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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 20-F
ANNUAL REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended 31 March 1999
Commission file number 1-10798
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TELECOM CORPORATION OF NEW ZEALAND LIMITED
(Exact name of Registrant as specified in its charter)
New Zealand
(State or other jurisdiction of incorporation or organisation)
Telecom Networks House, 68 Jervois Quay, Wellington, New Zealand
(Address of principal executive offices)
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Securities registered or to be registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of each class Name of each exchange on which registered
<S> <C>
American Depositary Shares ...........................................New York Stock Exchange
("ADSs", evidenced by American Depositary Receipts ("ADRs"))
Ordinary Shares, no par value ........................................New York Stock Exchange*
("Shares")
*Not for trading, but only in connection with the registration of ADSs pursuant to the requirements
of the Securities and Exchange Commission.
Securities registered or to be registered pursuant to Section 12(g) of the Act.....................None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act..........None
</TABLE>
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Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the Annual
Report.
<TABLE>
<S> <C>
Ordinary Shares, no par value..................................................................1,752,801,986
Special rights convertible preference share, no par value..................................................1
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to the filing requirements for
the past 90 days.
Yes [x] No
Indicate by check mark which financial statement item the registrant has elected
to follow.
Item 17 Item 18 [x]
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2
TABLE OF CONTENTS
INTRODUCTORY MATTERS
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<TABLE>
<S> <C>
Exchange Rates........................................................................................................... 3
Interpretation........................................................................................................... 3
Forward Looking Statements............................................................................................... 4
PART I
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Item 1 Description of Business...................................................................................... 5
Item 2 Description of Property...................................................................................... 22
Item 3 Legal Proceedings............................................................................................ 22
Item 4 Control of Registrant........................................................................................ 23
Item 5 Nature of Trading Market..................................................................................... 23
Item 6 Exchange Controls and Other Limitations Affecting Security Holders........................................... 24
Item 7 Taxation..................................................................................................... 27
Item 8 Selected Financial Data...................................................................................... 32
Item 9 Management's Discussion and Analysis of Financial Condition and Results of Operations........................ 35
Item 9A Quantitative and Qualitative Disclosures about Market Risk................................................... 35
Item 10 Directors and Officers of Registrant......................................................................... 35
Item 11 Compensation of Directors and Officers....................................................................... 37
Item 12 Options to Purchase Securities from Registrant or Subsidiaries............................................... 37
Item 13 Interest Of Management In Certain Transactions............................................................... 37
PART II
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Item 14 Description of Securities to be Registered..................................................................... 38
PART III
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Item 15 Defaults Upon Senior Securities................................................................................ 38
Item 16 Changes in Securities and Changes in Security for Registered Securities........................................ 38
PART IV
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Item 17 Financial Statements......................................................................................... 38
Item 18 Financial Statements......................................................................................... 38
Item 19 Financial Statements and Exhibits............................................................................ 41
</TABLE>
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3
INTRODUCTORY MATTERS
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Exchange Rates
In this Annual Report on Form 20-F (the "Report"), references to "US$" or "US
dollars" are to United States dollars and references to "$", "NZ$" and "NZ
dollars" are to New Zealand dollars. Telecom Corporation of New Zealand Limited
(together with its subsidiaries, where appropriate, the "Company" or "Telecom")
publishes its financial statements expressed in New Zealand dollars. For the
convenience of the reader, this Annual Report on Form 20-F contains translations
of certain NZ dollar amounts into US dollars at the rates indicated. Unless
otherwise stated, the translations of NZ dollars into US dollars have been made
at NZ$1.00 to US$0.5340, the rate applicable at 31 March 1999. These
translations should not be construed as representations that the NZ dollar
amounts actually represent such US dollar amounts or could be converted into US
dollars at the rate indicated or any other rate.
The NZ dollar is convertible into other currencies at freely floating rates and
there are no New Zealand restrictions on the flow of New Zealand currency across
borders. There are no governmental controls on the exchange rate of the NZ
dollar.
The following table sets forth certain information concerning exchange rates
between NZ dollars and US dollars based on the noon buying rate in New York City
for cable transfers in New Zealand dollars as reported by the Federal Reserve
Bank of New York (the "Noon Buying Rate"):
<TABLE>
<CAPTION>
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Fiscal Year ended 31 March Period End Average (a) High Low
(expressed in US dollars per NZ$1.00)
<S> <C> <C> <C> <C>
1995 .6549 .6154 .6549 .5593
1996 .6807 .6650 .6890 .6435
1997 .6973 .6932 .7148 .6678
1998 .5523 .6279 .6973 .5523
1999 .5340 .5249 .5615 .4838
</TABLE>
(a) Determined by averaging the Noon Buying Rates on the last day of each month
during the fiscal year
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On 20 September 1999 the Noon Buying Rate was NZ$1.00 to US$0.5215.
Most of Telecom's revenues are invoiced in NZ dollars and substantially all of
its operations are located, and services are provided, within New Zealand.
Although Telecom purchases telecommunications equipment from foreign suppliers
and borrows in foreign currencies, it has a policy of managing its exposure to
exchange rate fluctuations through a variety of financing techniques, including
currency swaps, forward foreign exchange contracts, and option agreements.
Interpretation
Certain information required for this Report is incorporated by reference to
Telecom's Financial Statements for the fiscal year ended 31 March 1999 (the
"Financial Statements") and Management's Discussion and Analysis of Financial
Condition and Results of Operations for the fiscal year ended 31 March 1999 (the
"MD&A"). The Financial Statements and MD&A are contained in Volume 2 of
Telecom's 1999 Annual Report to Shareholders (the "Annual Report"). The Annual
Report is filed under cover of Form 6-K dated 6 August 1999. References to
"Notes" are references to the Notes to the Financial Statements.
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4
Forward Looking Statements
This Report contains forward-looking statements within the meaning of Section
27A of the US Securities Act of 1933. Such forward-looking statements are based
on the beliefs of the Company's management as well as on assumptions made by and
information currently available to the Company at the time such statements were
made. When used in this Report, the words "anticipate," "believe," "estimate,"
"expect," "intends" and similar expressions, as they relate to the Company, are
intended to identify forward-looking statements, which include statements
relating to, among other things, the ability of the Company to continue to
successfully compete in the New Zealand telecommunications market. Actual
results could differ materially from those projected in the forward-looking
statements as a result of the matters set forth or incorporated in this Report
generally and certain economic and business factors, some of which may be beyond
the control of the Company, including without limitation: competition in the
telecommunications market; the outcome of litigation to which the Company is or
may become a party; the Company's exposure to exchange rate fluctuations; the
impact of rapid technological change in the telecommunications industry; the
impact of current or future government regulation; the state of the New Zealand
economy; risks related to the "Year 2000 Issue"; perceived health risks
associated with electromagnetic energy; and the adequacy of the Company's
disaster recovery programs.
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5
PART I
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Item 1 - Description Of Business
General
Telecom is a major supplier of telecommunications services in New Zealand.
Telecom provides a full range of telecommunications products and services
including local, national, international and value-added telephone services,
cellular and other mobile services, data and Internet services, equipment sales
and installation services, leased services and directories. In addition Telecom
has some offshore interests. See "-Products and Services-Calling-
International".
History and Development
The Company was established by the New Zealand Government (the "Government") in
1987 for the purpose of acquiring the telecommunications business of the Post
Office as part of a broad range of reforms instituted by the Government that
were designed to place government-owned trading agencies on an equal footing
with private industry.
Ameritech Holdings Limited (or any of its related companies where appropriate,
"Ameritech NZ" or "Ameritech") and Bell Atlantic Holdings Limited (or any of
its related companies where appropriate, "Bell Atlantic NZ" or "Bell Atlantic")
purchased the Company from the Government in September 1990. As part of the
purchase Ameritech and Bell Atlantic each agreed with the Government to reduce
their beneficial share ownership in the Company to 24.95% over time (the "Sell-
down").
In July 1991 Ameritech and Bell Atlantic sold 724.5 million shares in the
Company (representing approximately 31% of the then outstanding share capital)
to the public and institutions in a world wide offering to partially satisfy
their Sell-down obligations. The Sell-down was completed in 1993 by private
transactions.
In 1998 Ameritech NZ disposed of all or substantially all of its holdings in the
Company and the two directors who had been nominated to the Board of Directors
by Ameritech NZ resigned.
In February 1998, Bell Atlantic issued a series of exchangeable notes (the
"Exchangeable Notes"), which are exchangeable, commencing in September 1999,
under certain circumstances, into Telecom Shares. Bell Atlantic has ceased to
be an affiliate of Telecom for U.S. securities law purposes. See Item 4.
Since the establishment of the Company, the New Zealand telecommunications
industry has been progressively deregulated. Telecom now operates in a
comparatively deregulated environment and, except for certain limitations on
standard residential charges, is free to increase or decrease the prices it
charges for all of its services. See "Kiwi Share". The telecommunications
market in New Zealand is also open to competition. See "Competition". The
Government continues to monitor the emergence of competition and the pricing of
goods and services in the telecommunications market and retains the right to
intervene in certain circumstances. See "Regulatory Framework".
Since its establishment Telecom has implemented progressive restructuring to
consolidate operations, improve service quality and reduce operating costs.
This process continues. In 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 services, a purchase of equity by
Telecom in EDS (New Zealand) Limited and an agreement to work together with EDS
and Microsoft to develop and deliver online solutions to customers.
In May and June 1999 Telecom acquired 19.8% of the shares in AAPT Limited
("AAPT") an Australian telecommunications carrier through its wholly owned
subsidiary TCNZ Australia Investments (Pty) Limited ("TNZ Australia") and
subsequently made an offer for all of the remaining AAPT shares. See Item 9.
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6
New Zealand Economy
The bulk of Telecom's operations are in New Zealand and Telecom's business is
directly impacted by the state of the New Zealand economy. Weaknesses in the
economy tend to have an adverse effect on Telecom's growth rate. See "The New
Zealand Economy" in the MD&A page 3 Volume 2 of the Annual Report.
Telecom's domestic senior unsecured long term debt ratings are AA (on credit
watch with negative implications) by Standard & Poor's and Aa2 (on review for
possible downgrade) by Moody's Investors Service. Standards and Poor's placed
Telecom's long term rating on credit watch in September 1999 and Moody's
Investor Service placed Telecom's long term rating on review in August 1999.
Products and Services
Local Service
Local service contributed approximately 30.7% of Telecom's operating revenue for
fiscal 1999. The components of local telephone service are business and
residential line rentals, local call charges (predominantly paid by business
customers) including Centrex and VPN and enhanced network services products such
as Smartphone services, messaging and call track.
Local telephone service provides the customer with access to the local telephone
exchange, allowing telephone communication between customers in a local calling
area and access to national and international toll services. Local telephone
service is provided by cable or radio links that connect customers to the
Telecom network and exchanges that enable customers to connect to one another.
Centrex is a PABX-like service provided directly from Telecom telephone
exchanges. It is primarily designed to meet the requirements of business
customers and provides access to a wide range of features normally available
only from an advanced business system.
Smartphone services include call waiting, call diversion, 3-way calling, do not
disturb, quick dial and caller display. Telecom also offers network based call
answering and messaging services such as call minder and message manager.
Calling
National - National calls contributed approximately 20.3% of Telecom's operating
revenue for fiscal 1999. National calls (also known as inland toll calls or, in
the United States, long distance calls) include calls to a location outside the
caller's local calling area including Centrex and VPN, calls to the cellular
network originating within the fixed line network, National 0800 calls and
operator services charges.
Most national calls are placed by direct dialling, also known as Subscriber Toll
Dialling ("STD"). National calls are carried on "trunk lines" which are long-
line transmission systems connecting exchanges. Telecom's trunk lines are
almost entirely fibre optic cables and microwave radio links.
Telecom's 0800 services automatically charge the called party and are free to
the calling party. This service is used mainly by businesses to encourage long-
distance calls from customers. Telecom offers a call analysis package as part
of its 0800 service. Telecom also offers 0800 services for residential
customers.
Telecom also provides operator assistance for such services as price required
calls, transfer charge calls, collect calls, person-to-person calls, conference
calls and calls using Telecom Calling Cards. There is a charge for the use of
operator services.
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7
International - International calls contributed approximately 12% of Telecom's
operating revenue for fiscal 1999. International services provided by Telecom
include outgoing international calls made in New Zealand, collect, credit card
and "New Zealand Direct" calls to New Zealand, receipts from overseas
telecommunications administrations and companies for calls to New Zealand that
use Telecom's facilities and calls from international switched traffic
transiting Telecom's facilities. Telecom makes payments to overseas
administrations and companies for the use of their facilities for outward and
transit calls from New Zealand to their countries.
Telecom's largest international traffic route is between New Zealand and
Australia. For fiscal 1999, approximately 47% of the volume of Telecom's
outgoing international calls were calls to Australia. Outgoing international
calls to the United Kingdom, the United States, the Pacific Islands, Japan and
Canada comprise the next largest streams.
Telecom provides international services via cables and satellite earth stations,
which receive and transmit international traffic, and international gateway
exchanges, which route incoming and outgoing traffic. Telecom is directly
linked to 75 carriers in 50 countries by submarine cable and satellite and
through those countries to the rest of the world. Telecom owns a significant
interest in TASMAN 2, a South Pacific submarine fibre optic cable. Telecom also
owns an interest in PacRim East, which links New Zealand and Hawaii, and in
PacRim West, which links Australia and Guam. PacRim West, together with TASMAN
2, PacRim East, TPC-5 (linking Guam, Japan and Hawaii) and HAW-5 (linking Hawaii
to the United States mainland), form a Pacific network of fibre optic cables
linking New Zealand to North America and Asia.
In October 1998 Telecom joined with Cable and Wireless Optus and MCI WorldCom in
a joint venture to build and operate a trans-Pacific submarine optical fibre
cable called the Southern Cross Cable Network ("Southern Cross"), linking
Australia, New Zealand, Fiji, Hawaii and the West Coast of the United States.
Southern Cross is intended to provide international capacity to meet expected
growth of traffic generated by data services, including internet traffic, and is
expected to commence operations and achieve full operational capacity in 2000.
In March 1998 Telecom signed a capacity use agreement committing the Company to
purchase capacity on the cable of approximately US$140 million. The first
payment of US$70 million is due on the first ready for service date ("RFS").
The second payment of US$57 million is due on the anniversary of the RFS date
with the balance due 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. The Telecom Board has approved a 50% equity
investment in Southern Cross. Pursuant to this Telecom has provided US$58
million by way of a shareholder advance to Southern Cross. Telecom is committed
to advancing further funds to bring the total up to US$75 million by way of
either equity or further shareholder advances.
Telecom and its joint venture partners are currently negotiating revised funding
arrangements for the Southern Cross Project, which had previously been provided
by a syndicate of international banks. As a result Telecom is likely to
participate in a share of the further funding requirements for the Project.
Telecom has a licence under Section 214 of the Telecommunications Act 1934
(United States of America) to acquire and operate communications facilities in
the United States of America. A point-of-presence has been established in Los
Angeles to switch international wholesale telephony minutes. Other value added
services such as international leased services and private network offerings can
be supported from this facility. Telecom has established a point-of-presence in
Sydney, Australia, which supports international leased services and private
network offerings into Australia. These value added services are supplied
trans-Tasman in support of New Zealand corporates. Telecom has a licence under
Section 7 of the Telecommunications Act 1984 (United Kingdom) to acquire and
operate communications facilities in the United Kingdom. A point-of-presence is
being established in London to switch international wholesale telephony minutes
with European carriers. Telecom is also in the process of establishing points-
of-presence in other countries.
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8
Telecom is a shareholder in INMARSAT Limited, which provides international
marine satellite services to ships, airplanes, and other mobile satellite
services users. Telecom is also involved with INTELSAT and is likely to become
a shareholder when this inter-government organisation is privatised.
Other calling - Other calling services comprise Payphones, National 0900,
teleconference and analogue and dedicated digital voice services.
Interconnection
Revenues from Telecom's interconnection services contributed approximately 2.5%
of Telecom's operating revenue for fiscal 1999.
Telecom exchanges calls with competing telecommunications operators which
require access to Telecom's networks in order to provide their customers with
service capability throughout New Zealand. Prices and terms for this
interconnection are determined by agreement between the parties and Telecom's
revenues include payment for calls carried on behalf of other service providers.
Telecom entered into its first interconnection agreement in 1991 with Clear
Communications Limited ("Clear"). Clear is now a wholly owned subsidiary of
British Telecom ("BT"). Telecom and Clear entered into a comprehensive new
interconnection agreement which came into effect on 1 January 1996. The
interconnection agreement includes prices for local service interconnection
whereby Clear and Telecom pay each other interconnection charges for local
calls. It also includes revised prices for toll interconnection and 0800
interconnection and for Clear customers calling Telecom cellular customers.
Clear has filed a suit against the Company challenging, among other things, the
validity of both Clear's current and original interconnection agreements. See
"Item 3 - Legal Proceedings". On 26 November 1997, Telecom and Clear signed an
agreement establishing local number portability between their two networks.
Clear's interconnection agreement with Telecom requires Clear to pay to Telecom
interconnection and call charges to the extent Clear's customers' calls go over
the Telecom network and vice versa. The interconnection agreement does not
require that Telecom bill Clear customers or provide Clear with the names and
addresses of Telecom customers. Instead, Clear enters into agreements with new
customers on an individual basis and bills its customers directly. In order to
access the Clear network for toll interconnection, Clear customers must either
dial an access code or arrange for non-code access. Non-code access provides
customers with the ability to pre-select a long distance carrier. Clear pays
additional charges to Telecom in order to provide non-code access to its
customers. Clear is currently withholding certain payments for services
supplied under its interconnection agreement. See "Item 3-Legal Proceedings."
Telecom concluded an interconnection agreement with Saturn Communications
Limited ("Saturn") in June 1997. Saturn offers pay television services over a
cable network it has installed. Saturn also provides local and national call
services.
In March 1995, Telecom entered into an interconnection agreement with Global One
Telecommunications (New Zealand) Limited ("Global One"), an affiliate of Sprint.
Global One is currently offering international services.
In June 1996 Telecom concluded its first interconnection agreement with Telstra
New Zealand Limited ("Telstra NZ"), a subsidiary of Telstra. Telstra is the
major supplier of telecommunications services in Australia. The interconnection
agreement with Telecom enabled Telstra NZ to offer national and international
calls and 0800 service. Telstra NZ has also stated its intention of offering
leased data services. In November 1997, Telecom signed a new interconnection
agreement, which replaced the June 1996 agreement and also covered local
service. Telecom also signed a local number portability agreement with Telstra
NZ. Telstra NZ provides local service for business customers.
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9
In February 1998, BellSouth New Zealand ("BellSouth NZ") and Telecom entered
into a comprehensive new interconnection agreement, replacing the original March
1993 agreement between the parties. This interconnection agreement covers a
broad range of interconnection service, including interconnection with BellSouth
NZ's cellular network. In October 1998, BellSouth NZ assigned and transferred
its rights and obligations under the interconnection agreement to Vodafone New
Zealand Limited.
Telecom has an interconnection agreement with Teamtalk Limited ("Teamtalk")
covering the trunked mobile dispatch service operated by Teamtalk.
Telecom also has interconnection agreements with Compass Communications Limited,
Worldxchange Limited ("Worldxchange"), NewCall Communications Limited, CallPlus
Limited, The Internet Group Limited and Superway New Zealand Limited.
Cellular and Other Mobile Services
Cellular and other mobile services contributed approximately 13.9% of Telecom's
operating revenue for fiscal 1999. Cellular and other mobile services comprises
access and airtime charges for calls originating from Telecom's cellular network
(excluding international calls) and revenue from paging and mobile radio
services.
Cellular - Telecom's cellular network is available to approximately 96% of the
New Zealand population. The network consists of both digital (DAMPS) and analog
(AMPS) services, with most of Telecom's customers subscribing to the AMPS
service. Telecom is currently planning to deploy CDMA technology in its
cellular network beginning in 2001. See "-Technology - General". At 31 March
1999, Telecom had approximately 608,900 connections (up from approximately
476,200 connections, or 27.9% from 31 March 1998).
Special features provided through the Telecom cellular telephone service
include: optional rate plans; part-minute charging; customised billing; Cellular
Secretary (voice mail); call diversion; three-way conferencing; international
roaming; Voice Dial (where a customer can make a call by speaking numbers or
names); Mobile Notes (where text messages can be sent to the screen of a
customer's phone); and Tandem (where two phones operate on one number).
Telecom is developing personal communications services which bring together the
benefits of fixed and mobile technologies and applications, primarily using its
existing fixed wire and cellular infrastructure. For example Mobile Extension
allows users to dial internal fixed extension numbers from their mobile phones
anywhere in New Zealand. Another service allows users to make calls from within
their offices or "business zone" for less than a standard mobile phone call.
Historically, the Telecom cellular network was retailed by Telecom and three
independent service providers through a range of distribution outlets. These
independent service providers were purchased by Telecom during 1997 and 1998.
With the advent of Prepaid Cellular in 1998 Telecom has re-entered the reseller
market wholesaling airtime to a small number of service providers that have
complementary distribution capabilities.
As part of its marketing strategy for cellular services, the Company provides
dealers with handset subsidies which are passed directly to subscribers. These
subsidies are in addition to revenue-based dealer commissions. The amount of
the handset subsidy is dependent upon the length and type of service contract
that the subscriber selects.
Paging - Telecom provides an extensive paging service which is available to
approximately 95% of the New Zealand population. Telecom offers alphanumeric
(message) pagers which operate in conjunction with the Telecom paging message
centre. Telecom also offers simple tone and numeric pagers and private paging
systems such as wide area paging networks for the health sector. Telecom also
offers a paging service called "Minicall" aimed at the consumer market which
involves customers purchasing a pager with callers to the pager paying a per
call charge.
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10
Mobile Radio - Telecom operates a national mobile radio network that covers 90%
of New Zealand through its 1,750 channels and 190 mobile radio repeater sites
located strategically throughout the country. Most of Telecom's mobile radio
customer base of 35,000 terminals are companies with vehicle fleets operating
from a central base.
The number of mobile radio systems per capita in New Zealand is high in
comparison with other countries. This is largely attributable to the low cost
of the service to users and national co-ordination of the network. Telecom's
mobile radio network can connect to the PSTN to allow telephone calls. Mobile
services such as Fleetlink (trunked radio), Sealink (automatic marine telephone
service) and mobile data capability are also offered.
Data
Revenues from data services contributed approximately 9.7%, of Telecom's
operating revenue for fiscal 1999. Data revenue consists principally of revenue
from data transmission services, dedicated leased lines and Internet access.
Telecom offers PACNET a data transport system that uses packet switching
technology to accumulate and transmit information in "packets". PACNET is used
as a basis for value-added services such as electronic-mail, online database
systems and EFT-POS (Electronic Funds Transfer at the Point-of-Sale). Telecom's
frame relay and ATM services provide high-speed links between LAN host computers
and high performance workstations designed to address the growing market for
high-speed data services. The ATM service is increasingly being used to support
Internet protocol ("IP") services.
Telecom offers a wide range of dedicated circuit services to satisfy the needs
of customers requiring use of exclusive telecommunications links. These
services are used extensively in corporate data networks. Dedicated circuits
are commonly used for applications such as linking PABXs and for private data
networks. Other uses include transporting fire and other alarm signals to
centralised monitoring centres and transporting radio and television signals
between studio facilities and transmission sites.
The Company is a leading provider of Internet services in New Zealand. Telecom
aims to continue to grow the number of subscribers to its XTRA service and
increase usage by promoting electronic commerce applications in New Zealand. In
addition, Telecom aims to continue to attract advertising and Internet traffic
over its network. Growth in Internet usage is stimulating demand for second
access lines and fast data services by business and residential customers.
Telecom also provides IP network services which connect other Internet service
providers to their customers.
Other Operating Revenue
Directories-Telecom's directories business contributed approximately 4.6% of
Telecom's operating revenue for fiscal 1999. Telecom annually publishes 18
regional directories listing customers' names and telephone numbers ("The
Telephone Book"), 21 local directories and 1 specialist directory. Telecom also
has a contract to publish the Cook Islands telephone directories. Telecom has
entered into separate agreements with Clear and Telstra New Zealand Limited
("Telstra NZ") for their respective customers to be listed in Telecom's
directories.
A standard listing in the regional and local directories is free to both
residential and business customers. Special listings are available on a charged
basis. Regional advertising directories classified by product or service
("YELLOW PAGES(R)") are also published every year.
Every home and business in New Zealand receives, at no charge, one copy of The
Telephone Book and YELLOW PAGES(R) for the region in which they are located.
Additional copies may be purchased. In addition, a national directory of
facsimile numbers is published and distributed to customers listed in the
facsimile directory at no charge and to others for a fee.
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11
Telecom offers four colour advertising, bold and super bold entries and logos in
its directories. Telecom also provides Electronic White Pages, Internet WHITE
PAGES and Internet YELLOW PAGES(R).
Equipment Revenue - Revenues from Telecom's equipment sales and installation
services contributed approximately 3.2% of Telecom's operating revenue for
fiscal 1999. Telecom supplies and installs a range of customer premises
equipment ("CPE"), including telephones, PABXs, keyphones, pagers, facsimile and
other data terminals and equipment. All CPE supplied by Telecom is manufactured
by non-affiliated suppliers. Telecom provides rental telephones for business
and residential customers but does not sell telephones to residential customers
except in limited cases such as to encourage the uptake of network services
(e.g., caller display). Telecom also supplies PABXs and other business systems
on a rental and sale basis and through third party leasing arrangements.
Miscellaneous Other Services - Revenues from miscellaneous other services
contributed approximately 1.1% of Telecom's operating revenue for fiscal 1999.
Miscellaneous other services provided by Telecom primarily include software
development and an international outside plant project.
Tariffs
There is no statutory regulation of Telecom's prices for telephone network
access or usage or for any of its other services in New Zealand. Consequently,
Telecom is not required to appear before any regulatory authority in order to
increase or decrease its rates. However, under Telecom's Constitution
("Constitution"), Telecom is restricted, except in certain circumstances, from
raising its standard residential line charges above the percentage increase in
the New Zealand Consumers Price Index ("CPI"). See "Regulatory Framework - Kiwi
Share".
Historically, telecommunications tariffs were set by the Post Office on the
basis of financial targets set by the Government to achieve social and political
objectives. This pricing structure resulted in significant cross-subsidisation
among various elements of Telecom's services. The foremost example was the
subsidy of local telephone services by other revenue, principally from national
calls. This cross-subsidisation continues to a lesser degree.
Under Telecom's tariff structure, residential customers ordinarily pay a fixed
monthly access charge of NZ$32.30 before Goods and Services Tax ("GST"), that
entitles them to make local calls without additional charge. Telecom also
offers residential customers various optional payment plans relating to monthly
access charges and per call pricing, which provides, for example, residential
customers with the option to pay for local calls in return for a reduced access
charge.
From 1 November 1999, Telecom intends to introduce a new tariff structure for
residential customers dialling local numbers that allow connection to the
Internet. Under this structure the first 10 hours of such calls will be free
but after that a charge of NZ 2 cents per minute (including GST) will be
payable. However, calls to 0867 numbers in the same local calling area will be
free for residential customers for accessing the internet.
Most business customers now pay a uniform fixed-wire rental, plus a usage charge
for local calls. The current level of the standard fixed access charge is
NZ$58.42 per month (before GST). The usage charge is NZ 4.55 cents per minute
(before GST) between 7am and 10pm and NZ 0.99 cents per minute (before GST) at
other times. Some business customers receive discounts on their line rental and
local call charges as part of business discount plans available to the business
market.
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12
Residential and business customers are charged for direct dial national calls on
a 1 minute + 1 second basis, which charges customers for the first minute of use
at the time the call is connected and on a per second basis from the completion
of the first minute of calling. The prices for national calls vary according to
traffic route, distance and time of day. Promotions and price specials are run
periodically to stimulate growth in volume. Telecom offers a range of discount
plans to its business and residential customers designed to ensure that prices
for national calls are competitive within the most important market segments.
International calls are also charged on a 1 minute + 1 second basis. Promotions
and price specials are used periodically to stimulate growth in international
calls. Telecom offers a range of discount plans to its business and residential
customers designed to ensure that prices for international calls are
competitive.
Telecom offers a range of cellular plans to its business and residential
customers, which consist of monthly access fees and per call charges on a 1
minute + 1 second basis. Telecom also offers discounts to business customers.
Originators of calls to cellular telephones generally pay all usage charges.
Telecom also offers pre-paid cellular plans.
Telecom charges subscribers a monthly access charge for subscription to its
value-added services such as voice messaging and caller display.
Marketing
Telecom's marketing activities are focused on positioning Telecom as a major
competitive provider of telecommunications services to business and residential
customers in New Zealand. There are three marketing teams within the company
focused on three main groups of customers - Consumer, Business and large
Corporate customers. In addition there are product focused marketing teams for
mobile, data, access/enhanced services and calling. Each of the Consumer,
Business and Corporate groups also operate a range of direct and indirect
channels, including face-to-face account management of key business customers
and all of Telecom's top 600 customers.
Telecom maintains an advertising programme, through broadcast and print media,
to support its sales effort. The focus of Telecom's advertising strategy is to
increase customer awareness of products, stimulating usage and building the
Telecom brand.
Technology
General
Telecom operates an advanced telecommunications network. Over 99% of Telecom's
customers are connected to digital telephone exchanges. Approximately 99% of
Telecom's transmission links between cities (inter city links) and links within
urban areas (urban links) have digital capacity. Of these, approximately 99% of
urban transmission systems are now fibre optic. Inter city links are fibre
optic cables (86%) with some digital microwave radio (14%). Local loop
technology includes copper cable, radio and fibre optic. A network of digital
transmission systems connects the major switching nodes. Telecom uses the
internationally standardised CCS No.7 signalling system as a key component of
its network design. Telecom operates an Intelligent Network ("IN"). The IN
enhances the operation of the existing network and allows Telecom to more easily
provide new services. Telecom also operates synchronous transmission systems.
Telecom's network is managed through a computerised management system which
monitors the network, records network traffic flows and rearranges network
capacity as necessary.
In mid-1999, Telecom commercially launched a fast Internet access service based
on ADSL technology. The service is initially being offered in the main centres,
and will be expanded as demand dictates. ADSL utilises existing copper cabling
and has the potential to be used for a range of broadband services including
video. A nationwide ATM (asynchronous transfer mode) network is operational and
experiencing strong growth.
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Telecom's international network provides international services via optical
fibre submarine cables and satellite earth stations. The international network
is 99.7% digital. Telecom is a leading investor in the Southern Cross Cable
network, a submarine fibre-optic cable system that will link New Zealand and
Australia with Fiji, Hawaii and the west coast of the United States. Cable
laying commenced in mid-1999 and is scheduled for completion in 2000.
Telecom does not manufacture telecommunications equipment but concentrates on
the design and development of its networks with the best technology available.
Research and development costs are, therefore, not material. Equipment is
purchased on supply contracts after international tendering of bids. Turnkey
supply and installation contracts and flexible supply contracts (typically of
three to five years duration) are used for equipment installed by Telecom in its
network. Telecom has long-term equipment supply relationships with NEC
Corporation of Japan ("NEC"), Fujitsu Limited of Japan ("Fujitsu"), Nokia
Telecommunications of Finland ("Nokia") and L M Ericsson of Sweden ("Ericsson"),
which has enabled it to develop an integrated network of high technical quality.
NEC has been the provider of main exchange switches to the Telecom network since
1973, first with crossbar electro-mechanical switches and, since 1982, with
digital switches. NEC has also provided IN and international gateway switches.
Fujitsu, Nokia and Siemens are the main providers of transport systems.
Ericsson has supplied Telecom with its cellular network since 1986, including
cell sites and switches.
Telecom has no obligation to continue to purchase equipment from NEC, Fujitsu,
Nokia or Ericsson and Telecom believes there are sufficient alternative sources
of supply. Until August 1999, Telecom controlled a joint venture company with
NEC for software writing, fault servicing and turnkey installation of switching
equipment for the national network. Telecom's interest in this business has now
been sold to NEC New Zealand.
In August 1999, Telecom decided to deploy cdmaOne cellular technology with a
commercial launch planned for the first half of 2001. CdmaOne is the brand name
for an advanced 2nd generation digital cellular technology. CdmaOne is based on
the generic spectrum sharing technique known as CDMA (Code Division Multiple
Access), in which users share the same spectrum through the use of unique
"codes". Telecom is currently in negotiations with prospective vendors for the
supply of cdmaOne network infrastructure and handsets. It is expected that the
existing AMPS/DAMPS cellular network will continue to be grown and developed for
at least 3 years.
Impact Of Rapid Technological Change
Rapid changes in telecommunications and information technology are redefining
the markets in which Telecom operates, the products and services demanded by
customers and the ability of enterprises to compete in the telecommunications
industry. Such changes are broadening the range, reducing the costs and
expanding the capacity and function of infrastructures capable of delivering
these products and services. Partially as a result of these changes, the prices
that can be charged for many products and services are falling. There is a risk
that competitors will deploy or develop technologies that provide them with
lower costs or other operating advantages relative to Telecom, which could
require Telecom to reduce the prices of its products and services to remain
competitive and incur significant expenditures in addition to those already
planned in order to remain competitive.
Perceived Health Risks Associated with Electromagnetic Energy
Allegations have been made, but not proven, that mobile telecommunications
equipment may pose health risks due to emissions of electromagnetic energy from
such devices. The weight of national and international scientific opinion is
that there is no substantial evidence of detrimental public health effects from
cellular transmission equipment operating at typical levels. Investigations are
continuing into the safety of cellular handsets. In its operations, Telecom
complies with the electromagnetic energy emissions levels permitted by the
applicable New Zealand standard. However, there is a risk that an actual or
perceived health risk associated with mobile telecommunications equipment could
lead to litigation, adversely affect the Company through a reduction in the
number of subscribers or the growth rate of mobile telecommunications services
or reduced usage per subscriber, or hinder the company's placement of new mobile
telecommunications equipment.
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14
Year 2000
Until recently the majority of computer software worldwide was programmed to
process transactions using only two digits to identify a year (eg, "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. Almost all of the services which Telecom offers its
customers are based on technology-driven systems, including the exchanges and
other components in Telecom's fixed-wire, cellular, data, and paging networks.
This issue also affects many of Telecom's traditional information technology
applications. In addition, Telecom's customers and suppliers are subject to the
same risks and, if they are so affected, such event could, in turn, adversely
affect Telecom.
The operating cost of making the modifications necessary to maintain existing
functionality into the year 2000 and beyond is estimated at NZ$87 million. The
Company will also make capital expenditures in connection with this issue
estimated at approximately NZ$20 million. Telecom established a reserve to
account for Year 2000 costs as at 31 March 1997. Costs of approximately NZ$70
million incurred to 30 June 1999, have so far been charged to this provision.
To 30 June 1999 Telecom has incurred NZ$13 million of capital expenditure in
connection with the Year 2000 issue.
While the Company is going through a process of checking, validation and
contingency planning there can be no assurance that the Year 2000 program will
be successful, additional costs will not be incurred, Telecom's customers or
suppliers will not be adversely affected or such issues will not otherwise have
a material adverse effect on Telecom's business, financial condition or results
of operations.
See also "MD&A-Other Matters-Year 2000 Costs"
Disaster Recovery
The computer systems used by Telecom to support its sales and service
operational groups and for the processing of data for billing and financial
reporting purposes are situated principally in one location. The Company does
not presently have back-up processing facilities adequate for the timely
processing of this data in the event of the destruction or substantial
impairment of its primary processing facilities, which could occur as a result
of earthquake, fire, flood or other disaster. Were such an event to occur, the
Company could experience significant problems in servicing customers, delays in
the processing of customer bills and the receipt of related payments and the
production of financial accounts.
In addition, as Telecom's network continues to develop, it becomes more
concentrated and more dependent upon computer technology. The concentration of
more lines terminating in fewer switches means that the possible impact of
earthquakes, fires, floods or other disasters is likely to be greater. Greater
dependence on computer technology also means a greater susceptibility to the
usual array of computer-related problems.
Competition
Introduction
Since 1989, there have been no statutory barriers to entry to any part of the
telecommunications industry in New Zealand, and vigorous competition has
developed in the various telecommunications markets in New Zealand. Broadly
speaking, Telecom competes on the basis of product range, service, quality and
price.
Telecom expects competition to continue to intensify, with the prospect of
existing participants extending their activities as well as additional
competitors entering the market. Further declines in prices for many products
and services can be expected.
Competition exists in each of the markets in which Telecom operates. Certain of
Telecom's competitors are large multi-national corporations, or affiliates
thereof, with substantial resources, including Telstra, BT and Vodafone.
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The Company is required to make publicly available certain pricing information
that may place it at a competitive disadvantage in the market. See "-Regulatory
Framework-The New Zealand Regulatory Environment-Telecommunications (Disclosure)
Regulations 1990." There can be no assurance that the competitive environment
will not have a material adverse effect on Telecom's business, financial
condition or results of operations.
Local Service
Competition in local call services has, until recently, been limited to the
business market. This has changed in the last 12-18 months as Saturn
Communications has rolled out its network in the Wellington region, offering
services to both residential and business customers. The roll-out of an HFC
network by Superway in North Auckland may provide opportunities for other
players to resell services.
Clear is offering local call services to business customers in central business
districts of the main centres and Telecom expects Clear to continue to expand
the rollout of this service. In addition, Clear has stated it might offer local
call services to some residential customers. The interconnection agreements
signed with several other carriers also allow each of them to provide local
service. See "-Interconnection".
Telstra has indicated that it plans to build a network in Auckland's central
business district. This would allow it to service a number of trans-Tasman
companies whose telecommunications decisions are being increasingly influenced
from Australia. Most of these companies already have a relationship with
Telstra Corporation in Australia.
In February 1998, both Formus Communications and Clear acquired spectrum in the
New Zealand LMDS auctions. Formus has indicated that it now plans to sell its
spectrum and withdraw from the New Zealand market, following its failure to
secure any LMDS spectrum in Australia. This will provide opportunities for
other operators to purchase the spectrum and offer wireless access services.
As detailed in "-Interconnection," Telecom has signed local number portability
agreements with several other carriers which allow customers to retain a
telephone number when changing carriers.
Numbering
Telecom has also entered into a Number Administration Deed with several other
carriers which provides for a mechanism for the centralised and independent
administration of the parties' telecommunication number resources and for the
provision of number portability. It includes a provision for an independent
assessment of the costs and benefits of a long term number portability solution,
and a commitment by the parties to implement and pay for that solution if the
assessment is that the benefits outweigh the costs. The Number Administration
Deed has been the subject of an authorisation from the Commerce Commission.
Telecom has entered into an agreement with other carriers establishing an
unincorporated joint venture for introducing toll free number portability, and a
system for the allocation of toll free numbers. The effect, if any, of number
portability upon Telecom's revenues cannot be measured at this time.
National Calls
Competition in the national call markets commenced in 1991 with the signing of
the first interconnection agreement between Telecom and Clear. See "-
Interconnection." Vigorous competition between Telecom and Clear in this market
was further fuelled by the launch of Telstra NZ's national tolls offering in
1996, followed in 1997 by offerings from Global One, Worldxchange and other
carriers. Most of these operators depend upon a network of resellers for
distribution, targeting business and consumer markets. There has been some
consolidation in this market in the last 12 months: resellers have been
acquired by other operators; customer bases have been sold as operators re-
focus; and new, non-traditional distribution channels have been established.
Internet Service Providers, Ihug and Voyager, are also now offering calling
services. Intensive price competition is expected to continue.
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International Services
Telecom is facing intense competition from a variety of sources in international
services. Clear provides international telephone services to New Zealand
customers via its satellite earth stations and its ownership interest in the
TASMAN 2 submarine cable. Telstra NZ and several other carriers also offer
international services. There are also a range of resellers, refilers and
callback operators offering competing international services.
The environment for international services is changing rapidly as the regulated
trading regime for international traffic shifts to competition-based pricing.
Such changes result from, among other things, the global trend toward
deregulation of the telecommunications industry in many countries and from the
attendant increase in competition. Increased competition has put pressure on
the traditional accounting rate regime as telecommunications organisations
endeavour to lower their costs through reducing settlement rates or through
various forms of arbitrage. Arbitrage activity in the industry is growing
rapidly, which is also forcing settlement rates toward the real costs of
termination for international calls. While total payments and receipts are both
declining as settlement rates move towards cost, the rates of movement are
dissimilar. Historically, Telecom's net settlement position was substantially
in balance, but that position moved to a net settlement deficit as a result of
traffic being arbitraged into New Zealand at a rate faster than settlement rates
for outgoing traffic can be lowered and outgoing traffic growing at a faster
rate than incoming traffic. Intensive price competition is expected to
continue.
Mobile Services
BellSouth, through BellSouth NZ, commenced operating a competing mobile cellular
network in 1993. In May 1993, the New Zealand Government sold spectrum
management rights in the GSM-B band to Telstra NZ. In December 1997 Telstra NZ
announced an agreement with BellSouth NZ involving the transfer of Telstra NZ's
rights in the GSM-B band to BellSouth NZ and allowing Telstra NZ to offer mobile
services using the BellSouth NZ network but providing its own phones and
customer service. Telstra NZ launched its service in May 1998.
In August 1998 Vodafone Europe Holdings BU (a subsidiary of Vodafone AirTouch)
purchased BellSouth NZ for approximately NZ$750 million. Since taking over from
BellSouth, Vodafone has grown its customer base predominantly through the take-
up of prepaid services and also through the increased number of distribution
channels. This has been supported by a strong branding campaign and the signing
of significant sports sponsorships. In the fourth quarter of fiscal 1998,
Telecom announced reductions in cellular rates which were, in part, a response
to competitive pressures.
Vodafone Australia recently announced that it will pay NZ$1.55 billion to
Vodafone Europe Holdings, a wholly owned subsidiary of Vodafone AirTouch, for
Vodafone's New Zealand operation and for 49 percent of its Fiji operation.
Vodafone Australia is expected to make an initial public offering of stock early
next year.
The New Zealand Government has announced that it intends to auction spectrum in
the 2 GHz range which can be used to provide a range of second and third
generation cellular services. This auction was originally scheduled to commence
in March 1999, but was postponed in order to allow time for the government to
consider Maori interests with respect to the 2 GHz band, and the radio spectrum
more generally. A revised commencement date has not yet been announced. The
Company has not yet determined whether it will participate in the rescheduled
auction. If it decides to participate, there can be no assurance that Telecom
will be successful or, if successful, that Telecom could obtain New Zealand
Commerce Commission (the "Commerce Commission") approval for an acquisition of
spectrum. The Commerce Commission has indicated that Telecom's acquisition of
additional spectrum within the 2 GHz band may raise dominance issues. Telecom
disputes this position and is engaged in ongoing discussions with the Commerce
Commission. See "-Regulatory Framework-Radiocommunications Act 1989."
<PAGE>
17
Customer Premises Equipment
The CPE market is competitive with a wide range of products available from
numerous competitors. See "-Products and Services-Other Operating Revenue-
Equipment Revenue" for a description of Telecom's role in the CPE market.
Other Services
A number of large companies operate private networks for domestic communications
on dedicated lines leased from Telecom and other suppliers. Several companies
resell excess capacity on dedicated lines to other users but it is difficult to
assess the extent of such use. Other companies have established businesses
based on acquiring bulk transmission capacity from Telecom and reselling this
capacity in smaller parcels with network management services. Telecom has
experienced increased competition since deregulation from a number of companies
providing voice mail, electronic messaging and other value-added services using
Telecom's network.
See also MD&A-"Competitive Framework".
Regulatory Framework
The New Zealand Regulatory Environment
Unlike telecommunications companies in most other countries, Telecom operates in
a comparatively deregulated environment - although there can be no assurance
that the New Zealand Government will not introduce laws to further regulate the
telecommunications industry in the future. Telecom has entered into a Number
Administration Deed (dated 15 December 1998) with several other carriers, which
was authorised by the Commerce Commission in May 1999. See "-Competition-
Numbering".
Commerce Act 1986. Following the liberalisation of the New Zealand
telecommunications market, the Commerce Act 1986 (the "Commerce Act") became the
principal statute controlling market behaviour.
The Commerce Act prohibits various forms of restrictive trade practices in New
Zealand. These include entering into contracts, arrangements or understandings
that have the purpose of, or that have or are likely to have the effect of,
substantially lessening competition in a market. It also prohibits any person
who has a dominant position in a market from using that position for the purpose
of restricting the entry of others into any market, preventing or deterring
others from engaging in competitive conduct in any market or eliminating others
from any market. It further prohibits the acquisition of assets of a business
or shares by any person that is likely to result in that or any other person
acquiring or strengthening a dominant position in a market without the consent
of the Commerce Commission.
Applications for merger and takeover clearances are now made on a voluntary
basis. However, the Commerce Act retains penalties for mergers and takeovers
which proceed without Commerce Commission clearance or authorisation and have
anti-competitive effects, which are likely to result in any person acquiring or
strengthening its dominant position in a market.
The Commerce Act gives the High Court of New Zealand (the "High Court") the
power to grant injunctions to restrain conduct and to award damages and impose
pecuniary penalties of up to NZ$5 million against a company in respect of each
breach. A bill currently before the New Zealand Parliament would increase this
to NZ$10 million (see below). The Commerce Act also gives the Government power
to introduce price controls for goods or services supplied or acquired in a
market where competition is limited or likely to be lessened.
The New Zealand Government is reviewing aspects of the Commerce Act. Proposed
changes include increasing penalties, extending the limitation period in which
actions under the Commerce Act may be taken, expanding the deemed offences
provision and lowering certain thresholds.
<PAGE>
18
The Commerce Commission, as the government agency responsible for policing the
Commerce Act, investigates complaints about alleged breaches of the Commerce
Act. Private persons can also bring actions under the Commerce Act.
Fair Trading Act 1986. Telecom is also subject to the Fair Trading Act 1986
(the "Fair Trading Act"), like all trading enterprises in New Zealand. The Fair
Trading Act prohibits misleading and deceptive conduct, false representations
and unfair trade practices. It also establishes a mechanism for the
prescription of consumer information and product safety standards.
Consumer Guarantees Act 1993. The Consumer Guarantees Act provides rights of
redress against suppliers and manufacturers of goods and services in respect of
any failure to comply with guarantees given, or deemed by the statute to be
given, to consumers.
Telecommunications Act 1987. The Telecommunications Act 1987 (the
"Telecommunications Act") removed Telecom's statutory monopoly on the provision
of network services as from 1 April 1989. By removing entry restrictions it
facilitated effective competition in the supply of telecommunications goods and
services.
The Telecommunications Act allows the establishment and maintenance of
telecommunications networks by any person. It also confers upon network
operators statutory rights of entry upon any land (including land owned by the
Government) for the purpose of gaining access to existing lines constructed
before 1 April 1989 and existing works constructed before 1 January 1988 owned
by the network operator. Telecom is a network operator.
The Telecommunications Act is the enabling legislation for the
Telecommunications (International Services) Regulations 1994 and the
Telecommunications (Disclosure) Regulations 1990.
Telecommunications (International Services) Regulations 1994. The
Telecommunications (International Services) Regulations 1994 apply to all
persons who establish, operate or maintain facilities in New Zealand for the
purpose of providing to other persons in New Zealand, pursuant to an agreement
or arrangement between that person and an overseas operator, public switched
telecommunication services to or from territories outside New Zealand or leased
circuits that are connected both with public networks in New Zealand and with
public networks in the territory of the overseas operator. Any person to whom
the regulations apply must become a registered operator.
The Secretary of the Ministry of Commerce (the "Commerce Secretary") may (having
regard to the desirability of promoting a competitive market in international
telecommunications services in New Zealand and the interests of users of such
services in New Zealand) at any time require any registered operator:
. to ensure that any agreement or arrangement between the registered
operator and an overseas operator specified by the Commerce Secretary
provides for the registered operator to pay a fee for terminating traffic
to the overseas operator, which fee shall be at a rate, and in accordance
with a method, fixed by the Commerce Secretary;
. to ensure that any agreement or arrangement between the registered
operator and an overseas operator specified by the Commerce Secretary
provides for the registered operator's share of total traffic to New
Zealand from that overseas operator to be in a similar proportion to that
registered operator's share of total traffic from New Zealand to that
overseas operator.
Registered operators are also required to:
. comply with such international telecommunication agreements and
conventions to which New Zealand is a party as the Secretary may notify;
. provide to the Commerce Secretary such statements, reports and agreements
with overseas operators as the Commerce Secretary may require;
. pay such fees as are payable under the Regulations. A registration fee of
NZ$10,000 and an annual fee of NZ$10,000 thereafter are currently payable.
The government has indicated that it intends to repeal these regulations.
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19
Telecommunications (Disclosure) Regulations 1990. The Telecommunications
(Disclosure) Regulations 1990 (the "Disclosure Regulations") are intended to
support the regulatory regime under the Commerce Act by making certain
information about Telecom's activities available to the public.
The information which Telecom is required to make publicly available at regular
intervals is as follows:
. year end (audited) and six monthly (unaudited) financial statements of
Telecom New Zealand Limited, its principal operating subsidiary;
. Telecom's standard prices, terms and conditions for "prescribed services".
Prescribed services are essentially basic network services, leased
circuits and network interconnection;
. the principles or guidelines applied by Telecom in determining whether or
not to allow a discount and the maximum discount available;
. where Telecom provides discounts of 10% or more on prescribed services,
the discount allowed, any relevant variation to the standard terms and
conditions and the principles applied in determining whether to give the
discount;
. where Telecom has supplied prescribed and other services and a discount of
10% or more was applied in relation to the aggregate price of all the
services, the discount allowed and the fact that the discount applied to
services other than prescribed services; and
. the full text of any interconnection agreement relating to interconnection
to Telecom's public switched network.
The Company Secretary of the Company is required to make statutory declarations
that the Disclosure Regulations have been complied with, based on his reasonable
enquiry.
The Government announced in August 1999 that it intended to make a number of
changes to the Disclosure Regulations. As part of these changes Telecom will be
required to publish separate financial statements for its `local loop' and
`other telecommunications services' businesses. Telecom will also be required
to calculate and disclose the net economic cost of complying with the Kiwi Share
obligations. See "-Kiwi Share".
Radiocommunications Act 1989. Until 1989, all radio frequencies were allocated
by the New Zealand Government, which issued radio apparatus licences to users in
respect of transmitters or particular groups of transmitters. The
Radiocommunications Act 1989 instituted a new regime for the management of the
radio frequency spectrum, whereby the government decides to bring particular
frequency bands within the new regime and creates tradable management rights and
spectrum licences in those frequency bands. Until such time as a frequency band
is brought within the new regime, the old system of radio apparatus licences
remains in force.
Telecom currently holds:
. Management rights until 2012 in respect of both the AMPS A and B bands
that its cellular network currently utilises; and
. Management rights until 2010 in respect of eight MMDS channels. Telecom's
future use of these channels is currently under review.
Such management rights are deemed to be assets of a business for the purposes of
the Commerce Act. On expiry, the management rights revert to the New Zealand
Government, which can then sell them. The prior holder of the management rights
is given no first right of refusal or preference in that sale.
Telecom also holds approximately 8,200 radio apparatus licences, relating to
frequencies which have not yet been brought under the new regime. These are
issued on an annual basis, and are generally renewed automatically, although
there is no statutory right to renewal. The radio apparatus licences include
licences in respect of transmitters used to provide service to households in
remote areas, trunked despatch services, land mobile, maritime mobile, paging
services and fixed point-to-point links that support a national infrastructure.
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The New Zealand Government has indicated that it intends to bring a number of
the frequencies to which these radio apparatus licences relate within the new
regime during the period 1999-2005. The Radiocommunications Act provides that
where the new regime is applied to a frequency band in which a party holds radio
apparatus licences, that party has a right to obtain five year spectrum licences
which protect its existing rights, but only in respect of radio apparatus
licences that were first granted before 1 July 1989. Approximately 50% of the
Telecom transmitters covered by radio apparatus licences are covered by licences
first granted before 1 July 1989.
The New Zealand Government has announced that it intends to auction the 2 GHz
frequency band. The auction was initially scheduled for the second half of 1998
but is now unlikely to occur before March 2000. Part of this band has been
allocated internationally for "third generation" mobile applications.
Approximately 30% of the radio apparatus licences Telecom holds within this band
were first granted before 1 July 1989. If Telecom wishes to obtain replacement
licences for the balance of its existing operations, or for additional uses, it
will need to do so at its own cost.
The acquisition of management rights and spectrum licences may require Commerce
Commission approval if it is likely to result in the person making the
acquisition or any other person acquiring or strengthening a dominant position
in a market. See "- Competition - Mobile Services" and "- Commerce Act 1986."
The Radiocommunications Amendment Bill, which will amend the Radiocommunications
Act 1989, includes provisions allowing regulations to be made requiring
compliance with international electromagnetic interference standards,
strengthens provisions to prevent disruption caused by lawful interference
(through the introduction of an arbitration process), and allows for new
management rights to be created and allocated in advance of the expiry of
existing rights. While the bill has been reported back from the Commerce Select
Committee for some time it is unlikely that it will be passed into law until
sometime in 2000 at the earliest.
Overseas Investment Regulations 1995. Under the Overseas Investment Regulations
1995 ("Overseas Investment Regulations"), Telecom is deemed to be an "overseas
person" because of its foreign shareholders. Overseas persons are required to
obtain consent for certain business activities. Telecom must obtain consent for
business acquisitions where the value exceeds NZ$10 million, or for acquisitions
involving rural land.
Kiwi Share. Prior to the sale of Telecom to Ameritech and Bell Atlantic in
1990, the Government owned all the outstanding share capital of the Company.
The Government currently holds one preference share (the "Kiwi Share") of the
Company that has special rights. The Company's Constitution contains provisions
that require the Company and the Board of Directors ("the Board") to observe
certain principles relating to the provision of telephone services and their
prices. Unless the holder of the Kiwi Share otherwise consents, these
provisions require Telecom to (i) maintain a local free-calling option for all
residential customers, although Telecom may also offer optional tariff packages
that include local call charges, (ii) charge no more than the standard
residential rental charge for ordinary residential telephone service and not
increase the standard residential rental charge more than the percentage
increase in the CPI, provided that overall profitability is not unreasonably
impaired, (iii) charge residential users in rural areas no more for line rental
than the standard residential rental charge, and (iv) continue to make ordinary
residential telephone service as widely available as it was on 11 September
1990. The Company's Constitution provides that these provisions are not
intended to confer any benefit on and are not enforceable by any person other
than the holder of the Kiwi Share. The Kiwi Share may be converted into an
Ordinary Share at any time by the holder thereof, at which time all rights and
powers attaching to the Kiwi Share will cease.
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United States Regulation
Telecom is subject to all rules, policies, and duties of the United States
Federal Communication Commission ("FCC") applicable to U.S. international common
carriers. The FCC regulates Telecom as a "dominant" carrier on the U.S. - New
Zealand route, and as a non-dominant carrier on all other international routes.
As a dominant carrier on the U.S. - New Zealand route, Telecom is required to
operate on a structurally separate basis from its U.S. affiliate. The US
Telecommunications Act of 1996 also places certain duties on all
telecommunications carriers, to which Telecom is subject with respect to
services it provides in the United States.
In December 1996 the FCC granted Telecom authority under Section 214 of the
Communications Act of 1934 to operate as a United States international
facilities-based carrier and to acquire capacity in United States international
facilities in order to provide telecommunications services between the United
States and New Zealand and points beyond.
Other laws of the United States, such as the Trading with the Enemy Act of 1917,
the US Telecommunications Act of 1996 and the Foreign Corrupt Practices Act of
1977 may restrict certain activities of Telecom by virtue of Bell Atlantic's
ownership interest in the Company and the fact that the ADSs are traded on the
New York Stock Exchange.
Employees
Telecom's workforce has changed significantly over the last decade. This goes
much further than simple reductions in workforce numbers. The changes reflect
both the changing nature of the New Zealand labour market and the changing
business environment and in particular the increasing competition in the
telecommunications industry. Today Telecom's workforce is characterised by the
following principal features:
. a changing mix of permanent/part-time/temporary/casual/contractors;
. outsourcing has replaced direct hire in a number of areas;
. average tenure has declined significantly (today the median length of service
is four years);
. most Telecom staff are now employed on individual employment contracts;
. a significant proportion of Telecom staff (approximately 40%) have a variable
component in their remuneration linked to business objectives.
Two of the key drivers of the changes to Telecom's employment arrangements are
the need for flexibility and the need to increase the ratio of variable costs to
fixed costs. The former reflects the need to respond rapidly and easily to
changing and variable business requirements, and the latter reflects the need to
effectively manage costs.
As Telecom has progressively moved away from collectively negotiated employment
arrangements over the last six years managers have been able to select from a
variety of employment arrangements to meet their people resourcing requirements.
This has enabled managers to adopt employment arrangements that meet their
business requirements and the needs of individuals.
<PAGE>
22
Item 2 - Description Of Property
Telecom owns approximately 1,040 freehold sites and uses approximately 2,530
sites on a leasehold or other basis. Although Telecom's land assets are not
large in area, they include some strategic sites, such as the properties on
which its telephone exchanges are located. Most of Telecom's sites are related
directly to its telecommunications operations and are used for network equipment
of various types, such as telephone exchanges, transmission stations, microwave
radio equipment and cellular phone base station equipment. Many of Telecom's
operational sites are situated on leased land or land to which Telecom has
access by statutory right or other formal or informal arrangement. In addition
to its operational sites, Telecom owns or leases many properties for office
accommodation, storage and other miscellaneous purposes.
Many of Telecom's sites may be subject to land claims pursuant to the Treaty of
Waitangi Act 1975 (the "Waitangi Act"). Under the Waitangi Act, the Waitangi
Tribunal has jurisdiction to consider claims by Maori who may be prejudicially
affected by government policy or practice or New Zealand legislation that is
inconsistent with the principles of the Treaty of Waitangi. The Waitangi
Tribunal can recommend a return to Maori ownership of land owned by the New
Zealand Government that was transferred to Telecom, or recommend that
compensation be paid to the claimant. If the Waitangi Tribunal recommends the
return of land and no agreement can be reached between the New Zealand
Government and the claimant for its return, such recommendation is binding on
the New Zealand Government. Land declared to have special spiritual, cultural
or historical tribal significance may also be taken back by the New Zealand
Government. If an order were made by the Waitangi Tribunal for the return of
any land acquired by Telecom under the agreement between the Company and the New
Zealand Government pursuant to which the Company purchased the
telecommunications business of the Post Office, Telecom would be entitled to
compensation from the New Zealand Government under statute and also under such
agreement. If any Telecom land is taken back by the New Zealand Government,
Telecom would be entitled to compensation from the Government under statute.
Item 3 - Legal Proceedings
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 these
proceedings.
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 1980's regarding the provision of interconnection,
and incorporates other allegations previously raised in separate proceedings.
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. Telstra NZ seeks
injunctive relief together with unspecified damages.
In June 1999, a claim was filed against Telecom in the Employment Court by nine
representatives and six individuals plaintiffs a total of 78 plaintiffs. The
plaintiffs allege breach of various express and implied terms of their
collective employment contracts, in respect of the provision of a safe working
environment. The claim is not fully quantified.
<PAGE>
23
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.
All of the proceedings summarised above have been commenced in the High Court of
New Zealand unless otherwise stated.
Item 4 - Control of Registrant
The following table sets forth the ownership of the Ordinary Shares at 17
September 1999 by (i) any person known by the Company to own more than 10% of
the Ordinary Shares, and (ii) the Company's directors and executive officers as
a group:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Owner Number Owned % of Class
<S> <C> <C>
Bell Atlantic NZ 437,080,670 24.95%
Directors & Executive Officers as a Group 1,765,414 *
- ---------------------------------------------------------------------------------------------------------
</TABLE>
* Directors and executive officers as a group beneficially own less than 1%
of the outstanding Shares.
In February 1998, Bell Atlantic issued a series of exchangeable notes (the
"Exchangeable Notes"), which are exchangeable, commencing in September 1999,
under certain circumstances, into Telecom Shares. Bell Atlantic was required by
the terms of the Indenture governing the Exchangeable Notes to cease to be an
affiliate of Telecom for U.S. securities law purposes prior to 1 September 1999.
As a result the Directors nominated by Bell Atlantic resigned from the Telecom
Board in May 1999. Bell Atlantic has also undertaken to vote its shareholding
in the Company at shareholders meetings for and against resolutions proposed at
such meetings in the same proportion as other shareholders cast votes for and
against such resolutions.
Item 5 - Nature of Trading Market
The principal listing of the Shares is on the New Zealand Stock Exchange. The
Shares are also listed on the Australian Stock Exchange. American Depositary
Shares ("ADSs"), each representing 8 Shares evidenced by American Depositary
Receipts ("ADRs"), have been issued by the Bank of New York as Depositary, and
are listed on the New York Stock Exchange. Prior to a Share cancellation in
March 1994, each ADS represented 20 Shares. After the Share cancellation each
ADS represented 16 Shares. With effect from 1 April 1997 the ratio of Shares to
ADS's was halved from 16 shares per ADS to 8.
Bell Atlantic has issued Exchangeable Notes, which are exchangeable, commencing
in September 1999, under certain circumstances, into 24.95% of Telecom's Shares.
There can be no assurance that the delivery of the underlying Shares upon any
future exchange of the Exchangeable Notes or the anticipation of such an
exchange will not have an adverse effect on the market price of the Shares, or
the ADSs.
The following table sets forth, for the periods indicated, the highest and
lowest closing sale prices for the Ordinary Shares as derived from the Daily
Official List of the New Zealand Stock Exchange, and the highest and lowest sale
prices of the ADSs quoted on the New York Stock Exchange:
<PAGE>
24
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Period NZ$ per Share US$ per ADS
High Low High Low
<S> <C> <C> <C> <C>
1 April - 30 June 1997 7.50 6.43 40 3/4 35 5/8
1 July - 30 September 1997 8.25 7.04 42 1/2 37 3/4
1 October - 31 December 1997 8.95 6.92 44 3/8 36 1/4
1 January - 31 March 1998 9.05 7.55 41 35 1/8
1 April - 30 June 1998 8.91 7.77 39 3/4 31 1/8
1 July - 30 September 1998 8.76 7.27 35 7/8 29
1 October - 31 December 1998 8.60 7.32 36 5/16 29 7/16
1 January - 31 March 1999 9.80 8.47 42 1/16 36
- -------------------------------------------------------------------------------------------------------
</TABLE>
At 31 March 1999, 1,752,801,986 Shares were outstanding. At the same date, and
included within the number of Shares outstanding, 8,790,592 ADSs (equivalent to
70,324,736 Shares based on the ratio of 8 Shares to 1 ADS) were held by 827
record holders of ADSs.
Item 6 - Exchange Controls and Other Limitations Affecting Security Holders
Restrictions on Capital Exports or Imports
The NZ dollar is convertible into other currencies at freely floating rates and
there are no New Zealand restrictions on the flow of New Zealand currency across
borders. See Item 7, "Taxation of Dividends", for a description of the taxation
on dividend returns to shareholders.
Limitations on Shareholdings
Under New Zealand law, shareholders that are not residents of New Zealand may
hold, vote and transfer their Shares in the same manner as New Zealand
residents. Overseas persons must, however, comply with the Overseas Investment
Regulations. The High Court can order the disposal of Shares acquired in
contravention of the Overseas Investment Regulations. The Overseas Investment
Regulations require that an overseas person obtains consent from the Overseas
Investment Commission before the overseas person enters into certain
acquisitions of Shares or interests in Shares. The acquisitions for which
consent is required are acquisitions, which result in the overseas person:
(i) acquiring a beneficial entitlement or interest in 25% or more of the
outstanding Shares or interests, or the right to exercise or control the
exercise of 25% or more of the votes entitled to be cast at a meeting of
the Company; or,
(ii) increasing its entitlements, interests or rights beyond 25%; or,
(iii) being able to appoint or control the appointment of 25% or more of the
Board.
There are limited exceptions to these requirements. An overseas person in this
context is a company or body corporate incorporated outside New Zealand,
subsidiaries of an overseas person (as defined by the Overseas Investment
Regulations), any company or building society the shares or voting power of
which is held 25% or more by an overseas person or persons, a person who is not
a New Zealand citizen and not ordinarily resident in New Zealand (as defined in
the Overseas Investment Regulations) and any nominee of any overseas person.
"Nominee" has an extended definition under the Overseas Investment Regulations.
<PAGE>
25
The Constitution provides that no person may have a relevant interest in 10% or
more of the Company's voting shares without the prior written approvals of the
Board and the holder of the Kiwi Share. No person who is not a New Zealand
national (as defined in the Constitution) may have a relevant interest in more
than 49.9% of the Company's voting shares without the prior written approval of
the holder of the Kiwi Share. The term "relevant interest" is broadly defined
to include beneficial ownership, the power to vote or control the vote of voting
shares, the power to acquire or dispose of or control the acquisition or
disposition of voting shares, and an interest pursuant to any agreement or
arrangement under which any of the foregoing rights arise, whether express,
implied, direct, indirect, actual, contingent, present, future, shared with
others, legally enforceable or not, which is held directly or by a related body
corporate. The term excludes certain limited interests arising from particular
financial, custodial, trading and similar relationships. If the Board (or the
holder of the Kiwi Share after consultation with the Board) determines that
there are reasonable grounds for believing that a person has a relevant interest
in voting shares in excess of the above limitations, the Board (or the holder of
the Kiwi Share if the Board fails to act in a manner that remedies the
determination) may, after following certain procedures, prohibit the exercise of
voting rights (in which case voting rights vest in the chairperson) and may
force the sale of Shares. The Board may also decline to register a transfer of
Shares if it reasonably believes that the transfer would breach the above
restrictions. Bell Atlantic and the Depositary have each received consents from
the New Zealand Minister of Finance (as the holder of the Kiwi Share) and the
Board to acquire and hold the relevant interests in the Shares they hold. Each
holder of ADRs is also subject to the provisions of the Constitution restricting
ownership of Shares. The Board and/or the holder of the Kiwi Share may enforce
these provisions of the Constitution against the Depositary or the Custodian as
holders of Shares.
Under New Zealand law, persons who hold a relevant interest in 5% or more of the
voting securities of the Company (including persons who hold such an interest
through the holding of ADRs) are required to notify and report certain
subsequent changes in their interest in writing to the Company and the NZSE.
Limitations on Voting
The Listing Rules of the NZSE prohibit a shareholder from voting in favour of
resolutions that ratify certain issues and buy backs of Shares to, or approve a
non pro rata issue of Shares to, certain transactions with or benefiting, or the
provision of certain benefits to, the shareholder or an associated person of the
shareholder. They also prohibit shareholders who are directors or associated
persons of the Company or its directors from voting in favour of resolutions in
certain circumstances where they may receive greater benefit from the resolution
than other shareholders.
The Constitution prohibits the exercise of voting rights and transfer of Shares
in certain circumstances. The Constitution also allows the Board to set the
record date for determining who may vote and what Shares may be voted at a
meeting of shareholders. Such record date may be as late as 5 p.m. on the day
before such meeting.
The Constitution provides that shareholders may exercise the right to vote by
being present in person, represented by proxy or representative (if a
shareholder is a body corporate). Proxies and representatives are entitled to
be heard at a meeting of shareholders as if they were shareholders.
The Constitution requires 15 business days' notice to the NZSE of certain
details of transactions where an insider will acquire Shares alone or with
others which would cause them and their associated persons to control over 20%
of the votes attaching to the Company's Shares or, once that 20% threshold has
been exceeded, to increase such control by more than 5% in any 12 month period.
For these purposes insiders are directors, associated persons of directors and
persons with non-public materially price sensitive information about the
Company. Failure to give the required notice empowers the Company to prevent
the defaulting party from voting all or any of its Shares on a poll and allows
the Company to sell such Shares on one month's notice provided the default has
not been remedied and those Shares have not already been transferred.
<PAGE>
26
The provisions referred to under the headings "Limitations on Shareholdings" and
"Limitations on Voting" apply to an ADR holder because of the nature of the
holder's interest in the underlying Shares. Accordingly, if any such holder is
in breach of any such provisions the Shares to which such holder's ADRs relate
may be disenfranchised or compulsorily sold.
Further Restrictions Relating to ADRs
Telecom is required by its Constitution to make proxy forms available to
shareholders for purposes of voting at each meeting of shareholders. Upon
receipt of notice of any meeting of holders of Shares, the Depositary will, as
soon as practicable thereafter, mail to holders of ADRs a notice containing the
information included in the notice of meeting, and establishing a record date
for voting and informing holders of ADRs of their rights and the manner in which
instructions may be given to the Depositary and containing a statement that if a
poll is called and no instructions as to voting power are received by the
Depositary from an owner of ADRs on or before the date established in the
Depositary Agreement for such purpose, then the Depositary will not vote the
Shares underlying such ADRs or cause such Shares to be voted. The holders of
ADRs at the close of business on the date specified by the Depositary in such
notice are entitled under the Deposit Agreement, subject to any applicable
provisions of New Zealand law and of the Company's Constitution, to instruct the
Depositary as to the exercise of the voting rights pertaining to the Shares
represented by the ADSs that are evidenced by the ADRs in the event of a poll
being called. The Depositary has agreed that it will endeavour, insofar as
practicable, to vote the Shares so represented in accordance with such
instructions. The Depositary has agreed not to vote the Shares so represented
unless it has received instructions from the record holders of ADRs. The
Depositary will not, and the owners of ADRs are not entitled to, vote by voice
or on a show of hands. The Depositary will not demand a poll unless
specifically instructed (i) by at least five owners or holders of ADRs
evidencing ADSs, or (ii) by owners of ADRs evidencing ADSs representing Shares
which represent not less than 10% of the total voting rights capable of being
cast at such meeting or which confer a right to vote at such meeting and on
which the sum paid to the Company represents not less than 10% of the total sum
paid to the Company on all Shares which confer a right to vote at such meeting.
The Deposit Agreement does not provide for holders of ADRs evidencing ADSs the
right to cause the Depositary to request a meeting of Shareholders.
Each owner and beneficial owner of ADRs must, on behalf of the Depositary or the
Custodian, provide information required by, and comply with requests to provide
information pursuant to, the Company's Constitution. This information may
include the capacity in which ADRs or Shares are held, the identity, address and
extent of interest of any other person having a relevant interest in ADRs or
Shares by virtue of the reporting person's relevant interest and such other
information as will or is likely to assist in identifying the holders with
relevant interests in Shares and the nature of the relevant interest. Each
holder of ADRs who is requested to provide such information must inform the
Depositary of all relevant information and the Depositary will forthwith pass on
such information to the Board.
If the Depositary, the Custodian or their nominee receives a notice from the
Board or the holder of the Kiwi Share that it intends to declare that certain
Shares are held in breach of the limitations on shareholdings contained in the
Constitution ("Affected Shares"), the Depositary will send a copy of the notice
to the beneficial owner of the Affected Shares or, if no beneficial owner is
specified, to each owner of ADRs. Any owner of ADRs receiving such a notice may
make representations for and on behalf of the registered shareholders as to why
such Shares should not be treated as Affected Shares.
If the Depositary, the Custodian or their nominee receives a notice from the
Board or the holder of the Kiwi Share declaring that any Shares are Affected
Shares, the Depositary shall give notice to each beneficial owner identified in
such notice of the action to be taken by the Depositary. With respect to any
Affected Shares where a beneficial owner is specified, the Depositary must deny
the voting instruction rights attaching to any ADR representing Affected Shares
to the extent the Depositary, the Custodian, or their nominee is denied voting
rights. If such notice does not state the number of Shares to which it relates,
then the total number of Shares represented by ADRs held by the beneficial owner
shall be deemed to be Affected Shares. In the event of a beneficial owner
receiving such a notice, the beneficial owner must immediately take such steps
as may be required to become the
<PAGE>
27
registered holder of the ADRs representing the Affected Shares on the books of
the Depositary. If such notice does not identify a specific beneficial owner,
then the Depositary shall give notice to all holders of ADRs and deny the voting
instruction rights attaching to Affected Shares pro rata among the holders based
upon the number of ADSs held by them. The Constitution requires that the holder
of the Kiwi Share consult with the Board prior to determining that Shares are
Affected Shares and, therefore, prior to sending any notice that does not
identify a specific beneficial owner. The Company has agreed in the Deposit
Agreement to take all reasonable steps to identify the specific beneficial owner
of Affected Shares.
Under the Constitution, the Board and the holder of the Kiwi Share may sell
Affected Shares for the account of the registered owner. If any Affected Shares
represented by ADRs are sold, the ADRs shall thereafter represent only the right
to receive any cash received by the Depositary in respect thereof, less the fees
of the Depositary for cancellation of the ADR evidencing Affected Shares and any
expenses incurred or paid by the Depositary in distributing such cash and unsold
Shares or other property, if any, to the beneficial owner of the ADR. The
Depositary will give notice to the beneficial owner of an ADR of any sale
effected forthwith upon receiving such notice from the Board or the holder of
the Kiwi Share. Upon receiving such notice, such owner must surrender the ADR
for cancellation and, if applicable, issuance of a new ADR.
The Board will not, and will use its reasonable efforts to obtain the consent of
the holder of the Kiwi Share not to, sell any Affected Shares without delivering
to the Depositary a notice specifying the number of Affected Shares and the
identity of the beneficial owner of the ADRs representing Affected Shares. In
the event that such notice is not given to the Depositary, the Depositary will
immediately (i) notify all owners of ADRs on and after the date of such sale of
Affected Shares that their ADRs represent their pro rata share of the remaining
deposited Shares, and (ii) upon receipt of the cash proceeds of any such sale of
Affected Shares, distribute such cash proceeds pro rata to all owners of ADRs in
accordance with the terms of the Deposit Agreement. Thereafter, upon the
surrender of any ADR the Depositary will, subject to the terms of the Deposit
Agreement, deliver only the owner's pro rata share of the remaining deposited
Ordinary Shares.
Each ADR owner must take every reasonable step in accordance with any notice
given regarding any Affected Shares. Except to the extent provided in the
Constitution, the Board and the holder of the Kiwi Share are under no obligation
to give, modify or withdraw any such notice. Any resolution or determination
of, or decision or exercise of any discretion or power by, the Company, the
Board, the holder of the Kiwi Share or the Depositary under or pursuant to the
Constitution, or the Deposit Agreement shall be final, conclusive and binding on
any ADR owner or other person affected thereby and shall not be subject to
challenge. Neither the Company, the Board, the owner of the Kiwi Share, the
Depositary, the Custodian nor any registrar shall be liable to any person who
fails to act in accordance with such provisions or who is affected by any
decision or exercise of any discretion or power by the Company, the Board, the
holder of the Kiwi Share, the Depositary, the Custodian, or any registrar.
Item 7 - Taxation
The following summary is based on tax laws of the United States and New Zealand
in effect on the date of this Report, and is subject to changes in United States
or New Zealand law, including changes that could have retroactive effect. The
following summary does not take into account or discuss the tax laws of any
country other than the United States or New Zealand.
This summary does not describe United States federal estate and gift tax
considerations, nor state and local tax considerations within the United States,
and is not a comprehensive description of all United States federal or New
Zealand tax considerations that may be relevant to a decision to purchase, sell
or hold ADSs or Shares. Furthermore, this summary does not address United States
federal income tax or New Zealand income tax considerations relevant to holders
of ADSs or Shares who are subject to taxing jurisdictions other than or in
addition to the United States and New Zealand, and does not address all possible
categories of United States holders, some of which (such as tax-exempt entities,
insurance companies, securities dealers, holders who hold ADSs or Shares as part
of a hedging, straddle or conversion transaction, holders of 10% or more of the
total combined voting power of the Shares of the Company) may be subject to
special rules.
<PAGE>
28
This summary contains a description of the principal United States federal and
New Zealand tax consequences of the purchase, ownership and disposition of ADSs
or Shares by a "United States holder" only (as separately defined in "-United
States Taxation" and "-New Zealand Taxation" below).
United States Taxation
As used in this section "-United States Taxation," the term "United States
holder" means a beneficial owner of ADSs or Shares that is (i) a citizen or
resident of the United States, (ii) a domestic corporation, (iii) an estate the
income of which is subject to United States federal income tax without regard to
its source or (iv) a trust if a United States court is able to exercise primary
supervision over administration of the trust and one or more United States
persons have authority to control all substantial decisions of the trust. This
discussion assumes that United States holders hold ADSs or Shares as capital
assets.
For United States federal income tax purposes, holders of ADSs will be treated
as owners of the underlying Shares represented by the ADSs.
Dividends
For United States federal income tax purposes, the gross amount of all dividends
paid (without reduction for New Zealand withholding tax) with respect to ADSs or
Shares (including dividend amounts applied to the Final Instalment) out of
current or accumulated earnings and profits as determined under United States
federal income tax principles ("E&P") to a United States holder will be treated
as foreign source ordinary income to such holder. See "-New Zealand Taxation -
Dividends." United States corporations that hold ADSs or Shares will not be
entitled to the dividends received deduction generally available for dividends
received from United States corporations (and certain non-United States
corporations). To the extent a distribution exceeds E&P, it will be treated
first as a return of the holder's basis to the extent thereof, and then as gain
from the sale of a capital asset.
A distribution of Shares by the Company generally will not be treated as a
taxable dividend to United States holders.
For United States federal income tax purposes, the amount of any distribution
paid in NZ dollars will be the U.S. dollar value of the NZ dollars at the
exchange rate in effect on the date of receipt of the distribution by the United
States holder or by the Trustee and applied to the Final Instalment, whether or
not the NZ dollars are in fact converted into U.S. dollars at that time. Gain
or loss, if any, realised on the disposition of NZ dollars generally will be
United States source ordinary income or loss.
The withholding tax imposed by New Zealand is a creditable foreign tax for
United States federal income tax purposes in an amount generally equal to the
U.S. dollar equivalent of the withholding tax paid (i) for cash basis taxpayers,
at the conversion rate in effect on the day the withholding tax is paid, or (ii)
for accrual-basis taxpayers, at the average exchange rate for the taxable year
to which the withholding tax relates. Therefore, the holder will be entitled to
treat the amount withheld as a foreign tax paid in computing a foreign tax
credit (or in computing a deduction for foreign income taxes paid) if the holder
does not elect to use the foreign tax credit provisions of the Internal Revenue
Code of 1986, as amended (the "Code").
The Code imposes a number of limitations on the use of foreign tax credits. In
general, foreign tax credits are limited to the same proportion of the United
States tax against which such credit is taken which the taxpayer's net taxable
income from the sources outside of the United States ("foreign source income")
bears to the taxpayer's entire net taxable income for the taxable year. For this
purpose, the taxpayer's interest expenses and certain other expenses are
allocated between foreign source and domestic source income based on the tax
basis (or value) of the taxpayers foreign assets as compared to the tax basis
(or value) of the taxpayer's total assets. The ADSs or Shares will be foreign
assets for purposes of allocating interest. Thus, United States holders of ADSs
or Shares will allocate more of their total interest expenses to foreign source
income than would be the case if they held United States assets instead of the
ADSs or Shares. In certain circumstances, this could reduce
<PAGE>
29
the United States holder's ability to utilise foreign tax credits. Other
limitations on the use of foreign tax credits include the facts that the foreign
tax credit limitation described above must be computed separately for specific
classes of income, and that foreign tax credits may not reduce alternative
minimum tax by more than 90% of what it would be without foreign tax credits.
Capital Gains and Losses
Gain or loss recognised by a United States holder on the sale or other
disposition of ADSs or Shares will be subject to United States federal income
taxation as capital gain or loss in an amount equal to the difference between
the holder's basis in the ADSs or Shares and the amount realised upon their
disposition. Capital losses are generally deductible only against capital gains
and not against ordinary income. The capital gain or loss will be long term or
short term depending on whether the holder has held the ADSs or Shares for (i)
more than one year (which is subject to a maximum rate of 20% for certain non-
corporate taxpayers), (ii) not more than one year (which is subject to a maximum
rate of 39.6% for certain non-corporate taxpayers, respectively).
Capital gain recognised by a United States holder on the sale or other
disposition of ADSs or Shares will be United States source gain. Therefore,
such gain will not increase the holder's limitation on use of foreign tax
credits. The source of a loss attributable to the sale of ADSs or Shares is a
subject of debate at the present time. Under current regulations, the United
States Internal Revenue Service (the "IRS") will likely take the position that
any such loss is to be allocated to the same category of income as the dividends
received from the Company. This would generally reduce the holder's ability to
use foreign tax credits. Under the Code, the IRS has authority to change or
confirm the treatment of losses by regulation. Regulations have been proposed
that would continue the current treatment (i.e., presumably allocating such loss
to the same category of income as the dividends received from the Company) for
United States holders. Therefore, investors are encouraged to consult their tax
advisors regarding the proper treatment of such losses.
Exchanges, deposits and withdrawals of Shares for ADSs or ADSs for Shares by a
United States holder will not result in recognition of gain or loss for United
States federal income tax purposes.
New Zealand Taxation
As used in this section "-New Zealand Taxation," the term "United States holder"
means a beneficial owner of ADSs or Shares that (i) is resident in the United
States for tax purposes and is accepted as such by the New Zealand Taxing
authorities, (ii) is not also resident in New Zealand for New Zealand tax
purposes and (iii) does not hold ADSs or Shares in connection with any permanent
establishment or fixed base in New Zealand.
Dividends
New Zealand generally imposes a 30% withholding tax on dividends paid by a New
Zealand corporation to a non-resident shareholder. However, to the extent to
which dividends have imputation credits attached (see further below) the rate of
withholding is 15%. Also reduced rates (generally 15% at the maximum rate
allowed) apply to non-resident shareholders who are entitled to the benefits of
an income tax treaty.
Pursuant to the tax treaty between New Zealand and the United States, United
States holders will be subject to a maximum New Zealand withholding tax of 15%
of the gross amount of all cash dividends paid by the Company.
New Zealand operates a full "imputation system" of corporate taxation. Under
the "imputation system," New Zealand tax paid by the Company gives rise to
credits (known as imputation credits) which can be "attached" to its dividends
and used by a shareholder which is treated as a resident for New Zealand tax
purposes to offset such holder's New Zealand income tax liability on those
dividends. A United States holder cannot directly credit these imputation
credits against such holder's withholding tax liability. However, the financial
impact of the New Zealand withholding tax on cash dividends paid to a United
States holder can be reduced under the New Zealand Foreign Investor Tax Credit
("FITC") regime.
<PAGE>
30
Under the FITC regime, the Company can obtain a tax credit based on the amount
of imputation credits attached to dividends paid to non-New Zealand tax
residents. This tax credit reduces the Company's tax liability, providing it
with cash to make a "supplementary" dividend distribution to non-New Zealand tax
residents, which is in addition to the ordinary dividend. Provided that the
cash dividend has imputation credits attached at the maximum rate allowed, the
overall effect is that a non-New Zealand tax resident generally receives an
aggregate after New Zealand tax cash dividend equating to the amount that would
have been received if the withholding tax had not been imposed. To the extent
imputation credits are attached at less than the maximum rate allowed, the level
of supplementary dividend is reduced and thus the level of aggregate cash
dividend is reduced.
In some cases, certain forms of non-New Zealand sourced income derived by the
Company and distributed to United States holders will be subject to total New
Zealand tax at an effective rate of 15%. The benefit of the lower effective tax
rate in respect of such income can be delivered to a United States holder by
payment of an additional dividend equating to any "conduit tax relief credit"
allocated by the Company to the United States holder.
Stock dividends (also known as "bonus issues" for New Zealand tax purposes) made
by the Company will be categorised under New Zealand tax law as either taxable
bonus issues or non-taxable bonus issues. Broadly speaking, taxable bonus
issues arise where the Company allows a shareholder to choose between the
receipt of cash and the receipt of Shares (where the shareholder takes the
Shares) or when the Company issues Shares and elects to treat the issue as a
taxable bonus issue. In general, any distribution by the Company on or in
respect of its Shares, other than a non-taxable bonus issue, will be considered
a dividend for New Zealand tax purposes. Taxable bonus issues are treated as
non-cash dividends for New Zealand tax purposes. Taxable bonus issues (as well
as other non-cash dividends) made to a United States holder are subject to New
Zealand withholding tax at the rate of zero percent to the extent that
imputation credits are attached to the dividend at the maximum rate allowable.
With respect to any remaining portion, New Zealand withholding tax will be
payable by the Company. Non-taxable bonus issues are not treated for New
Zealand tax purposes as dividends and the New Zealand withholding tax does not
apply to them. The Company does not presently anticipate making any bonus
issues.
Share repurchases and cancellations by the Company are subject to a regime which
treats the repurchase or cancellation amount as a dividend to the extent that it
exceeds the amount of subscribed capital in the Company. Subscribed capital is
essentially the amount paid to the Company in respect of the issue of Shares,
less amounts of subscribed capital already returned to shareholders. If the
amount paid on cancellation or redemption is less than the amount of the
Company's subscribed capital, the payment is generally not treated as dividend.
However, where Shares are repurchased off-market and aggregate payments to
shareholders are less than 10% of the market value of all Shares in the Company
or to the extent the repurchase is in lieu of a dividend, payments to
shareholders are treated as dividends. Where the company repurchases Shares
"on-market", amounts received by shareholders are not dividends in the
shareholders' hands. However, to the extent the payments exceed the available
subscribed capital, tax is effectively required to be paid by the Company on
that excess amount.
Capital Gains
Under the tax treaty between New Zealand and the United States, a United States
holder who does not have, and has not had, a permanent establishment or fixed
base in New Zealand will not be subject to New Zealand tax on any gain on a sale
of ADSs or Shares. However, the tax treaty does not prevent New Zealand from
taxing profits on sales of ADSs or Shares held by a United States person where
the profits or gains are attributable to a permanent establishment or fixed base
available or previously available to such person in New Zealand. Although New
Zealand does not have a capital gains tax as such, certain profits on Share
sales are taxed under New Zealand income tax rules (for example, where Shares
are acquired for the dominant purpose of resale, or by a securities dealer).
<PAGE>
31
Other Tax Matters
No stamp duty is payable in New Zealand on transfers of the Shares and no notice
of such transfers need be given by a shareholder to New Zealand fiscal
authorities. GST does not apply to Share issues or transfers.
New Zealand gift duty will apply in respect of any gift by a United States
holder of ADSs or Shares where that gift and any other gift by the United States
holder of property situated in New Zealand within 12 months before or after that
first mentioned gift exceed in aggregate value NZ$27,000. For this purpose,
ADSs and Shares are treated as property situated in New Zealand. Certain
limited exemptions and reliefs exist. Gift duty applies at 5% on the excess
amount of gifts over NZ$27,000 and rises on a graduated scale to a maximum rate
of 25% on the excess amount of gifts over NZ$72,000.
Imputation Credit Account
Companies pay New Zealand tax on a provisional basis in three instalments at
four-month intervals during each income year. They may pay further tax or
receive a refund of tax depending on their final tax liability determined in
their tax return for that income year. Imputation credits arising from payments
of tax are recorded as credits in an account called an imputation credit account
at the time the tax is paid.
Continuity Of Ownership Requirement
The Company must satisfy continuity of ownership requirements to retain its
imputation credits. To this end, it must maintain at least 66% of its ownership
on a continuous basis from the date it derives imputation credits (i.e., pays a
tax instalment) to the date it attaches the imputation credits to dividends
(i.e., the date of the payment of the dividend). Accordingly, imputation
credits in the Company's imputation credit account will be lost upon the
occurrence of a more than 34% change in its ownership at any time between the
derivation of those credits and the attaching of those credits to dividends.
Ownership is measured by reference either to shareholders' voting interests or,
in certain circumstances, to both voting interests and the market value of
interests held in a company. In some cases, an attribution rule can apply to
treat all less-than-10% non-associated shareholders in the Company as a "single
notional person". When this attribution rule applies, changes in the individual
holding of these shareholders can be disregarded for calculating continuity of
ownership.
Other Credits
The Company may from time to time have other tax credits that it is able to
attach to dividends. Considerations similar to those applying to imputation
credits will arise. However, in the context of a "conduit tax relief credit"
the continuity of ownership requirement focuses on changes in the relative level
of New Zealand resident and non-New Zealand resident shareholders in the
Company.
<PAGE>
32
Item 8 - Selected Financial Data
The selected consolidated financial data set forth below has been derived
from the Company's audited Consolidated Financial Statements for each of
the years in the five year period ended 31 March 1999 which have been
reported on by PricewaterhouseCoopers (formally Coopers & Lybrand which
merged with Price Waterhouse in July 1998), independent chartered
accountants, subject to certain reclassifications of data from prior years
to conform to current year classifications. The data should be read in
conjunction with, and is qualified in its entirety by reference to, the
Consolidated Financial Statements and accompanying Notes which are
incorporated herein by reference from the Annual Report and previously
published Consolidated Financial Statements.
<TABLE>
<CAPTION>
Years Ended 31 March
--------------------------------------------------------------
1995 1996 1997 1998 1999 1999
NZ$ NZ$ NZ$ NZ$ NZ$ US$
--------------------------------------------------------------
(Dollars in millions, except per Share and per ADS amounts)
<S> <C> <C> <C> <C> <C> <C>
Statement of Financial Performance Data
Amounts in accordance with New Zealand GAAP:
Operating revenues
Local service 878 937 959 1,025 1,059 565
Calling 1,075 1,144 1,176 1,253 1,166 623
Interconnection (a) - - 66 71 86 46
Cellular and other mobile services 229 313 316 424 480 256
Data 190 217 256 295 336 179
Other operating revenues 312 298 310 330 307 164
Abnormal revenue (b) - - - - 16 9
Total operating revenues 2,684 2,909 3,083 3,398 3,450 1,842
Operating expenses
Net personnel costs 299 318 347 383 358 191
Depreciation 490 494 544 564 553 295
Cost of sales 373 394 405 515 575 307
Maintenance 163 151 201 171 166 89
Other operating expenses 322 337 355 388 383 205
Abnormal expenses (c) - - 152 37 15 8
Total operating expenses 1,647 1,694 2,004 2,058 2,050 1,095
Surplus from continuing operations 1,037 1,215 1,079 1,340 1,400 747
Net interest expense 104 92 99 127 110 59
Surplus from continuing operations before income tax 933 1,123 980 1,213 1,290 688
Income tax expense 308 377 311 397 411 219
Surplus from continuing operations after income tax 625 746 669 816 879 469
Gain/(loss) from discontinued operations (d) (4) (30) (87) 30 - -
Capital note distribution costs after income tax - - - 26 55 29
Net earnings attributable to shareholders (e) 620 717 581 820 822 439
Earnings per Share from continuing operations (f) 0.331 0.395 0.355 0.443 0.469 0.251
Earnings per ADS from continuing operations (f) 2.65 3.16 2.84 3.54 3.75 2.01
Dividends per Share (g) 0.300 0.350 0.390 0.430 0.460 0.246
Amounts in accordance with US GAAP (h):
Net surplus from continuing operations (e) 618 745 762 733 768 410
Net earnings attributable to shareholders (e) 614 715 675 763 768 410
Basic earnings per Share from continuing operations (f) 0.327 0.394 0.404 0.410 0.438 0.234
Basic earnings per ADS from continuing operations (f) 2.62 3.15 3.23 3.28 3.50 1.87
Diluted earnings per Share from continuing operations (f) 0.327 0.394 0.404 0.410 0.439 0.234
Diluted earnings per ADS from continuing operations (f) 2.62 3.15 3.23 3.28 3.51 1.87
</TABLE>
<TABLE>
<CAPTION>
As at 31 March
--------------------------------------------------------------
1995 1996 1997 1998 1999 1999
NZ$ NZ$ NZ$ NZ$ NZ$ US$
--------------------------------------------------------------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Statement of Financial Position Data
Amounts in accordance with New Zealand GAAP:
Fixed assets 3,598 3,632 3,763 3,793 3,780 2,019
Total assets 4,493 4,492 4,618 5,165 5,375 2,870
Debt due within one year 393 272 524 746 1,130 603
Long term debt 1,070 1,288 1,285 1,292 1,112 594
Total liabilities 2,403 2,343 2,976 3,155 3,341 1,784
Total capital funds (i) 2,090 2,148 1,643 2,010 2,034 1,086
Amount in accordance with US GAAP (h):
Total shareholders' funds (i) 2,429 2,356 1,961 1,276 1,325 708
</TABLE>
<PAGE>
33
(a) Interconnection revenues for the years ended 31 March 1995 and 1996 are not
disclosed separately due to confidentiality agreements, but are instead
included in local service, calling and other operating revenues.
(b) The liquidation of Telecom's executive share ownership plan (the "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 NZ$16 million net proceeds to Telecom as the residuary beneficiary.
(c) Estimated redundancy costs of NZ$15 million resulting from the decision to
outsource operator services to specialist call centre operator SITEL Asia
Pacific were provided for in the year ended 31 March 1999.
The estimated costs associated with the termination of the HFC rollout and
the reorganisation of First Media of NZ$37 million were identified and
provided for at 31 March 1998.
The costs associated with a strategic restructuring of Telecom together
with a provision for the cost of making all business-critical computer
platforms and applications Year 2000 compliant were charged against
earnings in the year ended 31 March 1997 as an aggregate abnormal charge
amounting to NZ$152 million.
(d) During the year ended 31 March 1997, the operations of Pacific Star Group
were classified as discontinued and a formal plan of disposal or wind-down
of its businesses was commenced. The comparative figures for the prior
years were reclassified accordingly.
During the year to 31 March 1998 the winding down of the Pacific Star
operations progressed satisfactorily resulting in a reduction in the
provision for loss on disposal of Pacific Star by NZ$30 million.
(e) After deduction of minority interests and including the Group share of
associate companies' profits/losses.
(f) Per share amounts have been calculated based on the weighted average number
of Shares outstanding during the periods indicated. Per ADS amounts have
been calculated based on a ratio of eight shares per ADS. Diluted earnings
per Share and per ADS amounts reflect the dilutive effects of options and
capital securities.
(g) Dividends per Share are presented on the basis of the year to which they
relate. See "Dividends".
(h) The principal differences between the amounts shown in accordance with NZ
GAAP and those shown in accordance with US GAAP arise from the treatment of
the capitalisation of interest costs, the recognition of costs incurred in
terminating interest rate swaps, accruals for compensated absences, the
method of providing for deferred income taxes, the recognition of amounts
relating to the executive share ownership plan, the recognition of accruals
for restructuring and Year 2000 modification costs and the timing of
reflection of dividends in retained earnings.
(i) Capital funds includes both shareholders' funds and other items included in
equity under New Zealand GAAP, such as capital securities and minority
interests. For US GAAP, such other items are not included in shareholders'
funds.
In February 1997, the Company commenced a share repurchase programme
subject to the requirements of the Company's Constitution, the Companies
Act 1993 and the New Zealand Stock Exchange. The repurchase programme was
completed on 19 December 1997. A total of 138,093,860 shares were
repurchased under the programme at a total cost of NZ$1,001 million.
<PAGE>
34
Dividends
The present dividend policy of the Company's Board of Directors, which came into
effect in fiscal 1996, is to pay a quarterly dividend in September, December,
March and June in respect of each fiscal quarter. Previously the policy was to
pay an interim dividend in November and to recommend a final dividend to be paid
in August with respect to each fiscal year ended 31 March.
The table below sets forth the dividends paid to shareholders with respect to
the 1995 to 1999 fiscal years:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Year NZ$ Per Share US$ Per ADS (a)
Interim/ Interim/
Quarterly Final Total Quarterly Final Total
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1995 0.1350 0.1650 0.300 1.345 1.776 3.121
1996 (b) 0.0850 - (b) 0.890 -
(b) 0.0850 - (b) 0.890 -
0.0850 - 0.917 -
0.0950 - 0.350 1.034 - 3.731
1997 0.0950 - 1.046 -
0.0950 - 1.061 -
0.0950 - 1.045 -
0.1050 - 0.390 (c)0.579 - (c)2.155
1998 0.1050 - 0.627 -
0.1050 - 0.492 -
0.1050 - 0.560 -
(d)0.0350 - 0.181 -
(d)0.0800 - 0.430 0.330 - 2.190
1999 0.1150 - 0.466 -
0.1150 - 0.480 -
0.1150 - 0.490 -
0.1150 - 0.460 0.490 - 1.926
- --------------------------------------------------------------------------------------------------
</TABLE>
(a) Dividends have been translated from NZ dollars into US dollars using
exchange rates prevailing on the date the dividends were paid to
shareholders.
(b) The first and second quarter dividends were paid together in November 1995.
(c) The fourth quarter dividend for the year ended 31 March 1997 was the first
dividend payment following the reduction of the ratio of Shares per ADS
from 16:1 to 8:1. The total 1997 US$ per ADS has been restated to reflect
the 8:1 ratio for the full year.
(d) Total dividends for the year ended 31 March 1998 represented three
quarterly dividends of NZ10.5 cents per share, a special dividend of NZ3.5
cents and a fourth quarter dividend of NZ8.0 cents per share. The fourth
quarter dividend was reduced by the amount of the special dividend.
The amounts of historical dividends are not necessarily indicative of dividends
to be paid in the future. Provided, however, that the Company does not have
alternative cash requirements and/or investment opportunities, and, subject to
maintaining a net debt to net debt plus equity ratio of between 45% and 50%,
Telecom would intend to maintain total dividends for future years at not less
than the same total cents per share level of the preceding year (on an
equivalent number of shares).
<PAGE>
35
Item 9 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information required by this Item is set out in the MD&A and is incorporated
herein by reference. See Item 19.
New Developments
In May 1999 Telecom acquired a 9.9% shareholding in AAPT Limited ("AAPT") an
Australian telecommunications carrier through its wholly owned subsidiary TCNZ
Australia Investments (Pty) Limited ("TNZ Australia"). This shareholding was
increased to 19.8% in June 1999. On 15 September 1999 Telecom announced that
TNZ Australia intended to make an offer for all of the remaining AAPT shares
that TNZ Australia did not already own but with the aim of increasing its
shareholding while maintaining AAPT as a major listed Australian
telecommunications carrier. The offer price was A$5.10 per share. If all AAPT
shareholders accepted this offer the cost to Telecom would be approximately
NZ$1.6 billion which would be funded by debt.
Item 9A - Quantitative and Qualitative Disclosures About Market Risk
The information required by this Item is set out in the following sections of
the MD&A (page 12 Volume 2 of the Annual Report):
. Market Risk;
. Interest Rate Risk Management;
. Foreign Exchange Risk Management;
and in the following sections of the Notes:
. Derivative Financial Instruments - Note 1, page 24 Volume 2 of the Annual
Report;
. Financial Instruments and Risk Management- Note 19, pages 40-42 Volume 2 of
the Annual Report.
The above mentioned information is incorporated herein by reference.
Item 10 - Directors and Officers of Registrant
Directors
The business and affairs of Telecom are managed under the direction of the
Board. The Board is elected by the shareholders of the Company. The Board may
also appoint Directors to fill casual vacancies that occur or to add additional
persons to the Board up to the maximum number (currently 12) prescribed by the
Company's Constitution. At each annual meeting of shareholders, all Directors
appointed by the Board must retire. In addition, at least one-third of the
other Directors must retire from office (other than the Managing Director). If
less than one third of the other Directors are due to retire by reason of age,
or the expiry of their term of appointment or because they wish to retire and
not be re-elected, the remaining Directors who retire are those Directors who
have held office longest since their last appointment or reappointment (other
than the Managing Director). A retiring Director is generally eligible for re-
election except where precluded by age or disqualification. At least one-half
of the Board must be New Zealand citizens (as defined in the Company's
Constitution).
<PAGE>
36
As of 17 September 1999, the Directors of the Company (including the Managing
Director) were as follows:
Mr G Peter Shirtcliffe - Chairman
Mr Shirtcliffe has been a Director of Telecom since its incorporation in April
1987. He was appointed Chairman in September 1990. Mr Shirtcliffe is Chairman
of the Pension Plan Committee. Mr Shirtcliffe is due to retire as Chairman on
30 September 1999. He will stay on the Board as a non-executive director.
Dr Roderick S Deane - Managing Director
Dr Deane was appointed Telecom Managing Director and Chief Executive in November
1992. Dr Deane is a director of Telecom New Zealand Limited and TCNZ Finance
Limited. Dr Deane is due to retire as Chief Executive Officer on 30 September
1999 and to take up the position of Chairman of the Board.
Mr John C King - Director
Mr King has been a Telecom Director since September 1990. He is a member of the
Human Resources/Compensation Committee and the Pension Plan Committee.
Ms Patricia L Reddy - Director
Ms Reddy has been a Telecom Director since December 1997. She is Chairperson of
the Human Resources/Compensation Committee.
Mr Paul Baines - Director
Mr Baines has been a Telecom Director since May 1998. He is Chairman of the
Audit Committee.
Mr Michael Tyler - Director
Mr Tyler joined the Telecom Board in June 1999. He is a member of the Audit
Committee.
The Directors have no fixed term of office but are subject to the retirement
provisions of the Constitution summarised above.
Executive Officers
As at 17 September 1999, the Executive Officers of Telecom (except the Managing
Director) were as follows:
Mr Jeffrey White - Chief Financial Officer
Mr White joined Telecom in January 1993 as Chief Financial Officer. Mr White's
current term of appointment is due to expire in April 2000. Mr White is a
director of Telecom New Zealand Limited. He is also a director of various other
Telecom subsidiaries.
Ms Theresa Gattung - Group General Manager Services
Ms Gattung joined the company in August 1994 as General Manager Marketing. She
was appointed Group General Manager Services as from 1 April 1996. She is due
to take up the position of Chief Executive as from 1 October 1999. She has no
fixed term of appointment. Ms Gattung is a director of Telecom New Zealand
Limited.
Mr Malcolm Gillespie - General Counsel and Company Secretary
Mr Gillespie joined Telecom as General Counsel and Company Secretary in April
1996. He has no fixed term of employment. Mr Gillespie is a director of
Telecom New Zealand Limited. He is also a director of other Telecom
subsidiaries.
Mr David Bedford - Group General Manager Network
Mr Bedford joined Telecom in January 1993 as General Manager Human Resources.
He was appointed to his present position in 1998. He has no fixed term of
employment. Mr Bedford is a director of Telecom New Zealand Limited. He is
also a director of other Telecom subsidiaries.
<PAGE>
37
Mrs Ariane Burgess - General Manager Communications
Mrs Burgess joined Telecom in June 1988 as Corporate Public Relations Manager.
She was appointed General Manager Communications as from 1 April 1996. She has
no fixed term of employment.
Ms Karyn Devonshire - General Manager Corporate Strategy and Information
Services
Ms Devonshire joined Telecom in December 1997 as General Manager Information
Services. She has no fixed term of employment.
Dr John Bell - General Manager Business Development
Dr Bell joined Telecom in April 1996 as General Manager Business Development.
Dr Bell has no fixed term of appointment. Dr Bell is a director of various
Telecom subsidiaries.
Mr Chris Rutledge - General Manager Human Resources
Mr Rutledge joined Telecom in May 1993 as Manager Human Resources Development.
He was appointed to his present position in February 1997. Mr Rutledge has no
fixed term of appointment.
Item 11 - Compensation of Directors and Officers
The aggregate amount of compensation payable by Telecom in respect of the
Directors and Executive Officers as a group during fiscal 1999 was NZ$4,317,037.
In addition, an aggregate amount of $118,695 was set aside during Fiscal 1999 to
provide pension, retirement and similar benefits to the Executive Officers.
The total of the remuneration and value of other benefits received by the
Directors of the Company during the year is set out in the "Directors
Remuneration" section of the Annual Report, which is incorporated herein by
reference. See page 29 Volume 1 of the Annual Report.
Item 12 - Options to Purchase Securities from Registrant or Subsidiaries
The Company has in place an Executive Share Option Plan. See Note 18,
"Options", for a description of this plan, which is incorporated herein by
reference. In addition to the options referred to in Note 18, 3,999,854 options
were granted in the period to 31 August 1999, and 136,081 options with a
weighted average exercise price of NZ$8.30 lapsed. As at 31 August 1999,
7,497,374 options are outstanding under this plan.
Item 13 - Interest of Management in Certain Transactions
The information required by this Item is set out in Note 23 and is incorporated
herein by reference.
<PAGE>
38
PART II
-------
Item 14 - Description of Securities to be Registered
Not applicable.
PART III
--------
Item 15 - Defaults Upon Senior Securities
None.
Item 16 - Changes In Securities And Changes In Security For Registered
Securities
None.
PART IV
-------
Item 17 - Financial Statements
Not applicable.
Item 18 - Financial Statements
See Item 19 for a list of Financial Statements included as part of this Annual
Report on Form 20-F.
Valuation and Qualifying Accounts
The table below shows movements in the allowance for doubtful accounts for the
1998 and 1999 fiscal years:
<TABLE>
<CAPTION>
Balance at Additions charged
beginning to costs and Balance at
of period expenses end of period
-------------------------------------------------------------------------------------
(Dollars in millions) NZ$ NZ$ NZ$
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
31 March 1999 20 2 22
31 March 1998 19 1 20
</TABLE>
<PAGE>
39
The table below shows movements in the provision for inventory obsolescence for
the 1998 and 1999 fiscal years:
<TABLE>
<CAPTION>
Balance at Additions charged Deductions for
beginning to costs inventory Balance at
of period and expenses written off end of period
- ---------------------------------------------------------------------------------------------------
(Dollars in millions) NZ$ NZ$ NZ$ NZ$
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
31 March 1999 9 2 - 11
31 March 1998 12 2 (5) 9
</TABLE>
Change of Balance Date
Effective 1 April 1999, the Company changed its annual balance date from 31
March to 30 June. A transition report covering the period 1 April 1999 to 30
June 1999 will be filed.
Segmental Reporting
During 1997, the Financial Accounting Standards Board issued SFAS 131
("Disclosures about Segments of an Enterprise and Related Information") which is
effective for periods beginning after 15 December 1997. SFAS 131 establishes
standards for the way companies must determine and report information about
operating segments. Telecom has two reportable segments: Wireline and Wireless.
The Wireline segment comprises all basic and value-added voice telephony and
data services. These services include the provision and maintenance of basic
connections between the customers premises and the public switched network,
voice telephony calls originating on fixed lines (Local, National, International
and Other Calling), value added services such as call waiting and voice
messaging, data transmission services, directory services, dedicated leased
lines, Internet services and offering interconnection to other service
providers. The Wireless segment includes a full range of wireless based
telecommunications services including the provision of, connection to and usage
of the cellular and paging networks. Operating segments included within the "all
other" category generate revenue by developing software, supplying equipment and
providing a network design, build and maintenance service. These other segments
do not meet the quantitative thresholds for determining reportable segments.
Telecom's reportable segments are aggregations of similar products and services.
This is a basis management uses for making operating decisions and assessing
performance. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies disclosed in Note 1
of Telecom's annual report.
The network design, build and maintenance segment charges the Wireline and
Wireless segments for the provision of services. Other intersegment revenue
relates to internal telecommunications services charges. The company generally
accounts for intersegment sales of products and services at current market
prices.
In each of the last three fiscal years ended 31 March, more than 90% of the
Group's total operating revenues, operating earnings and identifiable assets
were generated by operations in New Zealand.
<PAGE>
40
The table below summarises reportable segment surplus and segment assets as at
and for the years ended 31 March.
<TABLE>
<CAPTION>
Eliminations
Wireline Wireless All Other /Adjustments Consolidated
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in millions) NZ$ NZ$ NZ$ NZ$ NZ$
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues from external customers (before abnormal items)
31 March 1999 2,881 477 76 - 3,434
31 March 1998 2,871 423 104 - 3,398
31 March 1997 2,669 316 98 - 3,083
Intersegment revenue
31 March 1999 8 11 184 (203) -
31 March 1998 7 9 249 (265) -
31 March 1997 7 7 234 (248) -
Depreciation
31 March 1999 428 89 10 26 553
31 March 1998 381 83 13 87 564
31 March 1997 370 71 12 91 544
Segment surplus (before interest, taxation and abnormal items)
31 March 1999 1,159 202 16 22 a 1,399
31 March 1998 1,189 200 23 (35) a 1,377
31 March 1997 1,084 147 (1) 1 a 1,231
Segment fixed assets
31 March 1999 3,219 518 32 11 b 3,780 c
31 March 1998 3,192 509 40 52 b 3,793 c
31 March 1997 3,066 482 54 161 b 3,763 c
</TABLE>
(a) Included within this column is the results of the Corporate office (net of
a recovery from operating segments) whose activities are only incidental to
the activities of Telecom. The Corporate office is not considered an
operating segment under SFAS 131.
(b) The adjustment/elimination for segment fixed assets relates primarily to
Corporate office fixed assets net of the elimination of internal margins on
assets constructed by the network design, build and maintenance service.
(c) Reconciliation of Segment Assets:
<TABLE>
<CAPTION>
As at 31 March
----------------------------------------------
1997 1998 1999
- ---------------------------------------------------------------------------------------------
(Dollars in millions) NZ$ NZ$ NZ$
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed assets - reportable segments 3,602 3,741 3,769
Fixed assets - eliminations/adjustments 161 52 11
----------------------------------------------
Group fixed assets 3,763 3,793 3,780
Other assets 855 1,372 1,595
----------------------------------------------
Total group assets 4,618 5,165 5,375
----------------------------------------------
</TABLE>
<PAGE>
41
Item 19 - Financial Statements and Exhibits
Financial Statements
1. The following Consolidated Financial Statements are incorporated herein by
reference from the Annual Report.
. Statement of Financial Performance. See page 18 Volume 2 of the Annual
Report.
. Statement of Financial Position. See page 19 Volume 2 of the Annual
Report.
. Statement of Movements in Capital Funds. See page 20 Volume 2 of the
Annual Report.
. Statement of Cash Flows. See page 21 Volume 2 of the Annual Report.
. Notes to the financial statements. See pages 22 to 53 Volume 2 of the
Annual Report.
2. The MD&A is incorporated herein by reference from pages 2 to 16 Volume 2 of
the Annual Report.
3. The report of PricewaterhouseCoopers Independent Accountants is filed
herewith. See F-1.
Exhibits
None.
<PAGE>
Report of Independent Accountants
To the Board of Directors and
Shareholders of Telecom Corporation of New Zealand Limited
In our opinion, the accompanying consolidated statements of financial position
and the related consolidated statements of financial performance, movements in
capital funds and cash flows present fairly, in all material respects, the
financial position of Telecom Corporation of New Zealand Limited and its
subsidiaries at March 31, 1999 and 1998, and their results of operations and
their cash flows for each of the three years in the period ended March 31, 1999,
in conformity with generally accepted accounting principles in New Zealand.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards in New Zealand which have
been applied on a basis consistent with generally accepted auditing standards in
the United States which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above. Generally
accepted accounting principles in New Zealand vary in certain significant
respects from generally accepted accounting principles in the United States. The
application of the latter would have affected the determination of consolidated
net earnings expressed in New Zealand dollars for each of the three years in the
period ended March 31, 1999 and the determination of consolidated shareholders'
funds, also expressed in New Zealand dollars, at March 31, 1999 and 1998 to the
extent summarized in Note 28 to the consolidated financial statements.
Wellington, New Zealand PricewaterhouseCoopers
May 13, 1999 Chartered Accountants
F-1
<PAGE>
Signatures
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant certifies that it meets all of the requirements for filing
on Form 20-F and 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/ Dr Roderick Deane
--------------------------------
Dr Roderick Deane
Managing Director
Dated: 28 September 1999
