarter. A
decrease in labour costs was more than offset by increased cost of sales. If
cost of sales are excluded, operating expenses decreased by NZ$13 million, or
3.3%. Operating expenses were 58.9% of revenue compared with 58.7% for the same
period last year.
Labour
The decrease in labour costs of NZ$11 million, or 8.9%, for the quarter
reflected a reduction of 1,347 in personnel numbers between 30 September 1998
and 1999. The lower personnel numbers are due largely to the outsourcing of
operator services to SITEL Asia Pacific ("SITEL") during the year to 31 March
1999 and the outsourcing of information services to EDS in Q1 1999-2000. The
costs of outsourcing are included in "Other Operating Expenses". The effect of
the reduced personnel numbers was partially offset by salary increases arising
from Telecom's annual salary review process.
<PAGE>
12
<TABLE>
<CAPTION>
=====================================================================================================
Personnel Numbers
Variation to
September 1999
-----------------------------------------------------------------------------
September June September September June
1998 1999 1999 1998 1999
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operations 6,632 5,994 5,586 (1,046) (408)
Other 1,514 1,485 1,213 (301) (272)
-----------------------------------------------------------------------------
Total 8,146 7,479 6,799 (1,347) (680)
-----------------------------------------------------------------------------
=====================================================================================================
</TABLE>
Depreciation
Depreciation expense remained relatively stable for the quarter decreasing by
NZ$1 million, or 0.7%. The year on year comparison reflects a decrease due to a
major asset becoming fully depreciated in March 1999 largely offset by the
impact of the increasing fixed asset base resulting from capital expenditure.
Cost of Sales
Cost of sales increased by NZ$25 million, or 22.7%, in the quarter. This
increase was largely due to higher cellular and interconnect cost of sales,
partly offset by lower costs for outbound international calls.
Cellular cost of sales increased by approximately 64%. Special promotions to
attract new connections and encourage existing customers to upgrade their mobile
phones contributed to the increase in cellular cost of sales.
Interconnect expense was also significantly higher reflecting increased volumes
including the growth in calls from Telecom's fixed line network to Vodafone's
cellular network.
International cost of sales for outbound calls decreased by 16.1% for the
quarter (see "International").
Other Operating Expenses
Other operating expenses include occupancy, advertising, computer costs, bad
debts, vehicle costs, office expenses, postage and agency, outsourcing costs and
certain direct costs, which together represented approximately 80% of other
operating expenses.
Overall other operating expenses for the quarter remained relatively stable.
There were increases and decreases among the components of other operating
expenses, the most significant being an increase in outsourcing costs. This
increase reflected the outsourcing of operator services to SITEL in the year
ended 31 March 1999 and the outsourcing of information services to EDS effective
from 1 September 1999 (See "IT Outsourcing and Online Solutions
<PAGE>
13
Alliance"). This increase was offset by a net foreign exchange gain arising from
the closing out of surplus forward foreign exchange contracts relating to the
Southern Cross investment.
Net Interest Expense and Taxation
Net interest expense decreased by NZ$3 million, or 9.7%, for the quarter
compared with the same period last year. The decrease in net interest expense
for the quarter was partly due to lower short-term interest rates partially
offset by the cost of funding the investment in AAPT.
Income tax expense increased by NZ$3 million, or 2.8%, for the quarter compared
with the same period last year. This increase was largely owing to the 2.7%
increase in the surplus from operations before income tax. The effective tax
rate for the quarters ended 30 September 1998 and 1999 was 32.6% compared with a
statutory rate of 33%.
The surplus from operations covered net interest expense (after investment
income but before interest capitalised) and capital note coupons 7.2 times for
the quarter compared with 6.6 times for the same period last year.
Capital Expenditure
Capital expenditure for the quarter amounted to NZ$142 million, an increase of
NZ$28 million, or 24.6%, compared with the same period last year. Cash applied
to capital expenditure amounted to NZ$149 million, an increase of NZ$34 million,
or 29.6%.
Telecom currently expects to spend between NZ$750 million and NZ$800 million on
capital expenditure in the 12 months to 30 June 2000. This includes purchases
of capacity from Southern Cross Cables Limited but excludes any potential
acquisition of spectrum that may be available to purchase from the Government.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows from operating activities for the quarter were NZ$328 million, a
decrease of NZ$45 million. This decrease resulted from lower receipts from
customers and higher payments to suppliers and employees due to an increase in
prepayments, which were related largely to the IT outsourcing. The decrease was
partially offset by lower interest paid.
An increase in cash applied to the purchase of fixed assets was partially offset
by a reduction in net investments purchased, which led to net cash flows used in
investing activities increasing NZ$17 million.
<PAGE>
14
Net cash used in financing activities amounted to NZ$180 million, compared with
NZ$247 million for the quarter to 30 September 1998. The decrease is largely
due to an increase in net proceeds from short-term debt.
The net debt to net debt plus capital funds ratio was 49.3% at 30 September 1999
compared with 48.3% at 30 June 1999. In calculating this ratio, net debt is
deemed to consist of total long and short-term debt, net of cash and short-term
investments, and a term deposit of NZ$26 million. Capital funds include
shareholders' funds, capital notes (TeleNotes and Restricted Capital Securities)
and minority interests.
Cash and short-term investments were NZ$146 million at 30 September 1999
compared with NZ$143 million at 30 June 1999. As at 30 September 1999 Telecom
had available unutilised committed facilities of NZ$1.6 billion and US$150
million, as well as substantial uncommitted other borrowing capacity.
As at 30 September 1999 total interest-bearing long-term and short-term
liabilities amounted to NZ$2,156 million, compared with NZ$2,067 million at 30
June 1999. Capital notes totalled NZ$943 million at 30 September 1999.
On 18 August 1999 Moody's Investors Service ("Moody's") downgraded Telecom's
domestic long-term rating from Aa1 to Aa2. Moody's has kept the domestic rating
on review for further possible downgrade and expanded the review to include
Telecom's foreign currency rating (currently rated Aa2). Moody's advised the
review was driven by the uncertainty over the scale of Telecom's investment in
AAPT. On 15 September 1999 Standard & Poor's placed Telecom's long-term rating
of AA on creditwatch with negative implications following Telecom's announcment
that it was making a takeover bid for AAPT.
OTHER MATTERS
AAPT Limited
During the three months ended 30 June 1999, Telecom purchased a 19.8% stake in
AAPT, at a cost of NZ$387 million. At 30 September 1999 the book value of
Telecom's investment in AAPT was NZ$389 million compared to a current market
value of NZ$353 million. The directors do not consider there has been a
permanent diminution in value of this investment.
On 5 October 1999 Telecom made an offer to purchase all remaining shares in AAPT
at AUD$5.10 per share. The offer closed on 6 November 1999 at which time
Telecom had received entitlements to purchase an additional 184,610,054 shares
in AAPT at a cost of NZ$1,177 million. This will increase Telecom's
shareholding in AAPT to 81.5% (78.2% on a fully diluted basis) at a total cost
of NZ$1,564 million. The acquisition will be funded by debt.
<PAGE>
15
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.
The Southern Cross Cable Network is expected to cost US$1.3 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, approximately 40 international-based companies, including phone carriers
and Internet service providers, have signed up for a share of capacity in the
Southern Cross cable.
Telecom, Cable & Wireless Optus and MCI WorldCom are the shareholders in SCCL
with Telecom's holding a 50% equity stake in SCCL. The equity of Southern Cross
is US$150 million with US$75 million being Telecom's investment. Pursuant to
this a shareholders advance of US$57 million (excluding accrued interest) had
been provided by Telecom to SCCL as at 30 September 1999.
The majority of the funding for the construction of the Southern Cross cable was
to be provided through a limited recourse bank financing facility. However, the
facility required major alterations to accommodate delays in obtaining
Californian environmental permits and recent changes in Southern Cross's
marketing strategy. Following a Data Gathering Meeting in August 1999, which
resulted in significant additional capacity purchase indications, the
shareholders have substituted the banks and are providing interim funding prior
to re-financing the project on a basis more closely aligned to present capacity
purchase indications and the advanced state of the cable construction. It is
expected that Southern Cross will repay its borrowings in the first few years
after the project completion.
Southern Cross Cable Network has now completed over 70% of cable laying for
Phase One of its trans-Pacific network, which will connect Sydney, Auckland,
Hawaii and California. Phase One is expected to be ready for service by July
2000. Cable laying is also underway on Phase Two which will connect Sydney,
Fiji, Hawaii and California. Phase Two is expected to be ready for service in
November 2000.
<PAGE>
16
IT Outsourcing and Online Solutions Alliance
During July 1999, Telecom announced that it had entered into a strategic
relationship with global information services company EDS. The relationship
includes a 10-year, NZ$1.5 billion agreement for EDS to supply the majority of
Telecom's information systems ("IS") services and an equity position by Telecom
in EDS (New Zealand). Telecom, EDS and Microsoft have also agreed to proceed to
a detailed joint business planning phase to examine opportunities to develop and
deliver online solutions to customers.
EDS now manages and operates Telecom's information systems and technology
delivery, including its enterprise applications, technical infrastructure and IS
assets. EDS also manages and operates Telecom's billing and customer information
systems. EDS has employed approximately 600 Telecom staff who were involved in
managing Telecom's IS requirements.
As part of this strategic relationship, Telecom will acquire an initial 10%
stake in EDS (New Zealand), with an option of increasing its holding to 49% over
the next four years. This equity arrangement is subject to the completion of
due diligence and satisfaction of other conditions. Telecom will then have
representation on the Board of Directors of EDS (New Zealand). EDS will retain
a majority shareholding and operational control.
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 progressively installing Rate-
Adaptive Asymmetric Digital Subscriber Line (R-ADSL) technology in exchanges
around the country. R-ADSL is being used by residential and business customers
for 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 and because of New Zealand's varied
<PAGE>
17
terrain and scattered population centres there is no single technology that can
be used for provision of broadband services.
Year 2000
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 and data networks. The Y2K issue could
also affect many of Telecom's internal information systems.
Telecom's Y2K Programme has identified and is addressing a broad spectrum of
internal and external risks which include embedded business support systems,
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 put back into
production. Some remedial action extended into 1999. The testing of the
network infrastructure is well advanced, with the majority of this work
completed in March 1999. A small number of network suppliers are still to
deliver compliant components.
Processes have been developed and implemented to allow Telecom's ongoing
strategic and discretionary programmes to protect the Y2K readiness status of
many components already achieved by the Company. Telecom is also focussed on its
relationships with third parties and their ability to continue in business into
the year 2000. Telecom is aiming to minimise any potential impact on Telecom
customers (resulting from third party relationships). This work will continue
up to and beyond 1 January 2000.
Telecom's Y2K Programme includes a review of business continuity status and
processes. This is aimed at allowing Telecom to respond rapidly to customer
needs in the event of unplanned outages or disruption to services. Dress
rehearsals for Y2K business continuity scenarios have already commenced in
Telecom with 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.
<PAGE>
18
A provision of NZ$87 million was established at 31 March 1997 to cover the
operational costs of the Y2K programme. Operational costs of NZ$6 million were
incurred in Q1 1999-2000. Total costs incurred to 30 September 1999 are NZ$76
million. As at 30 September 1999 the Company had incurred NZ$13 million of the
budgeted NZ$20 million 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. As is the case
with any Y2K programme, there can be no absolute assurance that all Y2K risk
will have been mitigated prior to the Year 2000.
Glossary
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.
<PAGE>
19
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.
R-ADSL (Rate-Adaptive Asymmetric Digital Subscriber Line) - Technology using
compression and filtering to enable broadband transmission down copper wires.
R-ADSL is generally limited to 3-5 kilometres.
Trade Direct - The Telecom product name for a range of bilateral agreements for
exchanging international traffic. A Trade Direct Agreement is a formal
commitment between two carriers to terminate an agreed volume of traffic at an
agreed rate over the life of the contract. The agreements provide for the
establishment of rates for exchanging traffic which reflect market conditions.
VPN (Virtual Private Network) - A carrier provided service in which the public
switched network provides the equivalent of a privately established customer
network.
<PAGE>
20
OVERVIEW OF SURPLUS FROM OPERATIONS
<TABLE>
<CAPTION>
First Quarter Ended Variation
30 September 99:98
- ------------------------------------------------------------------------------------------------------------------------------
(in NZ$ millions, except percentages)
1998 % 1999 % $ %
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues
Local service 263 30.3 266 30.0 3 1.1
Calling
National 178 20.5 170 19.2 (8) (4.5)
International 108 12.4 92 10.4 (16) (14.8)
Other 13 1.5 12 1.3 (1) (7.7)
--------------------------------------------------------------------------------
299 34.4 274 30.9 (25) (8.4)
Interconnection 23 2.6 28 3.2 5 21.7
Cellular and other mobile 115 13.3 134 15.1 19 16.5
Data 82 9.4 99 11.2 17 20.7
Other operating revenues
Directories 48 5.5 52 5.8 4 8.3
Equipment 28 3.2 24 2.7 (4) (14.3)
Miscellaneous other 11 1.3 10 1.1 (1) (9.1)
--------------------------------------------------------------------------------
87 10.0 86 9.6 (1) (1.1)
--------------------------------------------------------------------------------
Total operating revenues 869 100.0 887 100.0 18 2.1
--------------------------------------------------------------------------------
Operating expenses
Labour 124 14.3 113 12.7 (11) (8.9)
Depreciation 138 15.9 137 15.5 (1) (0.7)
Cost of sales 110 12.7 135 15.2 25 22.7
Other operating expenses 138 15.8 137 15.5 (1) (0.7)
--------------------------------------------------------------------------------
Total operating expenses 510 58.7 522 58.9 12 2.4
--------------------------------------------------------------------------------
Surplus from operations 359 41.3 365 41.1 6 1.7
================================================================================
</TABLE>
Certain reclassifications of prior period data have been made to conform to
current period classifications
KEY PERFORMANCE INDICATORS
<TABLE>
<CAPTION>
Year ended Q1 Year ended Q1
June 1998 1998-99 June 1999 1999-00
<S> <C> <C> <C> <C>
Operating Margin (%) * 40.7 41.3 41.2 41.1
Asset Utilisation (%) # 75.2 76.2 ~ 71.5 69.5 ~
Net Interest Cover (times) . 7.3 6.6 7.2 7.2
Return on Average Total Assets (%) + 30.6 31.5 ~ 29.4 28.6 ~
Net Debt/Net Debt plus Capital Funds (%) 42.3 42.3 48.3 49.3
</TABLE>
* Normalised surplus from operations/operating revenue
# Operating revenue/average total assets (net of cash and short-term
investments)
. Normalised surplus from operations/net interest expense (before interest
capitalised) inclusive of capital note coupons
+ Normalised surplus from operations/average total assets (net of cash and
short-term investments)
~ Annualised
<PAGE>
[logo of Telecom]
16 November 1999
MEDIA RELEASE
Telecom lifts quarterly earnings to $209 million
( Embargoed until 9.00am, 16 November 1999 )
Telecom today reported after-tax earnings of $209 million for the three months
to 30 September 1999. Telecom will pay an 11.5 cents per share first quarter
dividend.
Chief Executive Theresa Gattung said the main boosters to Telecom's performance
in the first quarter were very strong growth in New Zealand's mobile phone
market and increasing growth in data revenues.
Overview
--------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Result % change
<S> <C> <C>
Operating revenues $887 million up 2.1%
Operating expenses $522 million up 2.4%
Earnings before interest and tax $365 million up 1.7%
Net earnings $209 million up 1.5%
Adjusted net earnings # $216 million up 4.9%
Earnings per share 11.9 cents up 1.4%
Dividends per share 11.5 cents unchanged
# Adjusted for Southern Cross startup costs and AAPT holding costs
- ---------------------------------------------------------------------------------------------
</TABLE>
Ms Gattung said startup costs associated with the Southern Cross Cable across
the Pacific and funding costs for Telecom's purchase of the initial 19.8 percent
shareholding in Australian telecommunications company AAPT had reduced earnings
by $7 million.
"Both of these projects are expected to add significant long-term value and net
earnings adjusted for Southern Cross and AAPT would have been $216 million for
the quarter, up 4.9%," Ms Gattung said.
The three months to 30 September had been the best ever period for signing up
new mobile customers, with more than 83,000 new mobile connections.
Ms Gattung said the huge growth in New Zealand's mobile phone market, and the
continued surge in XTRA customer numbers and usage reflected changes in the way
New Zealanders were communicating with each other and with the rest of the
world.
<PAGE>
Volume growth
-------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year-on-year Total as at and for
% change 3 months to 30 Sept
<S> <C> <C>
Cellular connections up 50.7% 760,800
Cellular call minutes up 38.3% 240.3 million
Fixed line to cellular call minutes up 33.0% 129.8 million
XTRA customers up 61.2% 228,300
XTRA usage (per customer) up 79.6% 17.6 hours in Sept
ISDN lines up 60.2% 60,700
Telephone access lines up 1.5% 1.88 million
National call minutes up 0.5% 506.8 million
International outward call minutes up 27.0% 137.8 million
International inward call minutes up 16.4% 96.6 million
- --------------------------------------------------------------------------------
</TABLE>
"National and international toll call prices continue to drop. This is great for
Telecom customers and while it means lower revenues from these lines of
business, growth in other parts of the business such as mobile and data is
offsetting declines in voice calling revenues," Ms Gattung said.
Data revenues now exceeded international calling revenues because increasing
numbers of New Zealand businesses were going online and because New Zealanders
had almost doubled the amount of time they spent emailing and web-surfing.
Media Enquiries:
Angus Barclay, Financial Communications Manager,
Telecom New Zealand
Phone 04-498-9372
[email protected]
- ---------------------------
Recent media releases can be found at the Telecom Home Page at
http://www.telecom.co.nz Click on "Media Releases" under the "About Telecom"
heading.
Disclaimer
- ----------
This media release may contain forward looking statements about Telecom
Corporation of New Zealand Limited (TCNZ) and the environment in which the
company operates. Because these statements are forward looking, TCNZ's actual
performance could differ materially. TCNZ's regular earnings announcement media
releases, management commentaries and various documents filed with the US
Securities & Exchange Commission, including the Annual Report on Form 20-F,
contain additional information about matters which could cause TCNZ's
performance to differ from any forward looking statements in this release.
Please read this release in the wider context of material previously published
by TCNZ and filed with the SEC.
<PAGE>
18 October 1999-11-16
MEDIA RELEASE
TELECOM APPOINTS THERESA GATTUNG TO BOARD OF DIRECTORS
The Board of Telecom Corporation of New Zealand Limited has appointed Theresa
Gattung as a Director.
Ms Gattung took up the position of Chief Executive of Telecom on 1 October this
year and was previously Group General Manager, Services. Before becoming Group
General Manager, Services, in April 1996, Ms Gattung was General Manager of
Marketing for Telecom, and prior to that Chief Manager Marketing for the Bank of
New Zealand following a period in a similar position with National Mutual.
Ms Gattung has a Law degree from Victoria University and an Honours degree in
Management Studies (Marketing and Economics) from the University of Waikato.
