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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 30 June 2000
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)
________________________________________________________________________________
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
American Depository Shares............................New York Stock Exchange
("ADSs", evidenced by American Depository 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
________________________________________________________________________________
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.
Ordinary Shares, no par value......................................1,755,413,443
Special rights convertible preference share, no par value......................1
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
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TABLE OF CONTENTS
INTRODUCTORY MATTERS
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<S> <C>
Interpretation................................................................................................3
Exchange Rates................................................................................................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..........................................................................................29
Item 8 Selected Financial Data...........................................................................34
Item 9 Management's Discussion and Analysis of Financial Condition and Results of Operations.............37
Item 9A Quantitative and Qualitative Disclosures about Market Risk........................................37
Item 10 Directors and Officers of Registrant..............................................................38
Item 11 Compensation of Directors and Officers............................................................40
Item 12 Options to Purchase Securities from Registrant or Subsidiaries....................................40
Item 13 Interest Of Management In Certain Transactions....................................................40
PART II
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Item 14 Description of Securities to be Registered........................................................41
PART III
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Item 15 Defaults Upon Senior Securities...................................................................41
Item 16 Changes in Securities and Changes in Security for Registered Securities...........................41
PART IV
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Item 17 Financial Statements..............................................................................41
Item 18 Financial Statements..............................................................................41
Item 19 Financial Statements and Exhibits.................................................................42
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3
INTRODUCTORY MATTERS
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Interpretation
Certain information required for this Report on Form 20-F ("Report") is
incorporated by reference to Telecom's Financial Statements for the fiscal year
ended 30 June 2000 (the "Financial Statements") and Management's Discussion and
Analysis of Financial Condition and Results of Operations for the fiscal year
ended 30 June 2000 (the "MD&A"). . References to "Notes" are references to the
Notes to the Financial Statements. The Financial Statements and MD&A are filed
herewith.
Certain information required for this Report is incorporated by reference to
Telecom's 2000 Annual Report to Shareholders (the "Annual Report"). The Annual
Report was filed under cover of Form 6-K dated 19 September 2000.
Exchange Rates
In this 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 Report 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$0.4690, the rate applicable at
30 June 2000. 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"):
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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>
1996 .6807 .6650 .6890 .6435
1997 .6973 .6932 .7148 .6678
1998 .5523 .6279 .6973 .5523
1999 .5340 .5249 .5615 .4838
Fiscal Year ended 30 June
1999 (b) .5295 .5418 .5635 .5248
2000 .4690 .4995 .5360 .4537
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(a) Determined by averaging the Noon Buying Rates on the last day of each month during the fiscal
year
(b) Three month period from 1 April 1999 to 30 June 1999
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On 4 December 2000 the Noon Buying Rate was NZ$1.00 to US$0.4216.
See the MD&A, page 11 of Exhibit 2, for a discussion of Telecom's foreign
exchange risk management.
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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," "intend" 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 and Australian telecommunications
markets. 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 New Zealand and Australian telecommunications markets; 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 and Australian
economies; perceived health risks associated with electromagnetic energy; and
the adequacy of the Company's disaster recovery programs.
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5
PART I
Item 1 - Description Of Business
General
Telecom provides a full range of telecommunications products and services in New
Zealand 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.
Telecom's Australian subsidiary, AAPT Limited ("AAPT"), is Australia's third
largest telecommunications carrier offering a wide variety of fixed-line, data,
Internet and mobile services. See "AAPT" in the MD&A, page 15 of Exhibit 2.
Telecom also has other offshore interests including a major interest in the
Southern Cross Cable Network ("Southern Cross"). See "-The Telecom
Network-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. This was done 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, under certain circumstances, into
Telecom Shares and in May 1999 the directors who had been nominated to the Board
of Directors by Bell Atlantic resigned. Bell Atlantic has informed Telecom that
it has ceased to be an affiliate of Telecom for U.S. securities law purposes.
See Item 4.
In 1999 Telecom acquired 81.4% of the shares in AAPT through a wholly owned
subsidiary. In September-December 2000 Telecom, through its subsidiary,
purchased the remaining AAPT shares at a price of A$7.25 per share and also
purchased the outstanding AAPT options at a price of A$7.25 per option less the
exercise price of the option. Telecom has announced measures aimed at
integrating Telecom and AAPT businesses. The measures include the combining of
the internet and mobile business of Telecom and AAPT into two business units
each under an integrated management team and the appointment of a Chief
Operating Officer for AAPT.
In December 2000 Telecom formally indicated an interest in participating in the
restructuring of Cable & Wireless Optus (CWO) in Australia. CWO is the second
largest telecommunications operator in Australia with reported total assets
valued at approximately A$8.5 billion. Telecom indicated that it was primarily
interested in Optus Mobile although recognised that any transaction Telecom
might undertake would need to be part of the overall restructuring of CWO.
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6
Products and Services
Local Service
Local service contributed approximately $1,064 million, or 24.6% of Telecom's
operating revenue for fiscal 2000. Of this amount, approximately NZ$7 million,
or 0.7%, was generated by AAPT.
In New Zealand the main 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.
In Australia AAPT resells Telstra' local call services to directly connected
customers (as a competitive local exchange carrier). At this stage, AAPT has a
limited number of customers connected directly to its network for local call
services. With the continuing roll-out of its CBD fibre loops and deployment of
LMDS technologies, AAPT expects the number of directly connected local call
customers to increase.
Calling
National - National calls contributed approximately $932 million, or 21.5% of
Telecom's operating revenue for fiscal 2000. Of this amount, approximately
NZ$224 million, or 24.0%, was generated by AAPT.
In New Zealand 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 cellular networks
originating within the fixed line network, National 0800 calls and operator
services charges.
In Australia, AAPT provides a range of voice services across Australia to all
consumer segments to all Australian destinations and international destinations.
AAPT owns or leases a high speed intercapital fibre network between Australia's
major cities to carry both data and voice.
In addition, AAPT's existing long distance customers that have pre-selected AAPT
are automatically provided with fixed to mobile services by AAPT (as long
distance and fixed mobile services are not unbundled in Australia). Calls made
from a fixed wire phone to mobiles will be carried over AAPT's network, and
terminated on a mobile network. AAPT pays an interconnect fee to mobile
operators to terminate calls on their network.
International - International calls contributed approximately $506 million, or
11.7% of Telecom's operating revenue for fiscal 2000. Of this amount,
approximately NZ$108 million, or 21.3%, was generated by AAPT.
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.
AAPT's international revenue includes international long distance traffic
carried by undersea cable or by satellite to and from Australia. See "-The
Telecom Network-International".
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7
Interconnection
Revenues from Telecom's interconnection services contributed approximately $90
million, or 2.1%, of Telecom's operating revenue for fiscal 2000. Of this
amount, approximately NZ$4 million, or 4.4%, was generated by AAPT.
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.
Cellular and Other Mobile Services
Cellular and other mobile services contributed approximately $717 million, or
16.6%, of Telecom's operating revenue for fiscal 2000. Of this amount,
approximately NZ$171 million, or 23.8%, was generated by AAPT.
Cellular and other mobile services comprises access and airtime charges for
calls originating from Telecom's cellular network (including international
calls) and revenue from paging and mobile radio services, cellular equipment and
other related services.
In New Zealand Telecom's cellular network is available to approximately 96% of
the New Zealand population. The network consists of both digital (DAMPS) and
analogue (AMPS) services. Telecom is currently planning to deploy CDMA
technology in its cellular network beginning in 2001. See "The Telecom
Network-New Zealand". At 30 June 2000, Telecom had approximately 980,000
connections (up from approximately 677,000 connections, or 44.8% from 30 June
1999), of which approximately 240,000 were DAMPS connections.
Special features provided through the Telecom cellular telephone service
include: optional rate plans; part-minute charging; two way text services;
Cellular Secretary (voice mail); call diversion; three-way conferencing;
international roaming; and Tandem (where two phones operate on one number).
Telecom's cellular service is marketed using a variety of distribution methods
including call centres, Telecom direct sales force and franchised retail
outlets. Telecom's cellular service is also resold by other organisations which
use a combination of direct response, retail, door-door selling and
telemarketing activity. 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.
In New Zealand 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 operates a New Zealand 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
customers are companies with vehicle fleets operating from a central base.
Telecom's mobile radio network can connect to the PSTN to allow telephone calls.
Mobile services such as Sealink (automatic marine telephone service), EasiTrac
(a GPS/Mobile location service) and mobile data capability are also offered.
AAPT retails mobile services as a reseller of Vodafone and Optus GSM products
through its wholly owned subsidiary CellularOne. Through those channels, AAPT
has in excess of 215,000 GSM mobile customers.
Data
Revenues from data services contributed approximately $535 million, or 12.4%, of
Telecom's operating revenue for fiscal 2000. Of this amount, approximately
NZ$103 million, or 19.3%, was generated by AAPT.
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8
Data revenue consists principally of revenue from Internet, Lanlink, ISDN, and
Frame Relay. Telecom has made extensive use of ADSL technology to provide
broadband internet access over existing copper telephone lines. LanLink and IP
Networking provide secure and private IP networking solutions to customers.
Telecom's frame relay and ATM (Asynchronos Transfer Mode) services provide
high-speed data services. The ATM service is increasingly being used to support
IP services. Telecom offers a wide range of dedicated circuit services to
satisfy the needs of customers requiring use of exclusive telecommunications
links. Telecom also provides IP network services which connect other Internet
service providers to their customers. Overtime, esolutions products are expected
to become increasingly important. See "esolutions", MD&A, page 15 of Exhibit 2.
AAPT owns and operates one of the largest secure private IP networks in
Australia for the Victorian Government called VicOne. During the year VicOne was
expanded to link over 3,500 sites, including schools, hospitals, police
stations, courts and all other public sector facilities and currently services
over 700,000 daily users.
Other Operating Revenue
Other operating revenue contributed approximately $437 million, or 10.1% of
Telecom's operating revenue for fiscal 2000. Of this amount, approximately
NZ$113 million, or 25.9%, was generated by AAPT.
Other operating revenue comprises revenue from the publication of directories,
revenue generated by equipment sales and installation services, revenue from
AAPT's resale activities (see "-Local Service"), and revenue relating to
non-core business.
Directories-In New Zealand 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. 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. Telecom offers four colour advertising, bold and super bold entries and
logos in its directories. Telecom also provides Electronic White Pages, Internet
WHITE PAGES(TM) and Internet YELLOW PAGES(R).
Equipment Revenue 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 PBXs and other business systems
through third party leasing arrangements.
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. Telecom operates 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.
AAPT is a full service telecommunications supplier marketing to all customer
segments including residential, small to medium businesses, large corporate,
government and wholesale. AAPT's traditional focus has been on the consumer and
small business segment of the market.
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9
AAPT now has approximately 600,000 residential customers, and as at 30 June 2000
there were approximately 300,000 customers signed up to AAPT's local call
service.
AAPT actively markets voice products across all customer segments. AAPT retails
mobile services across all segments, reselling Vodafone and Optus GSM products.
AAPT offers a range of data, network and related services over its data networks
principally to the corporate and government sectors. AAPT offers a range of
internet and e-commerce services for business through its wholly owned
subsidiary connect.com.au Pty Ltd. In addition, connect.com.au Pty Ltd provides
services to approximately 160 ISPs which in turn resell services to an estimated
200,000 end customer internet users. In the consumer market, AAPT has a 50%
interest in AOL Australia, a joint venture with America Online Inc., one of the
world's leading interactive services companies. The AOL Australia services are
marketed through AAPT's Cellular One retail outlets.
The Telecom Network
New Zealand
In New Zealand Telecom operates an advanced telecommunications network. Over 99%
of Telecom's customers are connected to digital telephone exchanges which are
linked with digital transmission systems. Telecom operates an Intelligent
Network and uses the internationally standardised CCS No.7 signalling system.
The Intelligent Network enhances the operation of the existing network and
allows Telecom to easily provide services such as free-phone and wide-area
CENTREX. Advanced Voice-mail and Fax-mail messaging services are provided to
over a third of Telecom's customers. 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 offered in main centres, and is being
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 Data (IP & ATM) network is operational and experiencing strong growth
with services such as Frame Relay and Virtual Private IP Networking.
Telecom offers pre-paid and post-paid mobile phone services with an AMPS/DAMPS
cellular network. A Short Message Service is provided and a range of WAP-based
services are being developed. Telecom is deploying a CDMA cellular network in
New Zealand and it is currently intended to begin commercial service in mid
2001. It is expected that the existing AMPS/DAMPS cellular network will continue
to operate for several years to allow customers to transfer to CDMA when
convenient.
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.
Telecom has long-term supply relationships with various equipment suppliers for
equipment installed in its network. These suppliers include NEC Corporation of
Japan ("NEC"), Fujitsu Limited of Japan ("Fujitsu"), Nokia Telecommunications of
Finland ("Nokia"), Cisco Systems of the USA ("Cisco") and Lucent Technologies of
the USA ("Lucent"). Telecom has no obligation to continue to purchase equipment
from these suppliers and believes there are sufficient alternative sources of
supply. In fiscal 2000, Telecom entered into an exclusive supply arrangement
with L M Ericsson of Sweden ("Ericsson") for a period of up to 5 years for the
supply of equipment for Telecom's AMPS/DAMPS cellular network. Telecom has also
outsourced the management and operation of its AMPS/DAMPS cellular network to
Ericsson for a period to 31 December 2000.
Australia
AAPT operates an extensive voice and data network in Australia. AAPT's voice
network consists of 7 major switching exchanges, 60 points-of-presence in
regional cities and towns, 2 integrated intelligent network nodes and 2 signal
transfer point nodes. All voice elements are interconnected with Telstra, Optus
and numerous international carriers. The switching exchanges are located in
Sydney, Melbourne, Brisbane, Adelaide, Perth and Canberra. AAPT's data switching
network has an ATM backbone based on Cisco/Stratacom's equipment. The core
backbone consists of 13 major ATM
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10
switches. These core switches are supported by frame relay switches at 77
regional locations. AAPT's ATM switches are housed in each of AAPT's switching
exchanges in the capital cities as well as in several regional centres.
In March 2000, AAPT and Cable & Wireless Optus ("Optus") signed an agreement
under which AAPT will acquire a high bandwidth network on Optus' national
backbone linking Cairns, Brisbane, Sydney, Canberra, Melbourne, Adelaide and
Perth. Also as part of this agreement, Optus will provide 50 regional drop off
points and AAPT will install equipment to link the drop off points with its
regional points of presence. AAPT is currently working with Optus to implement
this agreement and expects to have full use of this network by the first quarter
of 2001. In the interim and as part of this agreement AAPT has use of Optus'
backbone network. AAPT connects to Telstra's local network through its switches
and points-of-presence paying Telstra interconnection fees to originate and
terminate traffic to and from AAPT's customers as AAPT at present has limited
end to end direct access to its customers.
AAPT is expanding its first mile broad-band access capabilities with LMDS, CBD
Fibre and xDSL networks. These networks are complementary and together with
AAPT's voice and data switching capabilities they enable a rich range of voice,
high-speed data and IP based services. Markets have been segmented on both a
customer and geographic basis to target deployment of each type of access
technology.
AAPT has long-term supply relationships with various equipment suppliers for
equipment installed in its network. These suppliers include Siemens of Germany
("Siemens"), Marconi Limited of the UK ("Marconi"), Cisco Systems of the USA
("Cisco") and Lucent Technologies of the USA ("Lucent).
See also "Code Division Multiple Access (CDMA) Mobile Network, page 18 of
Exhibit 2.
International
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. The
international network is 99.7% digital. 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 & 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 provides international capacity for growth of traffic generated by data
services, including internet traffic, and commenced operations in November 2000.
Full operational capacity is expected to be achieved in 2001. Telecom has a 50%
equity investment in Southern Cross. See also MD&A "Southern Cross" page 14 of
Exhibit 2.
Telecom has a licence under Section 214 of the Telecommunications Act 1934
(U.S.) 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 (UK) to acquire and operate communications
facilities in the United Kingdom. Points-of-presence have been established in
London and Tokyo to switch international wholesale telephony minutes.
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.
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11
AAPT's international delivery transmission has several components including a
series of correspondent arrangements with international carriers as well as
investments in submarine cable consortia, plus satellite access infrastructure.
AAPT has established correspondent agreements with 20 major overseas
telecommunications companies to form an international delivery network. Those
arrangements generally provide for AAPT to deliver its outgoing voice and data
traffic to the relevant overseas carrier for termination by that carrier and for
the overseas carrier to provide AAPT with some or all of its outgoing traffic
destined for Australia for termination by AAPT. AAPT has acquired interests in
Sea-Me-We 3 and Southern Cross cables. Telecom and AAPT have begun to work
together to integrate and consolidate their international networks and
businesses.
Technological Risks
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. There is also the risk that the
technological options Telecom takes turn-out not to be competitive or that those
options are not developed or deployed in a timely fashion.
Perceived Health Risks Associated with Electromagnetic Energy
Allegations have been made, but not proven, that mobile telecommunications
equipment may pose health risks through exposure to emissions of radiofrequency
electromagnetic energy ("RF") 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 RF exposure 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.
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.
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12
Competition
New Zealand
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. Certain of Telecom's competitors are large multi-national
corporations, or affiliates thereof, with substantial resources, including
Telstra, British Telecom and Vodafone. 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.
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 (Information
Disclosure) Regulations 1999." 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.
Telecom has extensive interconnection arrangements with other network operators
and service providers. These agreements cover international services, national
and local voice services, data services, cellular services, Internet services
and mobile trunked services. Telecom now has interconnection agreements with 11
other carriers. Of these 8 have the ability to offer local services and in most
cases Telecom has a number portability agreement in place enabling competitors
to provide customers with the option of changing between local service providers
without the need to change numbers.
During the year, Telecom and Vodafone renewed and amended the interconnection
arrangements between their networks. In July 2000, Telecom and Telstra Saturn
reached a comprehensive new agreement on interconnection, wholesale services,
Internet traffic, pole-sharing and settlement of litigation on rebilling. This
agreement introduced the principle of "bill and keep", involving no payment for
the termination of prescribed local calls where volumes of those calls between
networks are reasonably in balance.
Telecom and Clear have entered into a new set of agreements (effective 1 October
2000) on interconnection and wholesale-related matters. The interconnection
agreement includes payment by Clear of $35 million over 12 months for
origination and termination by Telecom of a set volume of calls including long
distance calls and mobile calls. Excess minutes are charged at agreed rates, but
there are no payments for calls to numbers attracting disproportionate volume of
incoming calls (eg Internet calls). A data package gives Clear wholesale and
resale access to Telecom's ADSL service. The agreements also settle various
court proceedings between Telecom and Clear. See item 3.
In addition to those companies with which Telecom has interconnection, numerous
other organisations offer voice-calling services from overseas or by re-selling
services from network operators in New Zealand. Approximately 150 Internet
Service Providers ("ISPs") operate in New Zealand and 103 of these have asked
for access to the Telecom network through 0867 dial-up numbers. Telecom competes
in the ISP market through its Xtra operation.
Telecom also faces competition in leased-line services, paging, directory
publishing and supply, and installation and maintenance of CPE.
Australia
Competition for the provision of telecommunication services to the public in
Australia was deregulated from 1 July 1997 with a removal of the limit on the
number of carriers which could compete in the Australia market. Since that time
there has been a significant increase in competition particularly in the long
distance national and international voice traffic, mobile telecommunications
services and long distance national and international data services to
businesses.
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13
Telecommunications services growth is forecast to continue for the foreseeable
future, principally driven by demand for more bandwidth intensive products with
lower growth for basic voice services. Price reductions which have already been
seen in the market for long distance and local fixed wire services are expected
to continue. Data traffic is expected to overtake voice traffic in terms of
volume and revenue, particularly in the fixed line segment of the market. Whilst
the growth in voice and data traffic has driven demand for more capacity, the
roll-out of high capacity networks especially for commercial users is currently
underway. As capacity in bandwidth has become more accessible, prices have
fallen and it is expected that the emerging infrastructure based carriers such
as PowerTel, MCI Worldcom and others will deploy high bandwidth fibre optic
based networks in the near term. The telecommunications industry in Australia is
characterised by rapid changes in direction and focus. There are increasing
levels of competition, technology shifts, regulatory movements and changes in
customer demand patterns.
There are more than 45 carriers competing for the provision of
telecommunications services to the public in Australia. Of those carriers, there
are currently 3 main facilities based competitors for AAPT: Telstra, Cable &
Wireless Optus and Vodafone and new competitors PowerTel, OneTel, Hutchison and
MCI Worldcom are establishing facilities based competitive infrastructure. The
local call market is dominated by Telstra, as it owns most of the domestic local
loop network, and duplication of the Telstra fixed network is not economically
feasible in many parts of Australia. Interconnection with Telstra is necessary
for competitive carriers, including AAPT.
There is vigorous competition in the national and international long distance
market, and there is a necessity to interconnect with other carriers in respect
of both national and international originating and terminating traffic. AAPT
presently has interconnection arrangements with competing carriers. Telstra is
the subject of a "declaration" by the Australian Competition & Consumer
Commission in respect of access to originating and terminating access charges
for the public switch telephone network together with the GSM and CDMA mobile
networks under telecommunication laws in Australia. The implications of that
"declaration" are canvassed below. See "Regulatory Framework-Australia".
Regulatory Framework
New Zealand
The New Zealand telecommunications environment has been comparatively
deregulated compared to other countries. But the Government has proposed
changes. The existing environment and proposed changes are described below.
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 clearances for acquisitions of a business or shares are now
made on a voluntary basis. However, the Commerce Act retains penalties for
acquisitions 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.
<PAGE>
14
A Bill to amend the Commerce Act is currently before the New Zealand parliament.
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. For example, the threshold
for use of a dominant position would change to "take advantage of a substantial
degree of market power", and the threshold for acquisitions would change from
"dominance" to "substantially lessen competition".
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 (Information Disclosure) Regulations 1999.
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 Economic Development (the "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 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 Secretary;
. to ensure that any agreement or arrangement between the registered operator
and an overseas operator specified by the 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; and
<PAGE>
15
. provide to the Secretary such statements, reports and agreements with
overseas operators as the Commerce Secretary may require.
The Government has indicated that it intends to repeal these regulations.
Telecommunications (Information Disclosure) Regulations 1999. The
Telecommunications (Information Disclosure) Regulations 1999 (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. These regulations replaced the previous disclosure regulations as from 1
January 2000 and introduced some new disclosure obligations on Telecom, as
indicated below.
The information which Telecom is required to make publicly available at regular
intervals is as follows:
. 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.
. year end (audited) and six monthly (unaudited) financial statements for the
Company's `local loop' and `other telecommunications services'
businesses. This obligation was introduced by the 1999 Regulations. But the
Government (as part of its response to the Telecommunications inquiry (see
"--Telecommunications Inquiry")) has announced proposed amendments to the
regulations that would see this requirement revoked.
. the losses Telecom incurred in complying with the Kiwi Share obligations
(see "-Kiwi Share" for a description of the Kiwi Share obligations) and the
means by which Telecom recovered those losses, including any charges from
which Telecom recovered those losses-new obligation
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 not automatically given 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
<PAGE>
16
include licences in respect of transmitters used to provide service to
households in remote areas, trunked despatch services, land mobile, maritime
mobile, paging services and fixed point-to-point links that support a national
infrastructure.
The New Zealand Government has indicated that it intends to bring a number of
the frequencies to which these radio apparatus licences relate within the new
regime during the period 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.
On 10 July 2000, the New Zealand Government commenced the sale by auction of
spectrum in the 2 GHz band. Telecom is actively participating in this auction
which includes spectrum suitable for DCS1800, IMT2000 (3G) and fixed wireless
access services. Telecom has approximately 200 point-to-point services operating
in the spectrum being auctioned that will need to be relocated to alternative
spectrum if licences cannot be acquired through the auction at a suitable price.
Approximately 50 of these point-to-point links have a statutory entitlement to
continue operating for 5 years from the conclusion of the auction.
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.
The Radiocommunications Amendment Act 2000, which amends the Radiocommunications
Act 1989, has been enacted and will come into force on a date to be determined
(expected in early 2001). This Act, once in force, will allow the making of
regulations:
. requiring compliance with international electromagnetic interference
standards;
. strengthening provisions to prevent disruption caused by lawful
interference (through the introduction of an arbitration process);
. allowing for new management rights to be created and allocated in advance
of the expiry of existing rights;
. providing for a publicly accessible on-line records of all apparatus and
spectrum licences.
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$50 million, or for acquisitions
involving rural land.
Kiwi Share. The Government holds one preference share (the "Kiwi Share") in 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 Government, as the holder of the Kiwi Share otherwise
consents, these provisions require the Company to:
(i) maintain a local free-calling option for all residential customers,
although the Company 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
<PAGE>
17
(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. . See also "- Telecommunications (Information
Disclosure) Regulations 1999" and "-Telecommunications Inquiry".
Telecommunications Inquiry. In February 2000, the Government established a
Ministerial Inquiry into Telecommunications (the "Inquiry"), with an objective
to "ensure that the regulatory environment delivers cost efficient, timely and
innovative telecommunications services on an ongoing, fair and equitable basis
to all existing and potential users. A final report of the Inquiry dated 29
September 2000 recommended, among other things, that a stand alone regulator be
established and that a range of services be designated and hence come under the
purview of the regulator. These services include interconnect, wholesale
services, mobile roaming, cellphone co-location and number portability (as a
designated service in the event that industry agreement is not reached). The
Inquiry report also recommended that the Kiwi Share be replaced by legislation
and that it include a standard for data speed as well as voice. In December 2000
the Government announced its response to the Inquiry report.
The Government announced that it intended to set-up a Telecommunications
Commissioner as a specialist Commissioner within the Commerce Commission. The
Commissioner's key function would be to resolve disputes over regulated
services; to report to the Minister on the desirability of regulating additional
services and to monitor and enforce Kiwi Share obligations.
The announcement also specified the services that the Government proposed to
designate including:
. interconnection with Telecom's fixed telephone network;
. wholesaling Telecom's fixed network services;
. number portability including 0800 number portability.
Designation of fixed to mobile carrier selection was deferred with a deadline of
31 December 2001.
The Government has indicated it will define certain pricing principles to be
taken into account by the Commissioner in regulating prices. These are likely to
be largely consistent with commercial agreements the Company has already entered
into with major competitors.
Additionally the Government announced proposed amendments in relation to the
Kiwi Share including:
. extending the geographic coverage of the kiwi Share obligations relating to
the local-loop network to current levels rather than those applying when
the Kiwi Share was first introduced;
. specifying that free local calling includes dial-up data calls such as
Internet calls;
. requiring Telecom to ensure its network provides 9.6 kbps data capability
to 99% of its residential lines and 14.4 kbps to 95% of its residential
lines within two years of the passage of the legislation;
. legislating industry funding of Kiwi Share losses. On current market shares
of industry telecommunications revenues, Telecom would be required to fund
75-80% of this;
. explicitly allowing Telecom to lower prices in profitable main centres in
the face of competition (but subject to the Commerce Act).
Number Administration Deed. 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
<PAGE>
18
has been the subject of an authorisation from the Commerce Commission. The final
report of the Inquiry recommended that number administration and portability,
which is currently being addressed by the industry under the Number
Administration Deed should be the subject of regulation if the industry has not
reached agreement by 31 July 2001. 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.
Australia
Legislation and regulatory bodies
The current regulatory regime for telecommunications is contained in a package
of Commonwealth Acts, the most significant of which are:
. the Telecommunications Act 1997 (the Telecoms Act);
. the Telecommunications (Consumer protection and Service Standards) Act 1999
(which contains mainly consumer protection provisions previously contained
in and transferred from the Telecoms Act);
. Parts XIB and XIC of the Trade Practices Act 1974;
. the Radiocommunications Act 1992; and
. Australian Communications Authority Act 1997.
The Australian Communications Authority (ACA) is responsible for managing radio
frequency spectrum (under the Radiocommunications Act 1992), administering the
licensing of carriers, administering consumer and technical issues relating to
telecommunications and enforcing the Telecoms Act. The Australian Competition
and Consumer Commission (ACCC) is responsible for economic and competition
regulation, including regulating anti-competitive conduct and monitoring and
implementing the industry specific access regime under Parts XIB and XIC of the
Trade Practices Act, respectively.
The main aim of the Telecoms Act was to introduce greater competition into the
telecommunications industry and to thereby promote the long-term interests of
end-users and the efficiency and international competitiveness of the Australian
telecommunications industry. Industry self-regulation is also encouraged. The
two key industry bodies are the Telecommunications Access Forum and the
Australian Communications Industry Forum. Industry standards and codes of
practice are developed through the latter body. Codes may be registered with the
ACA. Compliance with such codes is voluntary unless the ACA directs compliance.
The ACA may impose industry standards if self-regulation fails.
There is also a Telecommunications Industry Ombudsman (TIO) scheme which
provides for the TIO to deal with complaints by customers against carriers and
service providers. The scheme is funded by its members - carriers and service
providers.
The Telecoms Act does not regulate the licensing or control of broadcasting
services, nor the content of communications. These matters are regulated by the
Australian Broadcasting Authority under the Broadcasting Services Act 1992 (Cth)
and certain State legislation.
Industry participants
Since 1 July 1997, the three main categories of operators in the industry have
been:
. carriers - which own the infrastructure used to provide carriage services
to the public;
. carriage service providers - which use infrastructure to provide carriage
services to the public;
. content service providers - which use carriage services to supply content
services to the public. Content services include broadcasting, on-line
information and on-line entertainment.
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19
Access to telecommunications facilities and services
Part XIC of the Trade Practices Act contains an industry specific regime for
access to telecommunications services "declared" by the ACCC, either on the
recommendation of the Telecommunications Access Forum or following a public
enquiry held by the ACCC. Certain services were deemed to be declared as at 1
July 1997. The ACCC has subsequently declared a small number of additional
services including:
. unconditioned local loop service, local PSTN originating and terminating
service and local carriage service;
. ISDN originating and terminating services; and
. analogue subscription television broadcast carriage service.
Once a service has been declared, a number of standard access obligations
automatically apply to any carrier or carriage service provider supplying the
declared service, including the obligation to supply the declared service upon
request. Access is to be provided on terms and conditions as agreed between
access provider and seeker. If agreement cannot be reached, supply must be in
accordance with any terms and conditions contained in an access undertaking
covered by the service (such undertakings are considered and approved by the
ACCC) or on such terms and conditions as are determined by the ACCC following
arbitration. The ACCC has issued a number of papers on access pricing and a
guide to the pricing principles it will apply when determining an access
dispute. The primary principle identified by the ACCC is that access prices
should be cost-based.
Access to a declared service can only be refused on very limited grounds,
including lack of available capacity.
Schedule 1 of the Telecoms Act imposes obligations on carriers to provide access
to their facilities and network information to other carriers, so that other
carriers can provide competitive facilities and competitive carriage services or
establish their own facilities. The terms and conditions of access are as agreed
between carriers or, failing agreement, as determined by the ACCC.
Regulation of industry participants
There is no limit on the number of carrier licences that may be issued. As a
general rule, there is no time limit on a licence. Subject to the payment of an
annual charge, it will continue in force until it is surrendered or cancelled.
Many carriers are also carriage service providers.
Owners of certain telecommunications infrastructure (such as a cable network)
may not supply carriage services to the public using the network units unless
they hold a carrier licence or a nominated carrier declaration is in force. Each
carrier must comply with certain licence conditions, including:
. compliance with the Telecoms Act;
. compliance with standard access obligations in Part XIC of the Trade
Practices Act;
. providing other carriers with access to specified facilities (including
land, buildings, structures, telecommunications transmission towers and
underground facilities) and to network information;
. preparing and maintaining a carrier industry development plan;
. preparing and maintaining an interception capability plan. Carriers must
also ensure that services passing over their networks can be intercepted by
law enforcement agencies; and
. contributing to the universal service levy (which funds the provision of
universal or basic services).
. with limited exceptions, State and Territory planning and environmental
laws apply in relation to the installation of telecommunications
infrastructure.
A nominated carrier declaration is made by the ACA and involves the nominated
carrier assuming the responsibilities of a carrier in relation to specified
network unit(s) owned by a non-carrier.
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20
Carriage service providers are not required to be licensed or registered but
they must comply with the service provider rules contained in the
telecommunications legislation. The rules include obligations to:
. provide operator services and directory assistance services to end-users
who are supplied with standard telephone services;
. comply with specified minimum performance standards established by the ACA;
. offer untimed local calls for standard telephone services;
. provide itemised billing for calls made using standard telephone services;
and
. provide access (where applicable) to telecommunications services under Part
XIC of the Trade Practices Act.
The Telecommunications (Consumer Protection and Service Standards) Amendment Act
No. 2 of 2000 became law in Australia in December 2000. Under section 20A(1),
"participating persons" who are required to lodge a return of eligible revenue
on the basis of which the Australian Communications Authority will assess
whether a contribution must be made to the universal service levy includes:
. persons who were carriers during the eligible revenue period; and
. carriage service providers if the Minister for Communications, Information
Technology and the Arts makes a written determination that carriage service
providers are participating persons for the eligible revenue period and a
person was a carriage service provider at any time during the eligible
revenue period.
Section 20A is taken (on assent) to have commenced on 1 July 2000. This
provision has the potential to spread the burden of the universal service levy
over carriage service providers as well as carriers, reducing the burden on
AAPT.
Content services providers are subject to only minimal regulation, although they
have the benefit of the access regime in Part XIC of the Trade Practices Act.
AAPT has held a carrier licence since 1 July 1997 and is also a carriage service
provider.
Competition
Anti-competitive practices in the telecommunications industry are subject to a
general anti-competitive regime contained in Part IV of the Trade Practices Act
and also to a telecommunications specific regime in Part XIB of the same Act.
Under the "special competition rule" in Part XIB, a carrier or carriage service
provider will be held to have engaged in anti-competitive conduct if it has a
substantial degree of power in a market and takes advantage of that power with
the effect, or likely effect, of substantially lessening competition in that or
any other telecommunications market. Substantial financial penalties apply for
breach of the rule.
The Productivity Commission is currently conducting a review of the
telecommunications industry specific competition regime.
Telecommunications mergers and acquisitions and foreign investment issues
The ACCC is responsible for monitoring mergers, joint ventures and acquisitions,
including those in the telecommunications sector. Section 50 of the Trade
Practices Act prohibits acquisitions or mergers which would have the effect, or
be likely to have the effect, of substantially lessening competition in a
substantial market for goods or services in Australia, in a State or in a
Territory.
There are no foreign investment restrictions which apply expressly to carriers
or service providers as a class. The Telecoms Act would, however, permit the
Minister to impose a licence condition that relates to the extent of foreign
ownership or control of a licence. Specific foreign ownership restrictions apply
only to Telstra Corporation Limited (51.1% of the shares in which are still
owned by the Australian Government).
<PAGE>
21
Other international issues
The Telecommunications (Compliance with International Conventions) Declaration
No. 1 of 1997 provides that carriers and carriage service providers are bound by
39 listed international conventions, including the WTO Basic Telecommunications
Agreement.
The Rules of Conduct about dealings with international telecommunications
operators No. 1 of 1997 require carriers and carriage service providers to use
all reasonable endeavours to prevent, mitigate or remedy unacceptable conduct
engaged in by an international telecommunications operator. The ACCC administers
the Rules.
Arbitration. AAPT is currently engaged in eight arbitrations under the Access
regime. Recent decisions by the ACCC in relation to Telstra PSTN Access
undertakings had favourable outcomes for AAPT. AAPT is awaiting indication of
the progress on three arbitrations, seeking to reduce the price of fixed to
mobile calls.
Number Portability. In Australia Local Number Portability ("LNP") has been
available to all carriers since November 1999. Customers can now keep their
local numbers when taking AAPT's bundled residential telephony service. Mobile
Number Portability ("MNP") will be available from 25 September 2001. Issues
relating to Freephone Number Portability are still outstanding. Both are
favourable for AAPT as they will increase the attraction of AAPT's services to
customers.
United States
Telecom is subject to all rules, policies, and duties of the United States
Federal Communication Commission ("FCC") applicable to U.S. international common
carriers. The FCC regulates Telecom as a "dominant" carrier on the U.S. - New
Zealand route, and as a 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 or from 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. Telecom's U.S. subsidiaries applied in
the fall of 2000 for additional authority under Section 214, specifically to
provide long distance and international services originating in New York. One of
those applications was granted in November 2000 and the other remained pending
but appeared likely to be granted, on a streamlined docket, as of 15 December
2000.
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
Most of Telecom's approximately 5,700 permanent employees in New Zealand are
employed on individual employment contracts with no fixed term. Part-time and
temporary employees and casual contractors are also used. Outsourcing has
replaced direct hire in a number of areas. See "Sale of Connectel", MD&A, page
14 of Exhibit 2.
AAPT employees are also mainly employed on individual employment contracts.
Awards of independent State and Federal employment Commissions are relevant to
some of these contracts. Awards specify minimum wages and conditions of
employment. They have no fixed term and are varied from time to time.
<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 indigenous land claims. See "Land Claims" Note 13.
AAPT leases premises in all major capital cities of Australia and several
regional centres. AAPT also has telehousing arrangements for various points of
presence throughout Australia, by contractual arrangement with building owners
or other carriers. AAPT is leasing or licensing land and premises for the
purposes of siting various infrastructure including antennae, base stations and
associated equipment and civil works.
Item 3 - Legal Proceedings
In various proceedings commenced since 1996, Clear Communications Limited
("Clear") alleged various breaches of the Commerce Act in relation to Telecom's
bundling practices, its interconnection agreements, and in relation to Telecom's
0867 service and a number of other issues. In April 1997, Telecom issued
proceedings against Clear for withholding certain payments for services supplied
under Clear's 1996 interconnection agreement with Telecom On 3 October 2000, the
parties announced that all proceedings between them had been settled on
confidential terms with effect from 30 September 2000.
In proceedings commenced in March 1997 in the Commercial Division of the Supreme
Court of New South Wales, Australia Telstra Corporation claimed against AAPT
approximately A$127 million for alleged unpaid charges for telecommunications
services. AAPT cross-claimed asserting breach of contract, negligence,
misleading and deceptive conduct, misuse of confidential information,
unconscionable conduct and abuse of market power under Part IV of the Australian
Trade Practices Act. On 11 September 2000, the parties announced that the
proceedings had been settled on confidential terms.
In May 1999, Telstra NZ Limited ("Telstra NZ") commenced proceedings alleging
that Telecom's cessation of certain carrier rebilling arrangements with Telstra
NZ breached the Commerce Act. Telstra NZ sought injunctive relief together with
unspecified damages. Telstra NZ's application for an interlocutory injunction
was dismissed in July 1999, and on 18 July 2000 the parties announced that the
proceeding was settled on confidential terms.
In June 1999, a claim was filed against Telecom in the Employment Court by
representative and individual plaintiffs. The plaintiffs allege breach of
various express and implied terms of their employment contracts. The claim is
not fully quantified.
In April 2000, CallPlus Limited ("CallPlus") and two other companies issued
proceedings against Telecom alleging breach of contract and the Commerce Act in
relation to Telecom's 0867 service. CallPlus seeks injunctive relief and an
inquiry into damages.
On 31 July 2000, the Commerce Commission issued proceedings against Telecom
claiming that the introduction of 0867 constituted a use by Telecom of its
dominant position for proscribed purposes. The Commerce Commission seeks a
declaration that this contravened s36 of the Commerce Act, a pecuniary penalty,
and costs.
Various other lawsuits, claims and investigations have been brought or are
pending against Telecom.
<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.
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 30
November 2000 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 2,092,258 *
--------------------------------------------------------------------------------------------------------------
</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, 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 informed Telecom that it has ceased to be an affiliate of Telecom
for U.S. securities law purposes. 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 Citibank, N.A. as Depositary, and are
listed on the New York Stock Exchange. Citibank, N.A. accepted appointment as
depositary on 4 February 2000 and replaced the original depositary, The Bank of
New York.
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.
<PAGE>
24
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:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
Period NZ$ per Share US$ per ADS
High Low High Low
<S> <C> <C> <C> <C>
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
1 April - 30 June 1999 9.60 7.80 41 7/8 33 1/2
1 July - 30 September 1999 8.88 7.62 37 7/8 31 1/4
1 October -31 December 1999 9.21 7.38 38 3/4 31 5/16
1 January -31 March 2000 9.72 8.21 38 11/16 32 11/16
1 April - 30 June 2000 9.81 7.23 38 15/16 27 3/16
---------------------------------------------------------------------------------------
</TABLE>
At 30 June 2000, 1,755,413,443 Shares were outstanding. At the same date, and
included within the number of Shares outstanding, 24,292,717 ADSs (equivalent to
194,341,736 Shares based on the ratio of 8 Shares to 1 ADS) were held by 760
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 - "-Taxation-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.
Penalties including disenfranchisement, forfeiture and orders to sell can be
imposed by the Courts if such notification is not made in the required form as
soon as such interests are known or ought to be known to have been acquired.
Takeovers Code
From 1 July 2001 New Zealand's recently approved takeovers code ("Code") will
limit the holding or control of Shares. The "fundamental rule" of the Code
prohibits a person from becoming the holder or controller of voting rights in
Telecom if the holder and its "associates" would afterwards control more than
20% of the voting rights, unless the increase fits within one of the exceptions
to the fundamental rule or the Takeovers Panel (established under the Takeovers
Act 1993) grants an exemption. A person who already holds more than 20% of such
voting rights (with or without its associates) cannot increase that level of
voting rights except in compliance with the Code or through an exemption.
The exceptions to the fundamental rule are:
. a full offer for all of Telecom's voting securities and non-voting equity
securities;
. a partial offer (for less than 100%) to all holders of Telecom's voting
securities for a specific percentage of each holder's voting securities. If
the offeror's existing holding (together with associates) is 50% or less,
the offer must be for securities which will result in the offeror holding
or controlling more than 50% of the voting rights. A partial offer can be
made for a lesser percentage if a written shareholder approval procedure is
followed and is successful;
. an offer approved by a resolution of shareholders (persons acquiring and
disposing of the securities and their associates may not vote on the
proposal);
. persons holding or controlling more than 50% but less than 90% of the
voting rights can increase their holding by up to 5% of the total voting
rights in any 12 month period. No such increase applies to persons holding
between 20% and 50%;
. no restrictions apply to a person holding or controlling 90% or more of the
voting rights. Above the 90% threshold, the person may compulsory acquire
the remaining securities and each remaining holder may require the person
to acquire the remaining holder's securities; and
<PAGE>
26
. an offer made pursuant to an exemption granted by the Takeovers Panel.
The term "voting rights" is defined to mean a currently exercisable right to
cast a vote at a meeting of shareholders of the Company except where the right
to vote is exercisable only in certain specified circumstances.
The term "associate" is very widely defined. A person is an "associate" of
another person if (i) the persons are acting jointly or in concert, (ii) the
first person acts, or is accustomed to act, in accordance with the wishes of the
other person, (iii) the persons are related companies, (iv) the persons have a
business relationship, personal relationship or an ownership relationship such
that they should, under the circumstances, be regarded as associates, or (iv)
the first person is an associate of a third person who as an associate of the
other person and the nature of the relationships between any of those persons is
such that under the circumstances, the first person should be regarded as an
associate of the other person. A director of a company or other body corporate
is not an associate of that company or body corporate merely because he or she
is a director of that company or body corporate.
The Code contains detailed requirements for partial offers and full offers, and
other features which include:
. detailed disclosure requirements for both the offeror and Telecom's board
specifying the contents of the offeror's takeover notice and Telecom's
statement in response;
. an offer must be on the same terms and conditions, including the same
consideration, to all holders of securities of the same class;
. a requirement for directors to obtain a report on the merits of an offer
from an advisor whom the Takeovers Panel considers is independent and has
approved;
. the offer must be open between 30 and 90 days, although a full offer can be
extended up to 60 days if it is not conditional on a minimum level of
acceptance or minimum acceptance conditions have been satisfied;
. where the offeror holds or controls less than 50% of the voting securities,
the offer must be conditional on receiving acceptances which will bring the
offeror's total holding above the 50% threshold, unless it is a partial
offer and shareholder approval for a lesser percentage is obtained;
. although an offer can be conditional, the conditions cannot depend on the
judgment of the offeror or be within the offeror's power or control;
. offers may be varied to increase the consideration or add a cash component
to the consideration. If the offer is varied, the variation must apply to
all offerees whether or not they have already accepted;
. restrictions, except in limited circumstances, any tactics by directors
which might "frustrate" an offer.
If the Code is breached, the Takeovers Panel has a limited power to make
restraining orders preventing an acquisition or suspending the right to vote
securities acquired in breach of the Code, for a period of up to 21 days.
Otherwise, the remedy for non-compliance with the Code is to apply to the High
Court, which has the power to grant much wider orders restraining conduct,
directing the sale of securities or controlling the exercise of voting rights.
The Court may excuse contravention where the breach was inadvertent, and the
panel may grant retrospective exemptions. In addition, the Takeovers Act 1993
provides for the High Court to impose financial penalties for a contravention of
the Code. The Takeovers Panel cannot compel the party in breach to make a full
takeover offer.
<PAGE>
27
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. See "- Further Restrictions Relating to ADRs" for a
description of the voting procedure in respect of ADRs.
The Constitution provides that shareholders may exercise the right to vote by
being present in person or be 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.
The provisions referred to under the headings "Limitations on Shareholdings",
"Takeovers Code" 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 has established an ADR facility to provide for the deposit of Shares and
the creation of ADSs representing the Shares so deposited and for the execution
and delivery of ADRs evidencing such ADSs. Telecom and Citibank, N.A. (as
depositary ("Depositary")) are parties to the Second Amended and Restated
Deposit Agreement dated as of March 7, 2000 ("Deposit Agreement") in relation to
such facility. The Deposit Agreement contains a number of restrictions relating
to ADRs and these are summarised below.
<PAGE>
28
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 Depository will, as
soon as practicable fix a record date for voting by holders of ADRs. The
Depositary will, following Telecom's written request, mail to holders of ADRs
the notice of meeting, and a statement that the holders of ADRs at the close of
business on the record date will be entitled, subject to any applicable law, the
Constitution and the provisions governing the Shares, to instruct the Depositary
as to the exercise of the voting rights pertaining to the Shares underlying the
ADRs and to demand a poll, and a brief statement as to the manner in which such
voting instructions may be given.
The holders of ADRs at the close of business on the record date are entitled
under the Deposit Agreement, subject to any applicable law, the Constitution and
the provisions governing the Shares to instruct the Depositary as to the
exercise of the voting rights pertaining to the underlying Shares in the event
of a poll being called and to demand a poll. If a poll is called and no voting
instructions are received by the Depositary from an owner of ADRs then the
Depositary will not vote the Shares underlying such ADRs or cause such Shares to
be voted.
The Depositary has agreed to, insofar as practicable, vote (in person or by
proxy) the underlying Shares in accordance with such voting instructions. The
Depositary has agreed not to vote the underlying Shares unless it has received
voting instructions in respect of the Shares. If the Depositary receives voting
instructions which are signed but have not been completed to instruct voting for
or against a particular item, the Depositary will deem the holder to have
instructed the Depositary to vote in favour of the item. The Depositary is not
entitled to vote by voice or on a show of hands. The Depositary will not demand
a poll unless specifically instructed by at least five holders of ADRs
representing underlying Shares carrying the right to vote at the meeting (i)
which represent not less than 10% of the total voting rights capable of being
cast at such meeting, or (ii) 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 holders of ADRs the right to
cause the Depositary to request a meeting of shareholders or to attend and vote
at a meeting of shareholders.
Each owner and beneficial owner of ADRs must comply with information requests
from the Company, the Board and the Kiwi Shareholder pursuant to New Zealand
law, the rules of the New Zealand Stock Exchange, and any other stock exchange
on which the Shares are listed or the Constitution. This information may include
the capacity in which the holder or beneficial owner owns ADSs, ADRs or Shares,
the identity, address and the nature and extent of interest of any other person
having a relevant interest in the ADSs or Shares. Each holder or beneficial
owner of ADRs who is requested to provide such information must inform the
Depositary of all relevant information and the Depositary will forthwith pass on
such information to the Board or the Kiwi Shareholder (as applicable).
The Company may restrict transfers of Shares where the transfer might result in
ownership of Shares exceeding limits imposed by applicable law or the
Constitution. The Company or the Depositary upon the written request of the
Company may also restrict, in such manner as it deems appropriate, transfers of
ADSs where the transfer may result in the total number of Shares represented by
the ADSs owned by a single holder or beneficial owner to exceed any such limits.
The Company may, in its sole discretion but subject to applicable law, instruct
the Depositary to take action with respect to the ownership interest of any
holder or beneficial owner in excess of the limits imposed by any applicable law
or the Constitution, including the imposition of restrictions on the transfer of
ADSs, the removal or limitation of voting rights or mandatory sale or
disposition on behalf of a holder or beneficial owner of the Shares underlying
the ADRs held by such holder or beneficial owner in excess of such limitations,
if and to the extent such disposition is permitted by applicable law and the
Constitution.
If the Depositary, the Custodian or their nominee receives a notice from the
Board or the Kiwi Shareholder 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 or holder of the Affected Shares or any person having a
relevant interest in the Affected Shares by virtue of ADRs ("Beneficial Holder")
specified or, if no Beneficial holder is specified, to each holder of ADRs. Any
holder of ADRs receiving such a notice or a person nominated by the holder may
make representations for and on behalf of the Depositary or the Custodian as to
why such Shares should not be treated as Affected Shares.
<PAGE>
29
If the Depositary, the Custodian or their nominee receives a notice from the
Board or the Kiwi Shareholder declaring that any Shares have been declared
Affected Shares, the Depositary shall give notice to each Beneficial Holder
identified in such notice of the action to be taken by the Depositary or if no
Beneficial Holder is specified, to each holder of ADRs. With respect to any
Affected Shares where a Beneficial Holder 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
Holder shall be deemed to be Affected Shares. If such notice does not identify a
specific Beneficial Holder, 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.
In the event of a Beneficial Holder receiving such a notice, the Beneficial
Holder must immediately take such steps as may be required to become the
registered holder of the ADRs representing the Affected Shares on the books of
the Depositary. The Constitution requires that the Kiwi Shareholder 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 Holder.
The Company has agreed in the Deposit Agreement to take all reasonable steps to
identify the specific Beneficial Holders who have a relevant interest in
Affected Shares in breach of the relevant limitation.
Under the Constitution, the Board and the Kiwi Shareholder may sell Affected
Shares for the account of the registered holder. 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 ADRs and any expenses incurred or paid
by the Depositary in distributing such cash and unsold Shares or other property
unaffected by the notice to the Beneficial Holder of the ADR. The Depositary
will give notice to the Beneficial Holder (or holder where no Beneficial Holder
is specified) of an ADR of any sale effected forthwith upon receiving such
notice from the Board or the Kiwi Shareholder. Upon receiving such notice, the
Beneficial Holder 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 Kiwi Shareholder 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 Holder 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 holders of ADR that their ADRs, on and after the date of such
sale of Affected Shares 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 holders 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 holder's pro rata share of the remaining deposited
Shares.
Each ADR holder or owner must take every reasonable step in accordance with any
notice given regarding any Affected Shares to ensure that theprovisions of
section 3.5 of the Deposit Agreement are effective. Except to the extent
provided in the Constitution, the Board and the Kiwi Shareholder 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 Kiwi Shareholder or the Depositary under or pursuant to
the Constitution, or the Deposit Agreement shall be final, conclusive and
binding on any ADR holder or beneficial owner or other person affected thereby
and shall not be subject to challenge. Neither the Company, the Board, the Kiwi
Shareholder, 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 Kiwi Shareholder, 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
<PAGE>
30
that could have retroactive effect. The following summary does not take into
account or discuss the tax laws of any country other than the United States or
New Zealand.
This summary does not describe United States federal estate and gift tax
considerations, nor state and local tax considerations within the United States,
and is not a comprehensive description of all United States federal or New
Zealand tax considerations that may be relevant to a decision to purchase, sell
or hold ADSs or Shares. Furthermore, this summary does not address United States
federal income tax or New Zealand income tax considerations relevant to holders
of ADSs or Shares who are subject to taxing jurisdictions other than or in
addition to the United States and New Zealand, and does not address all possible
categories of United States holders, some of which (such as tax-exempt entities,
insurance companies, securities dealers, holders who hold ADSs or Shares as part
of a hedging, straddle or conversion transaction, holders of 10% or more of the
total combined voting power of the Shares of the Company) may be subject to
special rules.
This summary 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 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").
<PAGE>
31
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 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 maximum 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.
<PAGE>
32
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.
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
<PAGE>
33
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).
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. New Zealand Goods and Services Tax ("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>
34
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
reporting periods in the five year period ended 30 June 2000 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. Effective 1 April 1999, the Telecom Group changed its balance
date from 31 March to 30 June. The selected consolidated financial data set out
below includes the transition period result for the three months ended 30 June
1999. The data should be read in conjunction with, and is qualified in its
entirety by reference to, the Consolidated Financial Statements and accompanying
Notes.
<TABLE>
<CAPTION>
Three
Months
Ended
Years Ended 31 March 30 June Year Ended 30 June
-------------------------------------------------------------------------
1996 1997 1998 1999 1999 2000 2000
NZ$ NZ$ NZ$ NZ$ NZ$ NZ$ US$
-------------------------------------------------------------------------
(Dollars in millions, except per share and per ADS amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Financial Performance Data
Amounts in accordance with New Zealand GAAP:
Operating revenues
Local service 937 959 1,025 1,058 264 1.064 499
Calling 1,144 1,176 1,242 1,161 270 1,488 698
Interconnection (a) - 66 56 65 20 90 42
Cellular and other mobile services 313 316 431 484 132 717 336
Data 217 256 305 342 96 535 251
Other operating revenues 298 310 339 324 66 437 205
Abnormal revenue (b) - - - 16 15 15 7
Total operating revenues 2,909 3,083 3,398 3,450 863 4,346 2,038
Operating expenses
Labour 456 471 494 479 112 486 228
Depreciation 494 544 564 553 136 583 273
Cost of sales 270 309 398 451 118 1,079 506
Other operating expenses 474 528 565 552 133 772 362
Abnormal expenses (c) - 152 37 15 22 - -
Total operating expenses 1,694 2,004 2,058 2,050 521 2,920 1,369
Surplus from continuing operations 1,215 1,079 1,340 1,400 342 1,426 669
Net interest expense 92 99 127 110 22 180 85
Surplus from continuing operations before income tax 1,123 980 1,213 1,290 320 1,246 584
Income tax expense 377 311 397 411 98 395 185
Surplus from continuing operations after income tax 746 669 816 879 222 851 399
Gain/(loss) from discontinued operations (d) (30) (87) 30 - - - -
Capital note distribution costs after income tax - - 26 55 13 54 25
Net earnings attributable to shareholders (e) 717 581 820 822 202 783 367
Earnings per Share from continuing operations (f) 0.395 0.355 0.443 0.469 0.115 0.447 0.209
Earnings per ADS from continuing operations (f) 3.16 2.84 3.54 3.75 0.920 3.58 1.67
Dividends per Share (g) 0.350 0.390 0.430 0.460 0.115 0.460 0.216
Amounts in accordance with US GAAP (h):
Net surplus from continuing operations (e) 745 762 733 768 211 733 344
Net earnings attributable to shareholders (e) 715 675 763 768 211 733 344
Basic earnings per Share from continuing operations (f) 0.394 0.404 0.410 0.438 0.120 0.418 0.196
Basic earnings per ADS from continuing operations (f) 3.15 3.23 3.28 3.50 0.960 3.34 1.57
Diluted earnings per Share from continuing operations (f) 0.394 0.404 0.410 0.439 0.120 0.417 0.196
Diluted earnings per ADS from continuing operations (f) 3.15 3.23 3.28 3.51 0.960 3.34 1.57
</TABLE>
<TABLE>
<CAPTION>
As at 31 March As at 30 June
----------------------------------------------------------------------------
1996 1997 1998 1999 1999 2000 2000
NZ$ NZ$ NZ$ NZ$ NZ$ NZ$ US$
----------------------------------------------------------------------------
(Dollars in Millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Financial Position Data
Amounts in accordance with New Zealand GAAP:
Fixed assets 3,632 3,763 3,793 3,780 3,774 4,250 1,993
Total assets 4,492 4,618 5,165 5,375 5,242 7,981 3,743
Debt due within one year 272 524 746 1,130 1,064 1,462 686
Long term debt 1,288 1,285 1,292 1,112 1,003 2,861 1,342
Total liabilities 2,343 2,976 3,155 3,341 3,207 5,819 2,729
Total capital funds (i) 2,148 1,643 2,010 2,034 2,035 2,162 1,014
Amount in accordance with US GAAP (h):
Total shareholders' funds (i) 2,356 1,961 1,276 1,325 1,335 1,321 620
</TABLE>
<PAGE>
35
(a) Interconnection revenues for the year ended 31 March 1996 are not disclosed
separately due to confidentiality agreements, but are instead included in
local service, calling and other operating revenues.
(b) In March 2000, AAPT completed the sale of its wholly owned subsidiary AAPT
Sat-Tel Pty Limited to New Skies Networks Australia Pty Limited. Included
in the Consolidated Statement of Financial Performance are post acquisition
profits relating to this sale, before minority interests, of $15 million.
During the three months ended 30 June 1999, a gain of $15 million was
recognised on the prepayment of Telecom's scheduled payment obligations
relating to a cross border finance lease.
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) During the three months ended 31 March 1999, the costs of buying out the
terms of certain onerous contracts were identified and provided for. The
contracts were onerous as the unavoidable costs of meeting the contractual
obligations exceeded their economic benefits.
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 financial reporting
period 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
<PAGE>
36
. the recognition of accruals for restructuring, Year 2000 modification
and onerous contract costs
. the recognition of losses incurred by associated companies
. the recognition within other comprehensive income of unrealised losses
on the holding of available for sale securities
. 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. 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$1,001 million.
Dividends
In light of the Company's requirements to maintain strong cash flows and
financial flexibility while committing significant investment for growth, a new
dividend policy was implemented on 1 July 2000. The Company now targets a
dividend pay-out ratio of approximately 50% of net earnings. This policy will be
dependent on earnings, cash flow, and other investment opportunities that may
arise in the future.
The dividend is paid in December, March, June and September in respect of each
fiscal quarter. The amounts of historical dividends are not necessarily
indicative of dividends to be paid in the future. But as a matter of practice,
the Company looks to pay a dividend at the same rate in each of the first three
quarters of the financial year, and set the fourth quarter dividend at a level
that accommodates the target ratio for the full year.
The table below sets forth the dividends paid to shareholders with respect to
the 1996 to 2000 fiscal periods:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
Period NZ$ Per Share US$ Per ADS (a)
ended Interim/ Interim/
Quarterly Final Total Quarterly Final Total
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
March 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
March 1997 0.0950 - 1.046 -
0.0950 - 1.061 -
0.0950 - 1.045 -
0.1050 - 0.390 (c)0.579 - (c)2.155
March 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
March 1999 0.1150 - 0.466 -
0.1150 - 0.480 -
0.1150 - 0.490 -
0.1150 - 0.460 0.490 - 1.926
June 1999 (e)0.1150 - 0.115 0.481 - 0.481
June 2000 0.1150 - 0.452 -
0.1150 - 0.480 -
0.1150 - 0.461 -
0.1150 - 0.460 0.454 - 1.847
</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.
<PAGE>
37
(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.
(e) Effective 1 April 1999, Telecom changed its balance date from 31 March to
30 June. A normal quarterly dividend was paid for the three month
transition period ended 30 June 1999.
Telecom operates a dividend reinvestment plan under which shareholders may
reinvest some or all of their dividends in shares issued by the Company.
Item 9 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information required by this Item is set out in:
. Management's Discussion and Analysis of Financial Condition and Results of
Operations for the fiscal year ended 30 June 2000 filed herewith. See Item
19.
. Management's Discussion and Analysis of Financial Condition and Results of
Operations for the fiscal year ended 30 June 1999 filed herewith. See Item
19.
. Management's Discussion and Analysis of Financial Condition and Results of
Operations for the Transition Period 1 April 1999 to 30 June 1999 (the
"Transition Period") filed herewith. See Item 19.
These documents replace and supercede the MD&A's for the respective periods
previously filed with the Commission.
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:
. Market Risk- page 10 of Exhibit 2.
. Interest Rate Risk Management-page 11 of Exhibit 2.
. Foreign Exchange Risk Management- page 11 of Exhibit 2.
and in the following sections of the Notes:
. Derivative Financial Instruments - Note 1.
. Financial Instruments and Risk Management- Note 19.
The above mentioned information is incorporated herein by reference.
<PAGE>
38
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).
As of 1 December 2000, the Directors of the Company (including the Managing
Director) were as follows:
Dr Roderick S Deane - Chairman
Dr Deane became Chairman in October 1999 after seven years as Chief Executive
and Managing Director. Dr Deane is a member of the Audit and Human
Resources/Compensation Committee.
Mr G Peter Shirtcliffe - Director
Mr Shirtcliffe has been a Director of Telecom since its incorporation in April
1987. He was appointed Chairman in September 1990 and retired as Chairman on 30
September 1999. He remains on the Board as a non-executive director. Mr
Shirtcliffe is a member of the Audit Committee.
Ms Theresa Gattung - Managing Director
Ms Gattung was appointed Telecom Managing Director and Chief Executive in
October 1999.
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.
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.
<PAGE>
39
Executive Officers
As at 1 December 2000, the Executive Officers of Telecom (except the Managing
Director) were as follows:
Mr Marko Bogoievski - Chief Financial Officer
Mr Bogoievski joined Telecom in his present position in May 2000. Mr Bogoievski
is responsible for finance and strategy. Mr Bogoievski is a director of Telecom
New Zealand Limited. He is also a director of other Telecom subsidiaries.
Mr Mark Verbeist - General Counsel
Mr Verbeist joined Telecom in his present position in November 2000. Mr Verbeist
is responsible for legal, compliance and risk management. Mr Verbeist is a
director of various Telecom subsidiaries.
Mr Kevin Stratful -General Manager Sales & Service
Mr Stratful joined Telecom in his present position in January 2000. He is
responsible for Telecom sales and service.
Mr Mohan Jesudason - General Manager Telecom Mobile Limited
Mr Jesudason joined Telecom in September 1996 as General Manager, Business. He
was appointed to his present position in November 2000. Mr Jesudason leads the
trans-tasman mobile business which brings together Telecom and AAPT's mobile
business.
Mr Mark Ratcliffe - Chief Information Officer
Mr Ratcliffe joined Telecom in May 1991 as Credit Manager. He was appointed to
his present position in November 2000.
Mr Graham Mitchell - General Manager Telecom Internet & Media
Mr Graham Mitchell rejoined Telecom in his present position in April 1999 having
previously worked for Telecom for some years in various roles. Mr Mitchell is
responsible for the trans-tasman internet business which brings together XTRA
and Directories in New Zealand together with connect.com.au in Australia. Mr
Mitchell is a director of Telecom Directories Limited.
Ms Jane Freeman - General Manager esolutions
Ms Freeman joined Telecom in her present position in December 1999.
Mr Bruce Parkes - General Manager Government & Industry Relations
Mr Parkes joined Telecom in May 1993 as Strategic Development Manager. He was
appointed to his present position in November 1999.
Ms Jane Austin - General Manager Corporate Communications
Ms Austin joined Telecom in 1989 as Communications Manager, Telecom Wellington
Limited. She was appointed to her present position in December 1999.
Mr Glen Petersen - General Manager Human Resources Mr Petersen joined Telecom in
his present position in September 2000.
Mr David Bedford - Chief Operating Officer, AAPT
Mr Bedford joined Telecom in January 1993 as General Manager Human Resources. He
was appointed to his present position in November 2000.
Ms Karyn Devonshire - Group General Manager TCNZ Corporate Australia
Ms Devonshire joined Telecom in December 1997 as General Manager Information
Services. She was appointed to her present position in February 2000.
<PAGE>
40
Mr Simon Moutter - Group General Manager, Network
Mr Moutter joined Telecom in September 1999 as General Manager, Network
Delivery. He was appointed to his present position in November 2000.
None of the Executive Officers have fixed term contracts.
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 2000 was NZ$7,077,556.
Nothing was set aside during Fiscal 2000 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 74 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 "Telecom
Share Options", for a description of this plan, which is incorporated herein by
reference. In addition to the options referred to in Note 18, 4,837,271 options
were granted in the period to 30 November 2000, and 389,717 options with a
weighted average exercise price of NZ $7.942 lapsed. As at 30 November 2000,
11,181,629 options are outstanding under this plan.
Item 13 - Interest of Management in Certain Transactions
The information required by this Item is set out in Note 22 and is incorporated
herein by reference.
<PAGE>
41
PART II
-------
Item 14 - Description of Securities to be Registered
Not applicable.
PART III
--------
Item 15 - Defaults Upon Senior Securities
None.
Item 16 - Changes In Securities And Changes In Security For Registered
Securities
Telecom and The Bank of New York (as the original depository) were parties to a
deposit agreement dated as of March 7, 1994 (as amended as of April 1, 1997).
Citibank, N.A. accepted appointment as depository on 4 February 2000 and
replaced The Bank of New York. Citibank, N.A. and Telecom entered into the
Second Amended and Restated Deposit Agreement as of March 7, 2000 thereby
amending the existing deposit agreement and establishing an ADR facility with
Citibank, N.A. Such alterations did not materially modify the rights of holders
of ADRs (representing ADSs). See Item 6 "- Further Restrictions Relating to
ADRs".
On 12 October 2000, Telecom altered its constitution to reflect changes to the
NZSE Listing Rules and to adopt certain other administrative changes. Such
alterations did not materially modify the rights of Shareholders.
PART IV
-------
Item 17 - Financial Statements
Not applicable.
Item 18 - Financial Statements
See Item 19 for a list of Financial Statements included as part of this Report.
Valuation and Qualifying Accounts
The table below shows movements in the allowance for doubtful accounts for the
1999 and 2000 fiscal years and the three month transition period ended 30 June
1999:
<TABLE>
<CAPTION>
Balance at Acquisitions and Additions charged
beginning disposals of to costs and Balance at
of period subsidiaries expenses end of period
------------------------------------------------------------------------------------------------
(Dollars in millions) NZ$ NZ$ NZ$ NZ$
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
30 June 2000 23 27 7 57
30 June 1999 22 - 1 23
31 March 1999 20 - 2 22
</TABLE>
<PAGE>
42
The table below shows movements in the provision for inventory obsolescence for
the 1999 and 2000 fiscal years and the three month transition period ended 30
June 1999:
<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>
30 June 2000 11 3 - 14
30 June 1999 11 - - 11
31 March 1999 9 2 - 11
</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 was filed.
Item 19 - Financial Statements and Exhibits
Financial Statements
1. The report of PricewaterhouseCoopers Independent Accountants is filed
herewith. See F-1.
2. The Consolidated Financial Statements including the Notes are filed
herewith. See F-2 to F-52
Exhibits
1. The Constitution of the Company as amended at the Annual Meeting of
Shareholders held on 12 October 2000-previously filed under cover of Form
6-K dated 8 December 2000.
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations for the fiscal year ended 30 June 2000.
3. Management's Discussion and Analysis of Financial Condition and Results of
Operations for the fiscal year ended 31 March 1999.
4. Management's Discussion and Analysis of Financial Condition and Results of
Operations for the Transition Period 1 April 1999 to 30 June 1999.
<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 30 June 2000 and 1999, and their results of operations and their
cash flows for the years ended 30 June 2000, the three months ended 30 June
1999, and the years ended 31 March 1999 and 1998, in conformity with generally
accepted accounting practice 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 both generally accepted
auditing standards in New Zealand and 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 the year ended 30 June 2000,
the three months ended 30 June 1999 and the years ended 31 March 1999 and 1998
and the determination of consolidated shareholders' funds, also expressed in New
Zealand dollars, at 30 June 2000 and 1999 and 31 March 1999 to the extent
summarized in Note 30 to the consolidated financial statements.
/s/ PricewaterhouseCoopers
Wellington, New Zealand PricewaterhouseCoopers
10 August 2000 Chartered Accountants
F-1
<PAGE>
TELECOM CORPORATION OF NEW ZEALAND LIMITED AND SUBSIDIARIES
Consolidated Statement of Financial Performance
For the year ended 30 June 2000
<TABLE>
<CAPTION>
Three
months
Year ended ended Year ended
31 March 30 June 30 June
---------------------------------------------------
1998 1999 1999 2000 2000
------------------------------------------------------------------------------------------------------------
(Dollars in millions, except per share amounts) notes NZ$ NZ$ NZ$ NZ$ US$
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues
Local service 1,025 1,058 264 1,064 499
Calling 2 1,242 1,161 270 1,488 698
Interconnection 56 65 20 90 42
Cellular and other mobile services 431 484 132 717 336
Data 305 342 96 535 251
Other operating revenues 2 339 324 66 437 205
Abnormal revenues 4 - 16 15 15 7
---------------------------------------------------
3,398 3,450 863 4,346 2,038
---------------------------------------------------
Operating expenses
Labour 3 494 479 112 486 228
Depreciation 564 553 136 583 273
Cost of sales 398 451 118 1,079 506
Other operating expenses 3 565 552 133 772 362
Abnormal expenses 4 37 15 22 - -
---------------------------------------------------
2,058 2,050 521 2,920 1,369
---------------------------------------------------
Surplus from continuing operations 1,340 1,400 342 1,426 669
Investment income 5 28 49 12 38 17
Interest expense 5 (155) (159) (34) (218) (102)
---------------------------------------------------
Surplus from continuing operations before
income tax 1,213 1,290 320 1,246 584
Income tax expense 6 (397) (411) (98) (395) (185)
---------------------------------------------------
Surplus from continuing operations after
income tax 816 879 222 851 399
Discontinued operations: 7
Reversal of provision for loss on disposal of
Pacific Star Group 30 - - - -
---------------------------------------------------
Surplus after income tax 846 879 222 851 399
Share of losses of associate companies after
income tax - - (7) (6) (3)
Minority interests in profits of subsidiaries - (2) - (8) (4)
---------------------------------------------------
Net surplus 846 877 215 837 392
Capital note distribution costs after income tax (26) (55) (13) (54) (25)
---------------------------------------------------
Net earnings attributable to shareholders 820 822 202 783 367
===================================================
Earnings per share from continuing operations $ 0.443 $ 0.469 $ 0.115 $ 0.447 $ 0.209
===================================================
Net earnings per share $ 0.459 $ 0.469 $ 0.115 $ 0.447 $ 0.209
===================================================
Weighted average number of ordinary
shares outstanding (in millions) 1,786 1,752 1,753 1,753 1,753
===================================================
</TABLE>
Unaudited comparative information for the three months ended 30 June 1998 and
the year ended 30 June 1999 is disclosed in Note 29 of these financial
statements.
F2
<PAGE>
Telecom Corporation of New Zealand Limited and Subsidiaries
Consolidated Statement of Movements in Capital Funds
For the year ended 30 June 2000
<TABLE>
<CAPTION>
Three
months
Year ended ended Year ended
31 March 30 June 30 June
----------------------------------------------------
1998 1999 1999 2000 2000
------------------------------------------------------------------------------------------------------------------------
(Dollars in millions) notes NZ$ NZ$ NZ$ NZ$ US$
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Capital funds at the beginning of the period 1,642 2,010 2,034 2,035 954
Net earnings attributable to shareholders 820 822 202 783 367
Movement in foreign currency translation reserve 18 1 -- 1 48 23
------ ------ ------ ------ ------
Total recognised revenues and expenses for the period 821 822 203 831 390
Movement in minority interests 4 1 -- 82 39
Dividends 18 (859) (910) (227) (906) (425)
Tax credit on supplementary dividends 103 104 25 100 47
Issue of capital notes 18 946 -- -- -- --
Discount on capital notes amortised 1 1 -- 1 --
Redemption of capital notes (6) -- -- -- --
Capital contributed 18 2 6 -- 19 9
Share repurchase 18 (644) -- -- -- --
------ ------ ------ ------ ------
Capital funds at the end of the period 2,010 2,034 2,035 2,162 1,014
====== ====== ====== ====== ======
Represented by:
Contributed capital 903 909 909 928 435
Foreign currency translation reserve -- -- 1 49 23
Minority interests 6 7 7 89 42
Retained earnings 160 176 176 153 72
Capital notes 941 942 942 943 442
------ ------ ------ ------ ------
2,010 2,034 2,035 2,162 1,014
====== ====== ====== ====== ======
</TABLE>
F3
<PAGE>
TELECOM CORPORATION OF NEW ZEALAND LIMITED AND SUBSIDIARIES
Consolidated Statement of Financial Position
As at 30 June 2000
<TABLE>
<CAPTION>
31 March 30 June 30 June 30 June
----------------------------------------------
1999 1999 2000 2000
-------------------------------------------------------------------------------------------------------
(Dollars in millions) notes NZ$ NZ$ NZ$ US$
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash 21 29 81 38
Short-term investments 8 673 114 617 289
Receivables and prepayments 9 754 691 918 431
Inventories 10 42 48 40 19
--------------------------------------------
Total current assets 1,490 882 1,656 777
Long-term investments 11 47 530 455 213
Intangibles 12 58 56 1,620 760
Fixed assets 13 3,780 3,774 4,250 1,993
--------------------------------------------
Total assets 5,375 5,242 7,981 3,743
============================================
LIABILITIES AND CAPITAL FUNDS
Current liabilities:
Bank overdraft 9 - - -
Accounts payable and accruals 14 801 821 1,242 583
Provisions - current 15 58 64 11 5
Debt due within one year 16 1,130 1,064 1,462 686
Provision for dividend 18 228 227 227 106
--------------------------------------------
Total current liabilities 2,226 2,176 2,942 1,380
Deferred taxation 6 - 25 13 6
Provisions - non-current 15 3 3 3 1
Long-term debt 17 1,112 1,003 2,861 1,342
--------------------------------------------
Total liabilities 3,341 3,207 5,819 2,729
--------------------------------------------
Commitments and contingent liabilities 20,21
Capital funds: 18
Shareholders' funds 1,085 1,086 1,130 530
Capital notes 942 942 943 442
Minority interests 7 7 89 42
--------------------------------------------
Total capital funds 2,034 2,035 2,162 1,014
--------------------------------------------
Total liabilities and capital funds 5,375 5,242 7,981 3,743
============================================
</TABLE>
On behalf of the Board
RODERICK DEANE, Chairman THERESA GATTUNG, Chief Executive and
Managing Director
Wellington, 10 August 2000
F4
<PAGE>
Telecom Corporation of New Zealand Limited and Subsidiaries
Consolidated Statement of Cash Flows
For the year ended 30 June 2000
<TABLE>
<CAPTION>
Three
months
Year ended ended Year ended
31 March 30 June 30 June
---------------------------------------------------
1998 1999 1999 2000 2000
-----------------------------------------------------------------------------------------------------------------------------------
(Dollars in millions) note NZ$ NZ$ NZ$ NZ$ US$
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities
Cash was provided from/(applied to):
Cash received from customers 3,285 3,423 872 4,192 1,966
Proceeds from cross border lease -- -- 15 -- --
Proceeds from liquidation of Executive Plan, net -- 16 -- -- --
Interest income 20 41 10 19 9
Dividend income 3 4 1 4 2
Payments to suppliers and employees (1,273) (1,380) (399) (2,093) (981)
Restructuring, onerous contracts and Year 2000 payments (60) (65) (16) (58) (27)
Income tax (paid)/refunded (289) (304) 51 (311) (146)
Interest paid on debt (149) (161) (41) (208) (98)
---------------------------------------------------
Net cash flows from operating activities 25 1,537 1,574 493 1,545 725
---------------------------------------------------
Cash flows from investing activities
Cash was provided from/(applied to):
Sale of fixed assets 11 21 1 57 27
(Purchase)/sale of short-term investments, net (461) (252) 560 (486) (228)
Purchase of long-term investments (8) -- (104) (238) (112)
Proceeds from sale of subsidiary companies -- 16 -- 95 45
Acquisition of AAPT Limited, excluding cash acquired -- -- (385) (1,189) (558)
Purchase of fixed assets (559) (554) (142) (837) (393)
Capitalised interest paid (14) (9) (3) (18) (8)
Redemption of notes receivable 46 -- -- -- --
---------------------------------------------------
Net cash flows applied to investing activities (985) (778) (73) (2,616) (1,227)
---------------------------------------------------
Cash flows from financing activities
Cash was provided from/(applied to):
Proceeds from long-term debt 269 12 9 1,850 867
Repayment of long-term debt (191) (199) (49) (246) (115)
Proceeds/(repayment) of short-term debt, net 102 378 (135) 466 219
Capital contributed 2 6 -- 23 11
Dividends paid (841) (914) (228) (894) (420)
Capital note distribution costs paid (26) (79) -- (77) (36)
Share repurchase (808) -- -- -- --
Proceeds from issue of capital notes, net 940 -- -- -- --
---------------------------------------------------
Net cash flows from/(applied to) financing activities (553) (796) (403) 1,122 526
---------------------------------------------------
Net cash flow (1) -- 17 51 24
Foreign currency translation adjustment -- -- -- 1 --
Opening cash position (including bank overdrafts) 13 12 12 29 14
---------------------------------------------------
Closing cash position (including bank overdrafts) 12 12 29 81 38
===================================================
</TABLE>
F5
<PAGE>
Telecom Corporation of New Zealand Limited
Statement of Financial Performance
For the year ended 30 June 2000
<TABLE>
<CAPTION>
Parent Company
----------------------------------------------------------
Year ended Three months Year ended
31 March ended 30 June 30 June
----------------------------------------------------------
1999 1999 2000 2000
--------------------------------------------------------------------------------------------------------------
(Dollars in millions) notes NZ$ NZ$ NZ$ US$
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating revenues 2 806 202 822 386
Operating expenses - - - -
----------------------------------------------------------
Surplus from operations 806 202 822 386
Investment income 5 37 11 104 48
Interest expense 5 (196) (54) (254) (119)
----------------------------------------------------------
Surplus before income tax 647 159 672 315
Income tax credit 6 52 15 50 24
----------------------------------------------------------
Net earnings 699 174 722 339
==========================================================
</TABLE>
Statement of Movements in Capital Funds
For the year ended 30 June 2000
<TABLE>
<CAPTION>
Parent Company
----------------------------------------------------------
Year ended Three months Year ended
31 March ended 30 June 30 June
----------------------------------------------------------
1999 1999 2000 2000
--------------------------------------------------------------------------------------------------------------
(Dollars in millions) note NZ$ NZ$ NZ$ US$
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Capital funds at the beginning of the 795 694 666 312
period
Net earnings 699 174 722 339
----------------------------------------------------------
1,494 868 1,388 651
Dividends 18 (910) (227) (906) (425)
Tax credit on supplementary dividends 18 104 25 100 47
Capital contributed 18 6 - 19 9
----------------------------------------------------------
Capital funds at the end of the period 694 666 601 282
==========================================================
Represented by:
Contributed capital 909 909 928 435
Retained earnings (215) (243) (327) (153)
----------------------------------------------------------
694 666 601 282
==========================================================
</TABLE>
F6
<PAGE>
Telecom Corporation of New Zealand Limited
Statement of Financial Position
As at 30 June 2000
<TABLE>
<CAPTION>
Parent Company
------------------------------------------------------
31 March 30 June 30 June 30 June
------------------------------------------------------
1999 1999 2000 2000
-----------------------------------------------------------------------------------------------------------------
(Dollars in millions) notes NZ$ NZ$ NZ$ US$
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Prepaid income tax 6 1 65 6 3
Accounts receivable - - 2 1
------------------------------------------------------
Total current assets 1 65 8 4
Future tax benefit 6 26 - 25 12
Investments 11 3,830 3,381 5,033 2,360
------------------------------------------------------
Total assets 3,857 3,446 5,066 2,376
======================================================
LIABILITIES AND CAPITAL FUNDS
Current liabilities:
Accounts payable and accruals 14 31 30 18 9
Provision for dividend 18 228 227 227 106
Due to subsidiary companies 22 2,904 2,523 4,220 1,979
------------------------------------------------------
Total current liabilities 3,163 2,780 4,465 2,094
------------------------------------------------------
Commitments and contingent liabilities 20,21
Capital funds: 18
Shareholders' funds 694 666 601 282
------------------------------------------------------
Total liabilities and capital funds 3,857 3,446 5,066 2,376
======================================================
</TABLE>
On behalf of the Board
RODERICK DEANE, Chairman THERESA GATTUNG, Chief Executive and
Managing Director Wellington, 10 August
2000
F7
<PAGE>
TELECOM CORPORATION OF NEW ZEALAND LIMITED
STATEMENT OF CASH FLOWS
For the year ended 30 June 2000
<TABLE>
<CAPTION>
Parent Company
---------------------------------------------------------
Year ended Three months
31 March ended 30 June Year ended 30 June
--------------------------------------------------------
1999 1999 2000 2000
----------------------------------------------------------------------------------------------------------------
(Dollars in millions) note NZ$ NZ$ NZ$ US$
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities
Cash was provided from/(applied to):
Interest income 37 11 104 49
Dividends received from subsidiary companies 825 202 808 379
Interest paid on debt (196) (54) (253) (119)
-------------------------------------------------------
Net cash flows from operating activities 25 666 159 659 309
-------------------------------------------------------
Cash flows from investing activities
Cash was provided from/(applied to):
Advances from subsidiary companies, net 232 558 735 345
(Purchase)/redemption of investments, net 11 (490) (507) (238)
-------------------------------------------------------
Net cash flows from investing activities 243 68 228 107
-------------------------------------------------------
Cash flows from financing activities
Cash was provided from/(applied to):
Dividends paid (914) (227) (891) (418)
Repayment of short-term debt (1) - - -
Capital contributed 6 - 4 2
-------------------------------------------------------
Net cash flows applied to financing activities (909) (227) (887) (416)
-------------------------------------------------------
Net cash flow - - - -
Opening cash position (including bank overdrafts) - - - -
-------------------------------------------------------
Closing cash position (including bank overdrafts) - - - -
=======================================================
</TABLE>
F8
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 STATEMENT OF ACCOUNTING POLICIES
Reporting Entity and Statutory Base
Telecom Corporation of New Zealand Limited is a company registered in New
Zealand under the Companies Act 1993, and is an issuer for the purposes of the
Financial Reporting Act 1993.
The financial statements presented are those of Telecom Corporation of New
Zealand Limited (the "Company" or the "Parent Company") its subsidiaries and
associates (the "Telecom Group" or "Telecom").
Nature of Operations
Telecom is a major supplier of telecommunications services in New Zealand and
Australia. 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.
Basis of Preparation
The financial statements have been prepared in accordance with the Financial
Reporting Act 1993 which requires compliance with accounting practice generally
accepted in New Zealand ("NZ GAAP"). This differs in certain significant
respects from accounting practice generally accepted in the United States ("US
GAAP"). For a description of the significant differences and related effect on
these financial statements, see Note 30.
The financial statements are expressed in New Zealand dollars. The amounts
pertaining to the most recent financial period are also expressed in United
States ("US") dollars, the latter being presented solely for convenience and
translated from New Zealand dollars, as a matter of arithmetical computation
only, at a rate on 30 June 2000 of NZ$1.00 to US$0.4690. The US dollar amounts
should not be construed as representations that the New Zealand dollars have
been, could be, or could in the future be converted into US dollars at this or
any other rate. References in these financial statements to "$" and "NZ$" are to
New Zealand dollars, references to "US$" are to US dollars and references to
"A$" are to Australian dollars.
Measurement Basis
The measurement basis adopted in the preparation of these financial statements
is historical cost, modified by the revaluation of certain investments as
identified in specific accounting policies below.
Specific Accounting Policies
Basis of Consolidation
Subsidiaries
Subsidiaries are those entities controlled, directly or indirectly, by the
Telecom Group.
The consolidated financial statements are prepared from the accounts of the
Company and its wholly and majority-owned subsidiaries using the purchase method
of consolidation. All significant intercompany accounts and transactions are
eliminated on consolidation.
Associates
Associates are entities in which the Telecom Group has significant influence,
but not control, over the operating and financial policies.
Associate companies are reflected in the consolidated financial statements using
the equity method whereby Telecom's share of the results of associates is
included in consolidated net earnings attributable to shareholders.
Where the equity accounted carrying amount of an investment in an entity falls
below zero, the equity method of accounting is suspended and the investment
recorded at zero. If this occurs, the equity method of accounting is not resumed
until such time as the Telecom Group's share of losses and reserve decrements,
not recognised during the financial years in which the equity method was
suspended, are offset by the current share of profits and reserves.
Goodwill Arising on Acquisition
Goodwill represents the excess of purchase consideration over the fair value of
net assets acquired at the time of acquisition of a business or shares in a
subsidiary or associate. Goodwill is amortised on a systematic basis over the
period benefits are expected to arise, which will be no more than 20 years.
Acquisition or Disposal During the Year
Where an entity becomes or ceases to be a Telecom Group entity during the year,
the results of that entity are included in the net earnings of the Telecom Group
from the date that control or significant influence commenced or until the date
that control or significant influence ceased.
F9
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
continued
NOTE 1 STATEMENT OF ACCOUNTING POLICIES (continued)
Revenue Recognition
Telecom generally recognises revenues as it provides services or delivers
products to customers. Billings for telecommunications services are made on a
monthly basis throughout the month. Unbilled revenues from the billing cycle
date to the end of each month are recognised as revenue during the month the
service is provided. Revenue recognition is deferred in respect of the portion
of fixed monthly charges that have been billed in advance.
Accounts Receivable
Accounts receivable are recorded at expected realisable value after providing
for bad and doubtful accounts expected to arise in subsequent accounting
periods.
Bad debts are written off against the provision for doubtful accounts in the
period in which it is determined that the debts are uncollectable.
Inventories
Inventories principally comprise materials for self-constructed network assets,
critical maintenance spares, customer premises equipment held for rental or sale
and mobile equipment held for sale. Inventories are stated at the lower of cost
and net realisable value after due consideration for excess and obsolete items.
Cost is determined on a first-in first-out or weighted average cost basis.
Investments
Long-term investments are stated at cost. Long-term investments include the
Company's investment in subsidiaries.
Investments in associate companies are stated at the Company's share of the fair
value of the net tangible assets at acquisition plus the share of
post-acquisition movements in reserves.
Investments not expected to be held to maturity are stated at market value, with
the resulting gains or losses taken to earnings.
Where, in the opinion of the Directors, there has been a permanent diminution in
the value of investments this is recognised in the current period.
Fixed Assets
Fixed assets are valued as follows:
. The value of fixed assets purchased from the Government was determined on
the basis of depreciated replacement cost using estimated remaining lives
as at 1 April 1987.
. Subsequent additions are valued at cost. The cost of additions to plant and
equipment and other fixed assets constructed by Telecom consists of all
appropriate costs of development, construction and installation, comprising
material, labour, direct overhead and transport costs.
. For each fixed asset project, interest costs incurred during the period
required to complete and prepare the fixed asset for its intended use are
capitalised as part of the total cost.
Software Developed for Internal Use
Telecom capitalises the direct costs associated with the development of network
and business software for internal use where project success is regarded as
probable. Capitalised costs include external direct costs of materials and
services consumed, payroll and direct payroll-related costs for employees
(including contractors) directly associated with the project and interest costs
incurred while developing the software. Software developed for internal use is
depreciated over its useful life to the Telecom Group.
Depreciation
Depreciation is charged on a straight-line basis to write down the cost of the
fixed assets to their estimated residual value over their estimated useful
lives, which are as follows:
Telecommunications equipment and plant:
Customer local access 3-50 years
Junctions and trunk transmission systems 10-50 years
Switching equipment 3-15 years
Customer premises equipment 3-5 years
Other network equipment 4-15 years
Buildings 40-50 years
Motor vehicles 4-10 years
Furniture and fittings 5-10 years
Computer equipment 3-5 years
F10
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
continued
NOTE 1 STATEMENT OF ACCOUNTING POLICIES (continued)
Where the remaining useful lives or recoverable values have diminished due to
technological change or market conditions, depreciation is accelerated or the
assets are written down.
Land and capital work in progress are not depreciated.
Where a fixed asset is disposed of, the profit or loss recognised in the
Statement of Financial Performance is calculated as the difference between the
sale price and the carrying value of the fixed asset.
Leased Assets
Telecom is a lessor of customer premises equipment. Such leases are considered
operating leases because substantially all the benefits and risks of ownership
remain with Telecom. Rental income is taken to revenue on a monthly basis in
accordance with the lease term.
Telecom is a lessee of certain plant, equipment, land and buildings under both
operating and finance leases. Lease costs relating to operating leases are
charged against earnings as incurred. Finance leases, which effectively transfer
to Telecom substantially all the risks and benefits of ownership of the leased
assets, are capitalised at the present value of the minimum lease payments. The
leased assets and corresponding liabilities are disclosed and the leased assets
are depreciated over the period Telecom is expected to benefit from their use.
Spectrum Licences
Costs incurred on the acquisition of spectrum licences are amortised from the
date the underlying asset is held ready for use on a straight-line basis over
the periods of their expected benefit, which does not exceed fifteen years.
Debt
Debt is stated at face value less unamortised discounts, premiums and prepaid
interest. Discounts, premiums and prepaid interest are amortised to interest
expense on a yield to maturity basis over the period of the borrowing. Borrowing
costs such as origination, commitment and transaction fees are deferred and
amortised over the period of the borrowing.
Compensated Absences
The liability for employees' compensation for future absences, calculated on an
actuarial basis, is accrued in respect of employees' services already rendered
and where the obligation relates to rights that may eventually vest.
Research and Development Costs
Research and development costs are charged to earnings as incurred, except
where, in the case of development costs, future benefits are expected beyond any
reasonable doubt to exceed these costs. Where development costs are deferred,
they are amortised over future periods on a basis related to the expected future
benefits.
Taxation
The taxation expense charged to earnings includes both current and deferred tax
and is calculated after allowing for permanent differences.
Deferred taxation calculated on a partial basis using the liability method is
accounted for on timing differences between the earnings stated in the financial
statements and the assessable income computed for taxation purposes. Deferred
taxation is recognised only on those timing differences that are expected to
crystallise within the foreseeable future.
Foreign Currency
Transactions
Transactions denominated in a foreign currency are converted at the New Zealand
exchange rate at the date of the transaction. Foreign currency receivables and
payables at balance date are translated at exchange rates current at balance
date. Exchange differences arising on the translation of accounts payable and
receivable in foreign currencies are recognised in the Statement of Financial
Performance.
Exchange gains and losses and hedging costs arising on contracts entered into as
hedges of firm commitments are deferred until the date of such transactions at
which time they are included in the determination of net earnings.
Where capital project commitments are hedged against foreign currency rate risk,
the exchange difference on the hedging transaction up to the date of purchase
and all other costs associated with the hedging transaction are capitalised.
F11
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
continued
NOTE 1 STATEMENT OF ACCOUNTING POLICIES (continued)
All exchange gains and losses relating to other hedge transactions are brought
to account in the Statement of Financial Performance in the same period as the
exchange differences on the items covered by the hedge transactions. Costs on
such contracts are amortised over the life of the hedge contract.
Translation of Foreign Group Entities
Assets and liabilities of independent overseas subsidiaries are translated at
exchange rates existing at balance date. The revenue and expenses of these
entities are translated at rates approximating the exchange rates ruling at the
dates of the transactions. The exchange gain or loss arising on translation is
carried directly to a foreign currency translation reserve.
Derivative Financial Instruments
Telecom uses derivative financial instruments to reduce its exposure to
fluctuations in foreign currency exchange rates and interest rates.
Telecom does not currently hold or issue derivative financial instruments for
trading purposes. Gains and losses on derivatives are accounted for on the same
basis as the underlying physical exposures. Accordingly, hedge gains and losses
are included in the Statement of Financial Performance when the gains or losses
arising on the related physical exposures are recognised in the Statement of
Financial Performance.
For an instrument to qualify as a hedge, it must be effective at reducing the
risk associated with the exposure being hedged and must be designated as a hedge
at the inception of the contract.
Derivative financial instruments that do not qualify or no longer qualify as
hedges are stated at market values and any resultant gain or loss is recognised
in the Statement of Financial Performance.
Interest rate swaps and cross currency interest rate swaps that hedge an
underlying physical exposure are accounted for using the accrual method of
accounting. Interest receivable and payable under the terms of the interest rate
swaps and cross currency interest rate swaps are accrued over the period to
which the payments or receipts relate, and are treated as an adjustment to
interest expense or capital note distribution costs.
The foreign exchange gains and losses on the principal value of cross currency
swaps are reflected in the Statement of Financial Performance using the spot
rate which offsets the foreign exchange gains and losses recorded on the
underlying hedged transaction.
Premiums paid for interest rate options and the net settlement on maturity of
forward rate agreements are amortised over the life of the underlying hedged
item.
Forward exchange contracts are accounted for as outlined in the accounting
policy for foreign currency transactions.
Cash flows from derivatives are recognised in the Statement of Cash Flows in the
same category as that of the hedged item.
Cash and Cash Equivalents
For the purposes of the Statement of Cash Flows, cash and cash equivalents are
considered to be cash on hand and in banks, net of bank overdrafts. Cash flows
from certain items are disclosed net, due to the short-term maturities and
volume of transactions involved.
Earnings Per Share
Earnings per share is computed by dividing net earnings by the weighted average
number of ordinary shares outstanding during each period.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Annual Balance Date Change
Effective 1 April 1999, the Company changed its annual balance date from 31
March to 30 June. These financial statements include the transition period
result for the three months ended 30 June 1999.
Reclassifications
Certain reclassifications of prior periods' data have been made to conform to
current year classifications.
Changes in Accounting Policies
The accounting policies used in the preparation of the financial statements for
the year ended 30 June 2000 are consistent with those used in the preparation of
the published financial statements for the three month transition period ended
30 June 1999 and the year ended 31 March 1999.
F12
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
continued
NOTE 2 CALLING AND OTHER OPERATING REVENUES
<TABLE>
<CAPTION>
Telecom Group
-----------------------------------------------------
Three months Year ended
Year ended 31 March ended 30 June 30 June
----------------------------------------------------
1998 1999 1999 2000
-----------------------------------------------------------------------
(Dollars in millions) NZ$ NZ$ NZ$ NZ$
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Calling
National 732 709 171 932
International 450 400 88 506
Other 60 52 11 50
------------------------------------------------
1,242 1,161 270 1,488
================================================
Other operating revenues
Directories 147 160 19 176
Equipment revenue 144 109 28 84
Miscellaneous other services 48 55 19 177
------------------------------------------------
339 324 66 437
================================================
</TABLE>
Parent Company
Operating revenues principally comprise dividends received from subsidiary
companies.
NOTE 3 OPERATING EXPENSES
Labour
Included in labour costs are pension contributions of $3 million to the
Government Superannuation Fund (30 June 1999: $1 million, 31 March 1999: $4
million, 31 March 1998: $5 million) and $5 million on behalf of Australian
employees as required by the Superannuation Guarantee (Administration) Act 1992.
Telecom has no other obligations to provide pension benefits in respect of
present employees. Telecom currently pays administration and management fees,
insurance premiums and other expenses incurred with respect to employees'
membership of the Telecom Retirement Savings Plan, but only members contribute
to that plan.
<TABLE>
<CAPTION>
Telecom Group
-----------------------------------------------------
Three months Year ended
Year ended 31 March ended 30 June 30 June
----------------------------------------------------
1998 1999 1999 2000
-----------------------------------------------------------------------
(Dollars in millions) NZ$ NZ$ NZ$ NZ$
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Other Operating Expenses
Other operating expenses include:
Lease and rental costs 35 33 8 42
Research and development costs 6 10 1 5
Foreign exchange (gains)/losses (4) 1 - (4)
Goodwill amortised 4 7 2 43
Bad debts written off 33 25 5 40
Increase in provision for doubtful accounts 1 2 - 7
Provision for inventory obsolescence 2 2 - 2
Loss on disposal of fixed assets 4 5 - 7
Auditors' remuneration:
Audit fees paid to principal auditors 1 1 - 1
Fees paid for other services provided by principal 3 3 1 3
auditors
Directors' fees 1 1 - 1
</TABLE>
F13
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
continued
NOTE 4 ABNORMAL ITEMS
<TABLE>
<CAPTION>
Telecom Group
--------------------------------------------------------
Three months Year ended
Year ended 31 March ended 30 June 30 June
--------------------------------------------------------
1998 1999 1999 2000
---------------------------------------------------------------------------
(Dollars in millions) NZ$ NZ$ NZ$ NZ$
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Abnormal Revenues
Sale of AAPT Sat-Tel Pty Limited - - - 15
Cross border lease - - 15 -
Liquidation of the executive share ownership plan - 16 - -
--------------------------------------------------------
- 16 15 15
========================================================
Abnormal Expenses
Onerous contract buy-out costs - - 22 -
Restructuring costs - 15 - -
Discontinuance of HFC roll-out & closure of
First Media Limited 37 - - -
--------------------------------------------------------
37 15 22 -
========================================================
</TABLE>
Abnormal Revenues
Sale of AAPT Sat-Tel Pty Limited
In March 2000, AAPT Limited ("AAPT") completed the sale of its wholly owned
subsidiary AAPT Sat-Tel Pty Limited to New Skies Networks Australia Pty
Limited. Included in the Consolidated Statement of Financial Performance
are post acquisition profits relating to this sale, before minority
interests, of $15 million.
Cross Border Lease
During the three months ended 30 June 1999, a gain of $15 million was
recognised on the prepayment of Telecom's scheduled payment obligations
relating to a cross border finance lease.
Liquidation of the Executive Share Ownership Plan (the "Executive Plan")
The liquidation of the Executive Plan was completed in March 1999. The
Trustee of the Executive Plan had disposed of the 1.9 million unallocated
shares held on trust and remitted the net proceeds to Telecom as the
residuary beneficiary. The net proceeds received were $16 million.
Abnormal Expenses
Onerous Contract Buy-out Costs
During the three months ended 30 June 1999, the costs of buying out the
terms of certain onerous contracts were identified and provided for. The
contracts were onerous as the unavoidable costs of meeting the contractual
obligations exceeded their economic benefits.
F14
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
continued
NOTE 4 ABNORMAL ITEMS (continued)
Restructuring
During the year ended 31 March 1999, Telecom reached an agreement with
specialist call centre operator SITEL Asia Pacific to contract out the
provision of operator services. The decision to outsource operator services
resulted in approximately 560 redundancies at a cost of $15 million.
Discontinuance of HFC Roll-out & Closure of First Media Limited ("First
Media")
During the year ended 31 March 1998, Telecom identified and provided for
the estimated costs associated with the termination of the residential
hybrid fibre/coax cable rollout and the closure of First Media, a cable
television operator.
NOTE 5 INVESTMENT INCOME/INTEREST EXPENSE
<TABLE>
<CAPTION>
Telecom Group
------------------------------------------------------
Three months Year ended
Year ended 31 March ended 30 June 30 June
------------------------------------------------------
1998 1999 1999 2000
----------------------------------------------------------------------------
(Dollars in millions) NZ$ NZ$ NZ$ NZ$
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment income:
Interest received 25 45 11 34
Dividends received 3 4 1 4
--------------------------------------------------------
Total investment income 28 49 12 38
========================================================
Interest expense:
Fixed loans 113 110 23 108
Finance leases 6 5 1 2
Other interest 50 53 13 126
--------------------------------------------------------
169 168 37 236
Less interest capitalised (14) (9) (3) (18)
--------------------------------------------------------
Total interest expense 155 159 34 218
========================================================
</TABLE>
Parent Company
Investment income and interest expense comprise interest received from and
paid to subsidiary companies.
F15
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
continued
NOTE 6 INCOME TAX
The income tax expense/(credit) is determined as follows:
<TABLE>
<CAPTION>
Telecom Group Parent Company
------------------------------------------- -----------------------------------
Three Three
months months
ended Year ended Year ended ended Year ended
Year ended 31 March 30 June 30 June 31 March 30 June 30 June
------------------------------------------- -----------------------------------
1998 1999 1999 2000 1999 1999 2000
--------------------------------------------------------------------- -----------------------------------
(Dollars in millions) NZ$ NZ$ NZ$ NZ$ NZ$ NZ$ NZ$
--------------------------------------------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Surplus from continuing operations
before income tax 1,213 1,290 320 1,246 647 159 672
============================================== ===================================
Tax at current rate of 33%
Adjustments to taxation for permanent 400 426 106 411 214 52 222
differences:
Intercompany dividends - - - - (266) (67) (267)
Other (3) (15) (8) (16) - - (5)
---------------------------------------------- -----------------------------------
Total income tax expense/(credit) 397 411 98 395 (52) (15) (50)
============================================== ===================================
The income tax expense/(credit) is
represented by:
Current taxation 399 388 99 348 (52) (15) (50)
Deferred taxation (2) 23 (1) 47 - - -
---------------------------------------------- -----------------------------------
397 411 98 395 (52) (15) (50)
============================================== ===================================
Deferred income tax expense/(credit)
results from the following:
Depreciation 15 9 (1) 32 - - -
Provisions, accruals and other (36) 7 (5) (1) - - -
Year 2000 expenditure 4 3 2 8 - - -
Tax losses in overseas subsidiary
company - - - 1 - - -
Restructuring provisions 15 4 3 7 - - -
---------------------------------------------- -----------------------------------
(2) 23 (1) 47 - - -
============================================== ===================================
</TABLE>
F16
<PAGE>
Notes to the Financial Statements
continued
NOTE 6 INCOME TAX (continued)
The Statement of Financial Position balances are:
<TABLE>
<CAPTION>
Telecom Group Parent Company
----------------------------- ----------------------------
31 March 30 June 31 March 30 June
----------------------------- ----------------------------
1999 1999 2000 1999 1999 2000
---------------------------------------------------- ------------------------------
(Dollars in millions) NZ$ NZ$ NZ$ NZ$ NZ$ NZ$
---------------------------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Current taxation:
Balance at the beginning of the year 17 71 (23) 1 1 65
Total taxation (expense)/credit in the current year (388) (99) (348) 52 15 50
Tax benefit of capital note distribution costs 28 7 27 - - -
Tax paid/(refunded) 304 (51) 311 - - -
Supplementary dividend tax credit
- previous year fourth quarter interim and special 27 26 - 27 26 -
- first, second and third quarter interims 78 - 75 78 - 75
- transition period interim - 25 - - 25 -
Tax loss offset with subsidiary companies - - - (52) - (59)
Supplementary dividend tax credit offset with
subsidiary companies - - - (105) - (126)
Transfer from deferred taxation - - (18) - - -
Other 5 (2) (1) - (2) 1
------------------------------ ------------------------------
Prepaid income tax/(income tax payable)
(see Notes 9 and 14) 71 (23) 23 1 65 6
============================== ==============================
Deferred taxation:
Balance at the beginning of the year 23 - (25) 27 26 -
Provided in the current year (23) 1 (47) - - -
Supplementary dividend tax credit
- previous year fourth quarter interim and special (27) (26) - (27) (26) -
- current year fourth quarter interim 26 - 25 26 - 25
Transfer to current taxation - - 18 - - -
Balance on acquisition of subsidiary company - - 14 - - -
Other 1 - 2 - - -
------------------------------ ------------------------------
(Deferred taxation)/future tax benefit - (25) (13) 26 - 25
============================== ==============================
Deferred taxation balances consist of the following:
Depreciation (93) (92) (128) - - -
Provisions, accruals and other 34 39 45 - - -
Year 2000 expenditure 21 19 11 - - -
Restructuring provisions 12 9 2 - - -
Tax losses in overseas subsidiary company - - 32 - - -
Supplementary dividend tax credit 26 - 25 26 - 25
------------------------------ ------------------------------
- (25) (13) 26 - 25
============================== ==============================
</TABLE>
At 30 June 2000, a deferred tax asset of $7 million (30 June 1999: $6
million, 31 March 1999: $6 million), in respect of timing differences
relating to depreciation on buildings, has not been recognised.
In accordance with the Income Tax Act 1994, Telecom received tax credits
from the Inland Revenue Department equivalent to the supplementary
dividends paid. Included as a deferred tax asset is $25 million
representing a tax credit due on the payment of supplementary dividends
that will be paid in conjunction with the fourth quarter dividend.
AAPT has not recognised in its deferred taxation balance the tax effect of
accumulated losses amounting to A$7 million (based on the Australian
corporation tax rate of 34%). Obtaining the benefits of these tax losses is
dependent upon deriving sufficient assessable income, meeting conditions
for deductibility and complying with Australian tax legislation.
F17
<PAGE>
Notes to the Financial Statements
continued
NOTE 7 DISCONTINUED OPERATIONS
Telecom announced on 22 July 1996 that it was reviewing the operations of
those of its Australian subsidiaries which formed the Pacific Star Group
("Pacific Star") at which time a formal plan of disposal or wind-down of
the Pacific Star businesses was approved by the Board.
The winding down of Pacific Star operations progressed satisfactorily
resulting in a reduction in the provision for loss on disposal of Pacific
Star by $30 million at 31 March 1998. The process of winding down the
discontinued Pacific Star operations was completed during the year ended 30
June 2000.
NOTE 8 SHORT-TERM INVESTMENTS
<TABLE>
<CAPTION>
Telecom Group
----------------------------------------
31 March 30 June
----------------------------------------
1999 1999 2000
---------------------------------------------------------------------------
(Dollars in millions) NZ$ NZ$ NZ$
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short-term deposits 47 55 301
Government securities 15 3 9
Other money market securities 611 56 50
Associate company advance (see Note 22) - - 257
----------------------------------------
673 114 617
========================================
</TABLE>
NOTE 9 RECEIVABLES AND PREPAYMENTS
<TABLE>
<CAPTION>
Telecom Group
----------------------------------------
31 March 30 June
----------------------------------------
1999 1999 2000
---------------------------------------------------------------------------
(Dollars in millions) NZ$ NZ$ NZ$
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trade receivables 499 515 742
Less allowance for doubtful accounts (22) (23) (57)
----------------------------------------
477 492 685
Unbilled rentals and tolls 163 119 159
Prepaid income tax (see Note 6) 71 - 23
Prepaid expenses and other receivables 43 80 51
----------------------------------------
754 691 918
========================================
</TABLE>
F18
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
continued
NOTE 10 INVENTORIES
<TABLE>
<CAPTION>
Telecom Group
----------------------------------------
31 March 30 June
----------------------------------------
1999 1999 2000
--------------------------------------------------------------------
(Dollars in millions) NZ$ NZ$ NZ$
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maintenance materials and consumables 7 5 -
Goods held for resale 11 11 16
Revenue work in progress 14 20 14
Materials for self-constructed assets 21 23 24
----------------------------------------
53 59 54
Less provision for inventory obsolescence (11) (11) (14)
----------------------------------------
42 48 40
========================================
</TABLE>
NOTE 11 LONG-TERM INVESTMENTS
<TABLE>
<CAPTION>
Telecom Group Parent Company
----------------------------------- ------------------------------------
31 March 30 June 31 March 30 June
----------------------------------- ------------------------------------
1999 1999 2000 1999 1999 2000
------------------------------------------------------------- ------------------------------------
(Dollars in millions) NZ$ NZ$ NZ$ NZ$ NZ$ NZ$
------------------------------------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Term deposits 26 26 34 - - -
International telecommunications
investments 21 21 21 - - -
Associate companies:
Investments (refer below) - (7) 30 - - -
Advances - 104 158 - - -
Shares in listed companies - 386 166 - - 166
Other long-term investments - - 46 - - -
Subsidiary companies (see Note 23):
Shares - - - 2,324 2,814 3,156
Term loans, net - - - 1,506 567 1,711
----------------------------------- ------------------------------------
47 530 455 3,830 3,381 5,033
=================================== ====================================
</TABLE>
Associate Company Investments
<TABLE>
<CAPTION>
Telecom Group
----------------------------------------
31 March 30 June
----------------------------------------
1999 1999 2000
--------------------------------------------------------------------
(Dollars in millions) NZ$ NZ$ NZ$
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cost of investment in associates - - 45
Opening balance of share of associates' equity - - (7)
Share of associates' deficit - (7) (6)
Net exchange difference on translation of associate - - (2)
----------------------------------------
Equity accounted value of the investment - (7) 30
========================================
</TABLE>
F19
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
continued
NOTE 11 LONG-TERM INVESTMENTS (continued)
Shares in Listed Companies
During the year ended 30 June 2000, Telecom purchased a 10% stake in Independent
Newspapers Limited ("INL") and a 2% stake in eVentures Limited ("eVentures"). At
30 June 2000 the market values of Telecom's investments in INL and eVentures
were $155 million and $3 million respectively.
During the three months ended 30 June 1999, Telecom purchased a 19.7% stake in
AAPT Limited ("AAPT"). At 30 June 1999 the market value of Telecom's investment
in AAPT was NZ$337 million. On 27 November 1999 Telecom purchased an additional
61.7% shareholding in AAPT, bringing the total shareholding at that date to
81.4%.
NOTE 12 INTANGIBLES
<TABLE>
<CAPTION>
Telecom Group
----------------------------------------
31 March 30 June
------------- ------------- ------------
1999 1999 2000
--------------------------- ------------- ------------- ------------
(Dollars in millions) NZ$ NZ$ NZ$
--------------------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Goodwill 58 56 1,469
Spectrum licences - - 151
------------- ------------- ------------
58 56 1,620
============= ============= ============
</TABLE>
NOTE 13 FIXED ASSETS
<TABLE>
<CAPTION>
Telecom Group
-------------------------------------------------------------------------
Tele- Capital Other
communications work in Freehold fixed
equipment progress land Buildings assets TOTAL
-----------------------------------------------------------------------------------------
(Dollars in millions) NZ$
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cost 7,554 398 111 525 830 9,418
Less accumulated depreciation (4,288) - - (243) (637) (5,168)
-------------------------------------------------------------------------
Net book value at 30 June 2000 3,266 398 111 282 193 4,250
=========================================================================
Cost 6,798 184 112 517 892 8,503
Less accumulated depreciation (3,837) - - (225) (667) (4,729)
-------------------------------------------------------------------------
Net book value at 30 June 1999 2,961 184 112 292 225 3,774
=========================================================================
Cost 6,693 187 111 516 878 8,385
Less accumulated depreciation (3,737) - - (222) (646) (4,605)
-------------------------------------------------------------------------
Net book value at 31 March 1999 2,956 187 111 294 232 3,780
=========================================================================
</TABLE>
F20
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
continued
NOTE 13 FIXED ASSETS (continued)
Values Ascribed to Land and Buildings
Telecom's properties consist primarily of special-purpose network buildings,
which form an integral part of the telecommunications network. The Directors
estimate that the fair valuation of land and buildings (excluding properties
designated for disposal) is approximately equivalent to their net book value as
at 30 June 2000, taking into account their integral value to the network.
Included in land and buildings at 30 June 2000 are properties held for sale at
their estimated realisable value of $11 million (30 June 1999: $13 million, 31
March 1999: $12 million).
Operating Leases
Included in telecommunications equipment at 30 June 2000 is equipment
(principally customer premises equipment) leased to customers under operating
leases with a cost of $303 million (30 June 1999: $284 million, 31 March 1999:
$282 million) together with accumulated depreciation of $272 million (30 June
1999: $262 million, 31 March 1999: $260 million).
Included in buildings at 30 June 2000 are buildings on leasehold land with a
cost of $11 million (30 June 1999: $9 million, 31 March 1999: $9 million)
together with accumulated depreciation of $2 million (30 June 1999: $2 million,
31 March 1999: $2 million).
Finance Leases
Included in telecommunications equipment at 30 June 2000 are assets capitalised
under finance leases with a cost of $541 million (30 June 1999: $576 million, 31
March 1999: $287 million) together with accumulated depreciation of $391 million
(30 June 1999: $376 million, 31 March 1999: $204 million).
Land Claims
Under the Treaty of Waitangi Act 1975, all interests in land included in the
assets purchased from the New Zealand Government may be subject to claims to the
Waitangi Tribunal, which has the power to recommend, in appropriate
circumstances, with binding effect, that the land be resumed by the Government
in order that it be returned to Maori claimants. In the event that the
Government resumes land, compensation will be paid to Telecom under the
provisions of the Public Works Act 1981. If this is insufficient to cover the
loss, certain additional compensation is payable under the provisions of the
Sale and Purchase Agreement between the Company and the Government.
Under the State Owned Enterprises Act 1986, the Governor General of New Zealand,
if satisfied that any land or interest in land held by Telecom is Wahi Tapu
(being land of special spiritual, cultural or historical tribal significance),
may declare by Order in Council that the land be resumed by the Government, with
compensation payable to Telecom under the provisions of the Public Works Act
1981. Telecom would expect to negotiate with the new Maori owners for continued
occupancy rights of any sites resumed by the Government.
F21
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
continued
NOTE 14 ACCOUNTS PAYABLE AND ACCRUALS
<TABLE>
<CAPTION>
Telecom Group
----------------------------------------
31 March 30 June
----------------------------------------
1999 1999 2000
--------------------------------------------------------------------
(Dollars in millions) NZ$ NZ$ NZ$
--------------------------------------------------------------------
<S> <C> <C> <C>
Trade accounts payable 502 520 969
Accrued personnel costs 69 60 66
Rentals billed in advance 56 55 64
Accrued interest 60 75 91
Income tax payable (see Note 6) - 23 -
Other accrued expenses 114 88 52
----------------------------------------
801 821 1,242
========================================
</TABLE>
Parent Company
Accounts payable and accruals comprise non-resident withholding tax and
other sundry payable balances.
NOTE 15 PROVISIONS - ONEROUS CONTRACTS, RESTRUCTURING AND YEAR 2000
<TABLE>
<CAPTION>
Telecom Group
----------------------------------------
31 March 30 June
----------------------------------------
1999 1999 2000
--------------------------------------------------------------------
(Dollars in millions) NZ$ NZ$ NZ$
--------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Onerous contracts provision - 22 8
Restructuring provisions 34 25 3
Year 2000 provision 24 17 -
----------------------------------------
58 64 11
========================================
Non-current:
Restructuring provisions 3 3 3
========================================
</TABLE>
Onerous Contracts
During the three months ended 30 June 1999, estimated costs of $22 million to
buy-out the terms of certain onerous contracts were identified and provided for.
During the year ended 30 June 2000 costs of $14 million were charged against
this provision.
F22
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
continued
NOTE 15 PROVISIONS - ONEROUS CONTRACTS, RESTRUCTURING AND YEAR 2000 (continued)
Restructuring
A strategic restructuring of Telecom was announced towards the end of the
1993 financial year. It was estimated that the cost of implementing this
restructuring would be $450 million. This was provided for in the fourth
quarter earnings of the year ended 31 March 1993 as an abnormal
restructuring cost. During the year ended 30 June 2000, costs of $5 million
were charged against this provision. As at 30 June 2000, the balance of
this provision was $6 million (30 June 1999: $11 million, 31 March 1999:
$12 million), the majority of which relates to expected losses on disposal
of surplus freehold properties.
A strategic restructuring, aimed at improving service and reducing
operating costs, was finalised in the fourth quarter of the 1997 financial
year. In addition, restructuring costs arising out of the Performance 2000
project, aimed at substantially reducing Telecom's operating costs, had
been identified as at 31 March 1997. All of these restructuring costs,
amounting to $65 million, were provided for in the fourth quarter results
of the year ended 31 March 1997. During the year ended 30 June 2000,
redundancy and other restructuring costs of $17 million were charged
against this provision. As at 30 June 2000, the balance of this provision
was nil (30 June 1999: $17 million, 31 March 1999: $18 million).
Redundancy costs of $15 million resulting from the outsourcing of operator
services were identified and provided for during the year ended 31 March
1999. The remaining balance of this provision (31 March 1999: $7 million)
was paid out during the three months to 30 June 1999.
Year 2000
The operating costs of making the modifications necessary to maintain
functionality into the year 2000 and beyond was estimated at $87 million
and a provision raised at 31 March 1997. This provision had been fully
utilised by 30 June 2000.
NOTE 16 DEBT DUE WITHIN ONE YEAR
<TABLE>
<CAPTION>
Telecom Group
----------------------------------------
31 March 30 June
------------- --------------------------
1999 1999 2000
--------------------------------------------------------------------
(Dollars in millions) NZ$ NZ$ NZ$
-------------------------------------------------------------------
<S> <C> <C> <C>
Long-term debt maturing within one year (see Note 17):
Bonds and other loans 159 229 130
Finance leases 18 18 58
----------------------------------------
177 247 188
Short-term debt:
Commercial paper 692 545 789
Notes 260 263 485
Other loans 1 9 -
----------------------------------------
953 817 1,274
----------------------------------------
1,130 1,064 1,462
========================================
</TABLE>
The weighted average interest rates at 30 June 2000 (inclusive of the
effects of hedging) were 6.20% for commercial paper and 6.73% for notes (30
June 1999: 4.56% and 4.65%, 31 March 1999: 4.45% and 4.33% respectively).
F23
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
continued
NOTE 16 DEBT DUE WITHIN ONE YEAR (continued)
Commercial paper comprises amounts issued under Telecom's US$750 million
European Commercial Paper Programme and Telecom's $200 million Asian
Commercial Paper Programme. Issues outstanding at 30 June 2000 are
denominated in NZ dollars, US dollars, Swiss francs and Euros and are
stated inclusive of the effect of hedging transactions.
Notes comprise amounts issued under Telecom's $500 million note facility.
As at 30 June 2000 Telecom had a committed stand-by credit facility of
$1,600 million with the major New Zealand trading banks (this facility was
cancelled on 31 July 2000), and access to US$200 million of committed short
term funding through a standby facility. Telecom also had committed
overdraft facilities of $20m with New Zealand banks. In addition AAPT had
access to an undrawn committed facility with a major Australian trading
bank of A$60 million at 30 June 2000. There are no material compensating
balance requirements associated with these facilities.
NOTE 17 LONG-TERM DEBT
<TABLE>
<CAPTION>
Telecom Group
-----------------------------------------
31 March 30 June
-----------------------------------------
1999 1999 2000
-------------------------------------------------------------
(Dollars in millions) NZ$ NZ$ NZ$
-------------------------------------------------------------
<S> <C> <C> <C>
TeleBonds 401 364 387
Eurobonds 655 655 480
Euro Medium Term Notes - - 1,650
Swiss franc issue 150 150 150
Finance leases (see Note 20) 90 87 81
Bank facility - - 309
Other loans 6 6 6
-----------------------------------------
1,302 1,262 3,063
Less unamortised discount (13) (12) (14)
-----------------------------------------
1,289 1,250 3,049
Less long-term debt maturing within one year (see Note 16) (177) (247) (188)
-----------------------------------------
1,112 1,003 2,861
=========================================
Schedule of Maturities*:
Due 1 to 2 years (7.58%) 253 177 908
Due 2 to 3 years (8.52%) 221 209 269
Due 3 to 4 years (7.71%) 93 223 137
Due 4 to 5 years (7.90%) 239 89 769
Due over 5 years (8.12%) 306 305 778
------------- ------------- -------------
Total due after one year (7.85%) 1,112 1,003 2,861
============= ============= =============
</TABLE>
(* weighted average effective interest rate for Telecom Group - includes
the effect of hedging transactions, see Note 19)
TeleBonds
TCNZ Finance Limited, a subsidiary of the Company, offers bonds
("TeleBonds") to institutional and retail investors. These are issued as
income, compounding, or zero coupon bonds and are offered on a continuous
basis for a term of from one to fifteen years as stipulated by the
investor. The interest or discount rate on offer, as the case may be, is
generally adjusted relative to Government debt securities and, upon issue
of the TeleBonds, is fixed for the period of the investment.
TeleBonds have interest rates ranging from 5.9% to 10.3% and maturity dates
between October 2000 and April 2015.
F24
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
continued
NOTE 17 LONG-TERM DEBT (continued)
Eurobonds
Eurobonds are issued by TCNZ Finance Limited and have the following interest
rates and maturity dates:
<TABLE>
<CAPTION>
Telecom Group
----------------------------------------
31 March 30 June
----------------------------------------
1999 1999 2000
--------------------------------------------------------------------
(Dollars in millions) NZ$ NZ$ NZ$
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
7 1/2% due 19 September 1999 100 100 -
9 1/2% due 3 April 2000 75 75 -
6 1/2% due 29 September 2000 69 69 69
6 1/2% due 11 October 2001 113 113 113
9 1/4% due 1 July 2002 66 66 66
7 1/2% due 14 July 2003 82 82 82
6 3/4% due 11 October 2005 150 150 150
----------------------------------------
655 655 480
========================================
</TABLE>
Eurobond issues with maturities of 11 October 2001 and 2005 are denominated in
US dollars. Cross currency swaps have been entered into to manage the currency
and interest rate risk exposure. The effective NZ dollar interest rates for
these issues are 8.53% and 8.44% respectively. All other issues are denominated
in NZ dollars.
Euro Medium Term Notes
TCNZ Finance Limited launched a US$1 billion Euro Medium Term Notes ("EMTN")
programme in March 2000. Both public debt transactions and private placements
can be issued under the programme.
<TABLE>
<CAPTION>
Telecom Group
----------------------------------------
31 March 30 June
----------------------------------------
1999 1999 2000
--------------------------------------------------------------------
(Dollars in millions) NZ$ NZ$ NZ$
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
5.5% due 19 April 2005 - - 769
1.85% due 5 June 2007 - - 412
Various private placements - - 469
----------------------------------------
- - 1,650
========================================
</TABLE>
The EMTN with maturities of 19 April 2005 and 5 June 2007 are denominated in
Euro and Yen respectively. The private placements are denominated in Yen and
have interest rates ranging from 0.5% to 2.0% with maturity dates ranging from
14 March 2002 to 8 June 2009. Cross currency swaps have been entered into to
manage the currency and interest rate risk exposures. The effective NZ dollar
interest rates for the EMTN range from 8.28% to 8.93%.
F25
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
continued
NOTE 17 LONG-TERM DEBT (continued)
Swiss Franc Issue
A Swiss franc bond has been issued by TCNZ Finance Limited with the following
interest rate and maturity date:
<TABLE>
<CAPTION>
Telecom Group
--------------------------------------
31 March 30 June
--------------------------------------
1999 1999 2000
------------------------------------------------------------
(Dollars in millions) NZ$ NZ$ NZ$
------------------------------------------------------------
<S> <C> <C> <C> <C>
3.25% due 27 May 2003 150 150 150
======================================
</TABLE>
Cross currency and interest rate swaps have been entered into to manage the
currency and interest rate risk exposure. The effective NZ dollar interest rate
for this issue is 8.07%.
Finance Lease Obligations
<TABLE>
<CAPTION>
Telecom Group
---------------------------------------
31 March 30 June
---------------------------------------
1999 1999 2000
------------------------------------------------------------------
(Dollars in millions) NZ$ NZ$ NZ$
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Finance lease obligations are denominated
in the following currencies:
NZ dollars 63 60 47
Japanese yen 27 27 34
-------------------------------------
90 87 81
=====================================
</TABLE>
Finance lease obligations have interest rates ranging from 1.64% to 9.7% (see
Note 20).
Included in long-term investments (see Note 11) are Japanese yen deposits
amounting to $34 million (30 June 1999: $26 million, 31 March 1999: $26 million)
which effectively hedge a substantial proportion of the finance lease
obligations denominated in Japanese yen as noted above. The deposits have the
same maturities as the finance lease obligations they are hedging, and interest
rates that range from 3.68% to 4.29%.
Bank Facility
AAPT has access to an A$300 million committed bank facility. At 30 June 2000 it
had drawn down A$240 million under this facility. Interest rate swaps amounting
to A$30 million have been entered into to partially hedge the interest rate
exposure on this facility. The effective interest rate of the bank facility
(inclusive of hedging) is 6.8%. The maturity date of the bank facility is
November 2001.
Other Loans
Other loans have interest rates ranging from 1.0% to 5.72% and maturity dates
between January 2002 and December 2006.
F26
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
continued
NOTE 18 CAPITAL FUNDS
Kiwi Share
A special rights convertible preference share (the "Kiwi Share") was created on
11 September 1990 and is registered in the name of, and may only be held by, the
Minister of Finance on behalf of the Crown. The consent of the holder of the
Kiwi Share is required for the amendment, removal or alteration of the effect of
certain provisions of the Company's Constitution which was adopted upon
re-registration on 27 September 1996 under the Companies Act 1993.
The Company's Constitution also contains provisions that require Telecom to
observe certain principles relating to the provision of telephone services and
their prices, and that require the consent of the holder of the Kiwi Share and
the Board of Telecom for a person to become the holder of an interest in 10% or
more of the voting shares in Telecom.
The holder of the Kiwi Share is not entitled to vote at any meetings of the
Company's shareholders nor participate in the capital or profits of the Company,
except for repayment of $1 of capital upon a winding up. The Kiwi Share may be
converted to an ordinary share at any time by the holder thereof, at which time
all rights and powers attached to the Kiwi Share will cease to have any
application.
Contributed Capital
Movements in the Company's issued ordinary shares were as follows:
Year ended Three months Year ended
31 March ended 30 June 30 June
------------- ------------- -------------
1999 1999 2000
Number Number Number
------------- ------------- -------------
At beginning of period 1,751,976,069 1,752,801,986 1,752,801,986
Issue of new shares upon exercise
of options 825,917 - 668,316
Shares issued under the dividend
reinvestment plan - - 1,943,141
------------- ------------- -------------
At end of period 1,752,801,986 1,752,801,986 1,755,413,443
============= ============= =============
Each of the ordinary shares confers on the holder the right to vote at any
general meeting of the Company except that the Company's Constitution provides
for certain restrictions on voting, including where a holder holds more than 10%
of the ordinary shares in breach of shareholding limitations.
Share Repurchase
In February 1997, Telecom began a flexible programme of share repurchases
subject to the detailed procedures and disclosure requirements of the Companies
Act 1993 and the requirements of the New Zealand Stock Exchange. The 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 $1,001 million.
Capital Notes
TCNZ Finance Limited ("the Issuer"), Telecom's main financing subsidiary, has
issued long-term fixed interest unsecured subordinated capital notes
("TeleNotes").
An initial issue was completed in May 1997 in the New Zealand market for an
aggregate principal amount of face value $275 million. The TeleNotes were issued
for an initial term of approximately seven years and with a fixed coupon of
8.5%. A second issue to the institutional market was made in August 1997 for an
aggregate principal amount of face value $150 million for an initial term of
approximately nine years and with a fixed coupon of 7.5%. At the end of the
initial term, investors are offered the option of continuing to hold the
TeleNotes at a new yield and for a term set by the Issuer. In the event that the
investors do not accept the new terms of the TeleNotes they may elect to have
their notes redeemed.
F27
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
continued
NOTE 18 CAPITAL FUNDS (continued)
The Issuer can, at its sole discretion, redeem the TeleNotes including any
unpaid interest for cash or redeem the TeleNotes including any unpaid interest
by subscribing for and procuring the issue of ordinary shares in the Company to
the noteholders at a price equivalent to 90% of the average closing price of the
Company's shares in the 10 business days preceding the election date.
In February 1998, Telecom New Zealand Finance Limited, a Telecom financing
subsidiary, issued to certain qualified institutional buyers in the United
States of America, under an Offering Memorandum pursuant to US SEC Rule 144A, an
aggregate principal amount of face value US$150 million 6.25% Restricted Capital
Securities and US$150 million 6.5% Restricted Capital Securities for an initial
term of five and ten years respectively. Telecom has entered into currency swaps
to remove the exposure to exchange rate fluctuations that would otherwise result
from the issue of US Capital Securities. The effective cost of the US Capital
Securities reflects the results of these currency swaps and related New Zealand
interest rate swaps. The Restricted Capital Securities rank pari passu with the
TeleNotes issued in New Zealand and are similar in all material respects.
The proceeds of the capital notes issues were used to effect the share
repurchase programme.
Foreign Currency Translation Reserve
Movements in Telecom's foreign currency translation reserve are reconciled
below:
<TABLE>
<CAPTION>
Telecom Group
----------------------------------------------------
Three months Year ended
Year ended 31 March ended 30 June 30 June
----------------------------------------------------
1998 1999 1999 2000
------------------------------------------------------------------------------
(Dollars in millions) NZ$ NZ$ NZ$ NZ$
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of period (1) - - 1
Net exchange difference on translation of
independent overseas subsidiaries 1 - 11 53
Net exchange difference on translation of
overseas associate company - - - 2
Hedge of net investment in an independent
overseas subsidiary - - (10) (7)
----------------------------------------------------
1 - 1 48
----------------------------------------------------
Balance at end of period - - 1 49
====================================================
</TABLE>
Telecom Share Options
Telecom (excluding AAPT) operates an executive share option scheme whereby
certain key executives are granted a number of options to purchase ordinary
shares in the Company. Each option will convert to one ordinary share on
exercise (provision is made for adjustment in certain circumstances). A
participant may exercise his or her options (subject to employment conditions)
any time during a prescribed period commencing at least one year from the date
on which the options are conferred. New ordinary shares will be issued in
accordance with the Constitution upon the exercise of options. The price payable
on exercise will be equivalent to the average daily closing price of Telecom
shares reported on the New Zealand Stock Exchange for the 10 business days on
which shares are traded immediately preceding the date on which options are
granted (subject to adjustment if the shares traded "cum dividend"). The options
granted are determined by a committee of the Board of Directors pursuant to the
executive share option scheme.
F28
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
continued
NOTE 18 CAPITAL FUNDS (continued)
Information regarding options granted under the executive share option scheme is
as follows:
Option price* Number of
$ options
--------------------------------------
As at 31 March 1997 5.83 1,467,718
Granted 7.13 1,473,447
Exercised 6.28 (264,992)
Lapsed due to resignation 6.86 (53,685)
----------
As at 31 March 1998 6.49 2,622,488
Granted 8.49 3,022,401
Exercised 6.65 (825,917)
Lapsed due to resignation 8.37 (186,087)
Forfeited 8.54 (999,284)
----------
As at 31 March 1999 7.46 3,633,601
Granted 8.12 3,954,194
Lapsed due to resignation 8.54 (32,239)
----------
As at 30 June 1999 7.80 7,555,556
Granted 8.39 487,894
Exercised 6.16 (668,316)
Lapsed due to resignation 8.15 (641,059)
----------
As at 30 June 2000 7.97 6,734,075
==========
<TABLE>
<CAPTION>
------------------------------------------------------- ------------------------------------
Options outstanding Options currently exercisable
------------------------------------------------------- ------------------------------------
Options Price range Price * Remaining Options Price *
Period Granted outstanding $ $ life* (years) exercisable $
-------------------------------------------------------------------------------------- ------------------------------------
<S> <C> <C> <C> <C>
1 April 1995 - 31 March 1996 372,415 5.71 5.71 1.0 372,415 5.71
1 April 1996 - 31 March 1997 135,951 6.01 - 6.98 6.67 2.0 135,951 6.67
1 April 1997 - 31 March 1998 764,040 6.85 - 8.42 7.38 2.9 764,040 7.38
1 April 1998 - 31 March 1999 1,610,000 7.85 - 9.17 8.46 3.6 1,610,000 8.46
1 April 1999 - 30 June 1999 3,363,775 8.12 8.12 4.4 2,179,791 8.12
1 July 1999 - 30 June 2000 487,894 7.87 - 8.80 8.39 5.3 - -
----------- -------------
6,734,075 5,062,197
=========== =============
</TABLE>
* Weighted average
AAPT Share Options
AAPT Limited operates an executive and employee share option plan whereby AAPT
executives and employees are granted a number of options to purchase AAPT
ordinary shares. Each option is convertible to one ordinary AAPT Limited fully
paid share. Participants may exercise their options as follows:
. Up to 50% of the options, between two and five years of the grant date;
. Up to a further 25% of the options, between three and five years of the
grant date; and
. Up to the remaining 25% of the options, between four and five years of the
grant date.
F29
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
continued
NOTE 18 CAPITAL FUNDS (continued)
New ordinary shares will be issued in accordance with AAPT's Constitution upon
the exercise of the options. The exercise price is determined by the weighted
average of the price at which AAPT's shares were traded on the Australian Stock
Exchange during the week before the options were granted. The options granted
are determined by AAPT's Board pursuant to the executive and employee share
option scheme.
Information regarding options granted under the AAPT executive and employee
share option plan is as follows:
Option price* Number of
A$ options
------------------------------------
As at 27 November 1999 2.15 11,250,000
Granted 5.42 5,524,000
Exercised 2.77 (5,422,475)
Lapsed due to resignation 4.86 (198,400)
----------
As at 30 June 2000 3.62 11,153,125
==========
<TABLE>
<CAPTION>
------------------------------------------------------- --------------------------------
Options outstanding Options currently exercisable
------------------------------------------------------- --------------------------------
Options Price range Price * Remaining Options Price *
Period Granted outstanding A$ A$ life* (years) exercisable A$
------------------------------------------------------------------------------------------ --------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 July 1997 - 30 June 1998 3,061,500 0.30 - 3.21 0.89 2.2 3,061,500 0.89
1 July 1998 - 30 June 1999 2,342,625 2.68 - 4.59 3.59 3.7 2,342,625 3.59
1 July 1999 - 27 November 1999 360,000 4.75 4.75 4.1 360,000 4.75
28 November 1999 - 30 June 2000 5,389,000 4.83 - 6.45 5.42 4.8 - -
----------- -------------
11,153,125 5,764,125
=========== =============
</TABLE>
* Weighted average
Dividends
Dividends declared and provided by the Company are as follows:
<TABLE>
<CAPTION>
Three months Year
ended ended
Year ended 31 March 30 June 30 June
------------------------------------------------------
1998 1999 1999 2000
----------------------------------------------------------------------------------------------------
(Dollars in millions, except per share NZ$ NZ$ NZ$ NZ$
amounts)
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First quarter dividend paid 186 201 - 201
Supplementary dividend 26 26 - 25
Second quarter dividend paid 185 201 - 201
Supplementary dividend 25 26 - 25
Third quarter dividend paid 184 202 - 202
Supplementary dividend 25 26 - 25
Third quarter special dividend provided 61 - - -
Supplementary dividend 8 - - -
Fourth quarter dividend provided 140 202 - 202
Supplementary dividend 19 26 - 25
Transition period dividend provided - - 202 -
Supplementary dividend - - 25 -
------------------------------------------------------
Total dividends 859 910 227 906
======================================================
Dividends per share (excluding supplementary dividends) 43.0 cents 46.0 cents 11.5 cents 46.0 cents
======================================================
</TABLE>
F30
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
continued
NOTE 18 CAPITAL FUNDS (continued)
Total dividends for the year ended 30 June 2000 represented four quarterly
dividends of 11.5 cents per share. In addition, and in accordance with the
Income Tax Act 1994, supplementary dividends totalling $75 million were paid
with the first three quarterly dividends to shareholders who are not resident in
New Zealand, for which Telecom received an equivalent tax credit from the Inland
Revenue Department. Supplementary dividends of $25 million have been provided
for which will be payable with the fourth quarter dividend.
Shares Issued in Lieu of Dividends
Telecom established a Dividend Reinvestment Plan effective from the third
quarter of the year ended 30 June 2000. Under the plan shareholders can elect to
receive dividends in cash or additional shares. In respect of the 31 March 2000
quarterly dividend 1,943,141 shares, with a total value of $15 million, were
issued in lieu of a cash dividend.
NOTE 19 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Interest Rate and Currency Risk
Telecom employs the use of derivative financial instruments for the purpose of
reducing its exposure to fluctuations in interest rates and foreign exchange
rates. Telecom effectively monitors the use of derivative financial instruments
through the use of well-defined market and credit risk limits and timely reports
to senior management.
The majority of Telecom's long-term debt has been, and is currently, subject to
fixed interest rates. Telecom uses derivative products such as interest rate
swaps, forward rate agreements and interest rate options to reduce the impact of
changes in interest rates on its floating rate debt.
The purpose of Telecom's foreign currency hedging activities is to protect it
from the risk that the eventual New Zealand dollar net cash flows, resulting
from purchases from foreign suppliers and foreign currency borrowings and
expenditure, will be adversely affected by changes in exchange rates. As at 30
June 2000, Telecom's net unhedged foreign exchange position relating to the
aforementioned activities was not significant.
The notional principal or contract amounts outstanding are as follows:
<TABLE>
<CAPTION>
Telecom Group
------------------------------------------------------
31 March 30 June
------------------------------------------------------
1999 1999 2000 Maturities
----------------------------------------------------------------------------------
(Dollars in millions) NZ$ NZ$ NZ$
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cross currency interest rate swaps 925 925 2,575 2001-2009
Interest rate swaps 719 719 2,397 2001-2010
Interest rate options - 300 450 2000-2001
Forward exchange contracts
(hedging firm purchase commitments and foreign
currency investments) 712 895 757 2000-2005
Forward exchange contracts
(hedging short-term debt) 718 605 340 2000
Forward rate agreements 30 - - -
Currency options
Purchased puts - - 21 2000-2001
Sold calls - - 20 2000-2001
</TABLE>
The notional amounts of the derivative financial instruments, with the exception
of forward exchange contracts and cross currency interest rate swaps, do not
necessarily represent amounts exchanged by the parties, and therefore, are not a
direct measure of the exposure of Telecom through its use of derivative
financial instruments. The amounts exchanged are calculated on the basis of the
notional principal amounts and the other terms of the instruments, which relate
to interest rates and exchange rates.
F31
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
continued
NOTE 19 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)
Parent Company
The Parent Company had no derivative contracts outstanding at 30 June 2000 and
1999, and 31 March 1999.
Concentration of Credit Risk
In the normal course of its business, Telecom incurs credit risk from trade
receivables and transactions with financial institutions. Telecom has a credit
policy, which is used to manage this exposure to credit risk. As part of this
policy, limits on exposures with counterparties have been set and approved by
the Board of Directors and are monitored on a regular basis.
Telecom does not require collateral or other security to support financial
instruments with credit risk. While Telecom may be subject to credit losses in
the event of non-performance by its counterparties, it does not expect such
losses to occur.
Financial instruments which potentially subject Telecom to credit risk consist
principally of cash, short-term investments, advances to associate companies,
trade receivables and various off-balance sheet instruments. Telecom places its
cash, short-term investments and off-balance sheet hedging instruments with high
credit quality financial institutions and sovereign bodies and limits the amount
of credit exposure to any one financial institution. Telecom has no significant
concentrations of credit risk in respect of any one financial institution.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers included in Telecom's customer base.
Fair Values of Financial Instruments
The estimated fair values of Telecom's financial instruments, which differ from
the carrying values, are as follows:
<TABLE>
<CAPTION>
Telecom Group
-------------------------------------------------------------
31 March 30 June
-------------------------------------------------------------
1999 1999 2000
-------------------------------------------------------------
Carrying Fair Carrying Fair Carrying Fair
value value value value value value
-----------------------------------------------------------------------------------------
(Dollars in millions) NZ$ NZ$ NZ$ NZ$ NZ$ NZ$
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Applicable financial instruments on the balance sheet:
Long-term investments - term deposits 26 28 26 28 34 35
Long-term investments - advances to associate
companies - - 104 104 158 151
Long-term investments - shares in listed
companies - - 386 337 166 158
Long-term debt (see Note 17) (1,289) (1,520) (1,250) (1,389) (3,049) (3,267)
Capital notes (942) (1,075) (942) (1,029) (943) (1,085)
Financial instruments with off-balance sheet risk:
Interest rate swaps (6) (43) (13) (24) (15) (62)
Cross currency interest rate swaps 6 156 9 146 7 277
Interest rate options - - 2 1 1 2
Foreign currency forward exchange contracts
(hedging firm purchase commitments and
foreign currency investments) 1 29 1 15 1 59
Foreign currency options - - - - - 1
</TABLE>
Telecom anticipates that long-term debt and capital notes will be held to
maturity and, accordingly, settlement at the reported fair value of these
financial instruments is unlikely.
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
F32
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
continued
NOTE 19 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)
Cash, Short-Term Investments, Bank Overdraft, Short-Term Debt, Receivables and
Prepayments, Accounts Payable and Accruals
The carrying amounts of these balances are approximately equivalent to their
fair value and therefore they are excluded from the table shown above.
Long-Term Investments
The fair value of term deposits is estimated on the basis of current market
interest rates available to Telecom for investments of similar terms and
maturities.
The fair value of advances to associate companies is based on current market
interest rates for debt of similar maturities.
The fair value of shares in listed companies is based on quoted market prices
for these securities.
It was not practicable to estimate fair values of the remaining long-term
investments as there are no quoted market prices for these or similar
investments.
Long-Term Debt
The fair values of TeleBonds, Eurobonds and the Swiss franc issue are estimated
on the basis of the quoted market prices of Government debt securities of
similar maturities. The fair value of other long-term debt is based on current
market interest rates available to Telecom for debt of similar maturities.
Capital Notes
The fair values of Capital Notes are estimated on the basis of the quoted market
prices of Government debt securities of similar maturities.
Cross Currency Interest Rate Swaps, Interest Rate Swaps, Forward Exchange
Contracts, Foreign Currency Options, Forward Rate Agreements and Interest Rate
Options
The fair values are estimated on the basis of the quoted market prices of those
instruments.
The carrying value of the cross currency interest rate swaps and interest rate
swaps represents the accrued interest on these instruments.
F33
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
continued
NOTE 19 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)
Repricing Analysis
The following table indicates the effective interest rates, the earliest period
in which recognised financial instruments reprice and the extent to which these
factors have been modified by off-balance sheet financial instruments. This
information provides a basis for the evaluation of the interest rate risk to
which Telecom is exposed in the future.
<TABLE>
<CAPTION>
Weighted
effective Greater
interest Within 1-2 2-3 3-4 4-5 than
rate 1 year years years years years 5 years Total
--------------------------------------------------------------------------------------------------------------------
(Dollars in millions) NZ$ NZ$ NZ$ NZ$ NZ$ NZ$ NZ$
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Financial assets:
Cash balances 5.14% 81 - - - - - 81
Investments 6.87% 739 38 - - - - 777
Financial liabilities:
Debt 7.93% (1,771) (599) (269) (137) (769) (778) (4,323)
Capital notes 8.60% - - (263) (273) - (407) (943)
Off-balance sheet
instruments:
Interest rate swaps 2,360 (39) (406) - (490) (1,425) -
Cross currency interest (2,293) 357 457 - 770 709 -
rate swaps
Interest rate options 350 (350) - - - - -
----------------------------------------------------------------------------
30 June 2000 repricing
profile (534) (593) (481) (410) (489) (1,901) (4,408)
============================================================================
30 June 1999 repricing
profile (518) (273) (387) (486) (362) (710) (2,736)
============================================================================
31 March 1999 repricing
profile (416) (279) (199) (356) (512) (690) (2,452)
============================================================================
</TABLE>
NOTE 20 COMMITMENTS
Operating Leases
Minimum rental commitments for all non-cancellable operating leases (excluding
amounts provided for in respect of restructuring) are:
<TABLE>
<CAPTION>
Telecom Group
-----------------------------------------
31 March 30 June
-----------------------------------------
1999 1999 2000
---------------------------------------------------------------------
(Dollars in millions) NZ$ NZ$ NZ$
---------------------------------------------------------------------
<S> <C> <C> <C>
Payable within 1 year 45 50 56
Payable within 1-2 years 41 45 48
Payable within 2-3 years 35 39 41
Payable within 3-4 years 32 32 28
Payable within 4-5 years 24 23 19
Payable thereafter 116 133 83
-----------------------------------------
293 322 275
=========================================
</TABLE>
F34
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
continued
NOTE 20 COMMITMENTS (continued)
Finance Leases
Lease commitments in respect of capitalised finance leases are:
<TABLE>
<CAPTION>
Telecom Group
-----------------------------------------
31 March 30 June
-----------------------------------------
1999 1999 2000
---------------------------------------------------------------------
(Dollars in millions) NZ$ NZ$ NZ$
---------------------------------------------------------------------
<S> <C> <C> <C>
Payable within 1 year 19 19 63
Payable within 1-2 years 63 59 23
Payable within 2-3 years 17 17 -
Payable within 3-4 years - - -
Payable within 4-5 years - - -
-----------------------------------------
Total minimum lease payments 99 95 86
Future finance charges on finance leases (9) (8) (5)
-----------------------------------------
Present value of net future minimum lease payments (see
Note 17) 90 87 81
=========================================
</TABLE>
Capital Commitments
At 30 June 2000, capital expenditure amounting to $754 million (30 June 1999:
$65 million, 31 March 1999: $55 million) had been committed under contractual
arrangements, with substantially all payments due within four years. The capital
expenditure commitments principally relate to telecommunications network assets
and at 30 June 2000 included Telecom and AAPT's commitments relating to Code
Division Multiple Access ("CDMA") network build costs.
In addition Telecom has signed an agreement with other international
telecommunications organisations to build and operate a Trans-Pacific submarine
optical fibre cable, called the Southern Cross Cable Network ("Southern Cross"),
linking Australia and New Zealand with Hawaii, Fiji and the West Coast of the
United States. In March 1998, Telecom contractually committed to purchase
capacity on Southern Cross of approximately US$140 million. The first payment of
approximately US$70 million is due on the first ready-for-service date ("RFS"),
now expected to be in November 2000. The second payment of approximately US$57
million is due on the first anniversary of RFS with the balance payable over the
following two years. In November 1999, Telecom committed to purchase further
capacity at a cost of US$69 million. Payments of US$12 million, US$23 million,
US$23 million and US$11 million are due on 31 January 2002, 2003, 2004 and 2005
respectively. In addition AAPT has committed to purchase capacity on Southern
Cross at a cost of approximately US$40 million payable over the next three
years.
To date Southern Cross has signed capacity purchase commitments with customers
totalling US$1.1 billion. Southern Cross cable construction costs are being
funded through a US$640 million external credit facility and interim funding
provided by the shareholders. Telecom has committed to provide up to US$150
million as part of this interim funding and as at 30 June 2000 had advanced
US$120 million (excluding accrued interest) under this arrangement. Southern
Cross plans to refinance the external credit facility, and repay all outstanding
interim funding from shareholders, on or before RFS. Based on current capacity
commitments and expected revenue forecasts, it is expected that Southern Cross
will repay its borrowings in the first few years after project completion.
In addition the Telecom Group has committed to provide additional funding of
A$90 million to another associate company, over the next 18 months.
F35
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
continued
NOTE 21 CONTINGENT LIABILITIES
Lawsuits and Other Claims
In proceedings commenced in November 1996, Clear Communications Limited
("Clear") alleges breaches of the Commerce Act in relation to Telecom's bundling
practices. Unspecified damages are sought.
In April 1997, Telecom issued proceedings against Clear for withholding certain
payments for services supplied under Clear's 1996 interconnection agreement with
Telecom. Telecom seeks a declaration that the outstanding amounts are payable
and an injunction requiring Clear to pay for services provided under the
interconnection agreement. Clear's latest amended defence and counterclaim
allege that the provisions of the 1991 and 1996 interconnection agreements
requiring payments of the sums invoiced by Telecom are void or unenforceable and
that by charging these sums and seeking to enforce the agreements Telecom has an
anti-competitive purpose and effect in breach of the Commerce Act.
In May 2000, Clear abandoned most of its causes of action in these two
proceedings. A three month liability trial dealing with remaining allegations in
both proceedings is due to commence on 26 March 2001. Specified allegations
previously the subject of separate proceedings will be referred to arbitration
after trial.
In proceedings commenced by Telstra NZ Limited ("Telstra NZ") in May 1999, it
was alleged that Telecom's cessation of certain carrier rebilling arrangements
with Telstra NZ breached the Commerce Act. Telstra NZ sought injunctive relief
together with unspecified damages. Telstra NZ's application for interlocutory
injunction was dismissed in July 1999, and the proceedings were settled in July
2000.
In June 1999 a claim was filed against Telecom in the Employment Court by
representative and individual plaintiffs. The plaintiffs allege breach of
various express and implied terms of their employment contracts. The claim is
not fully quantified.
In March 1997 Telstra Corporation commenced proceedings against AAPT in the
Commercial Division of the Supreme Court of New South Wales, Australia. These
proceedings were later transferred to the Federal Court of Australia in Sydney.
Telstra Corporation claims approximately A$127 million plus interest and costs
for unpaid charges for telecommunications services and restitution for the
benefits received in relation to those telecommunication services. AAPT has
cross-claimed asserting claims including breach of contract, negligence,
misleading and deceptive conduct, misuse of confidential information,
unconscionable conduct and abuse of market power under Part IV of the Australian
Trade Practices Act. Trial of these proceedings has commenced and the hearing is
due to resume in October 2000.
In April 2000, CallPlus Limited ("CallPlus") and two other companies issued
proceedings against Telecom alleging breach of contract and the Commerce Act in
relation to Telecom's 0867 service. Clear also commenced proceedings against
Telecom in April 2000, alleging breach of contract in relation to the number
portability agreement between Telecom and Clear and breach of the Commerce Act
in relation to Telecom's 0867 service. CallPlus and Clear each seek injunctive
relief and an inquiry into damages.
On 31 July 2000, the Commerce Commission issued proceedings against Telecom
claiming that the introduction of 0867 constituted a use by Telecom of its
dominant position for proscribed purposes. The Commerce Commission seeks a
declaration that this contravened s36 of the Commerce Act, pecuniary penalty,
and costs.
Various other lawsuits, claims and investigations have been brought or are
pending against Telecom.
The Directors of Telecom cannot reasonably estimate the adverse effect (if any)
on Telecom if any of the foregoing claims are ultimately resolved against
Telecom's interests, and there can be no assurance that such litigation will not
have a material adverse effect on Telecom's business, financial condition or
results of operations.
F36
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
continued
NOTE 21 CONTINGENT LIABILITIES (continued)
Land Claims
As previously stated in Note 13, interests in land included in fixed assets
purchased from the Government may be subject to claims to the Waitangi Tribunal
or deemed to be Wahi Tapu and, in either case, may be resumed by the Government.
Certain claims have been brought or are pending against the Government under the
Treaty of Waitangi Act 1975. Some of these claims may affect land transferred to
the Company by the Government and/or by the Company to its subsidiary companies.
In the event that land is resumed by the Government, there is provision for
compensation to Telecom.
Financial Instruments
There are contingent liabilities in respect of outstanding contracts for the
sale and purchase of foreign currencies, cross currency interest rate swaps,
interest rate swaps, interest rate options and foreign currency options. No
significant losses are anticipated in respect of these matters.
AAPT had issued bank guarantees totalling A$91 million as at 30 June 2000.
Parent Company
The Parent Company has guaranteed, along with guaranteeing subsidiary companies,
indebtedness of TCNZ Finance Limited amounting to $3,272 million ( 30 June 1999:
$1,546 million, 31 March 1999: $1,580 million) under a guarantee dated 27 May
1997 and trust deeds dated 25 October 1988, 3 April 1992 and 17 March 2000 and
subsequent supplemental trust deeds, together with interest thereon. The Parent
Company has issued further guarantees in relation to commercial paper and other
treasury activities of TCNZ Finance Limited. The Parent Company has also
provided intercompany guarantees to Telecom New Zealand Limited.
NOTE 22 RELATED PARTY TRANSACTIONS
Telecom Group
Transactions with Principal Shareholders
During the share repurchase programme, which was completed in December 1997,
31,979,330 shares were repurchased from each of Ameritech and Bell Atlantic at a
cost of $233 million each. At the time of the share repurchase, Ameritech and
Bell Atlantic were principal shareholders in Telecom.
Interest of Directors in Certain Transactions
Certain directors have relevant interests in a number of companies with which
Telecom has transactions in the normal course of business.
Advances to Associate Companies
As at 30 June 2000 Telecom had made a long-term shareholders advance of US$58
million (excluding accrued interest) to Southern Cross Cables Holdings Limited
at an interest rate of Libor + 0.75% (30 June 1999: US$55 million) and a
short-term advance for interim funding purposes of US$120 million (excluding
accrued interest) at an interest rate of Libor + 1.0%. AAPT had made an interest
free advance of A$25 million to AOL Australia Online Services Pty Limited at 30
June 2000.
F37
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
continued
NOTE 22 RELATED PARTY TRANSACTIONS (continued)
Parent Company
The Parent Company's transactions with subsidiary companies are set out in Notes
2 and 5.
Amounts due to subsidiary companies are for no fixed term and are at a weighted
average interest rate of 6.35% at 30 June 2000 (30 June 1999: 4.68%).
Included within investments in subsidiary companies (see Note 11) at 30 June
2000 are net term loans of $1,711 million (30 June 1999: $567 million) advanced
to subsidiary companies. These term loans have interest rates ranging between 0%
and 9.8% (30 June 1999: 0% and 9.8%).
NOTE 23 SUBSIDIARY AND ASSOCIATE COMPANIES
At 30 June 2000, the significant operating companies of the Telecom Group and
their activities were as follows:
<TABLE>
<CAPTION>
Country of Interest
incorporation held Principal activity
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Subsidiary Companies
Telecom New Zealand Limited New Zealand 100% Provides local, national and international and value-added
telephone services, cellular and other mobile services,
data and Internet services.
Telecom Directories Limited New Zealand 100% Publishes telephone directories.
Telecom Purchasing Limited New Zealand 100% A group purchasing and procurement company.
Telecom Cook Islands Limited Cook Islands 60% Provides telecommunications services in the Cook Islands.
TCNZ (UK) Investments Limited United Kingdom 100% A group finance company.
TCNZ (United Kingdom) Securities United Kingdom 100% A group finance company.
Limited
TCNZ Finance Limited New Zealand 100% A group finance company.
Telecom Investments Limited New Zealand 100% A group finance company.
Telecom New Zealand Finance New Zealand 100% A group finance company.
Limited
TCNZ Financial Services Limited New Zealand 100% A group finance company.
Telecom Enterprises Limited New Zealand 100% A holding company.
Telecom Wellington Investments New Zealand 100% A holding company.
Limited
Telecom Pacific Limited New Zealand 100% A holding company.
TCNZ Australia Investments Australia 100% A holding company.
Pty Limited
Telecom Southern Cross Limited New Zealand 100% A holding company.
TCNZ (Bermuda) Limited Bermuda 100% A holding company.
Telecom Southern Cross Finance Bermuda 100% A group finance company.
Limited
Telecom New Zealand Australia Australia 100% Provides international wholesale telecommunications services.
Pty Limited
Telecom New Zealand Japan Japan 100% Provides international wholesale telecommunications services.
Kabushiki Kaisha
Telecom New Zealand UK Limited United Kingdom 100% Provides international wholesale telecommunications services.
Telecom New Zealand (UK) Licences United Kingdom 100% Holds United Kingdom telecommunications licences.
Limited
</TABLE>
F38
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
continued
NOTE 23 SUBSIDIARY AND ASSOCIATE COMPANIES (continued)
<TABLE>
<S> <C> <C>
Telecom New Zealand USA Limited United States 100% Provides international wholesale
telecommunications services.
AAPT Limited Australia 79.9% Provides value added telecommunications
services.
Cellular One Communications Australia 100%* Provides mobile telecommunications services.
Limited
connect.com.au Pty Limited Australia 100%* Internet service provider.
Commerce Solutions Limited Australia 100%* Provides e-commerce solutions.
AAPT CDMA Pty Limited Australia 100%* Provides CDMA wireless services.
Associate Companies
Pacific Carriage Holdings Limited Bermuda 50% A holding company.
Southern Cross Cables Bermuda 50% A holding company.
Holdings Limited
AOL Australia Online Services Australia 50%* Internet service provider.
Pty Limited
</TABLE>
Other than Telecom New Zealand Australia Pty Limited, which has a balance date
of 31 March, the financial year-end of all significant operating subsidiaries
and associates is 30 June.
* Represents AAPT's shareholding in the company.
NOTE 24 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 three reportable segments: Wireline, Wireless
and AAPT. 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. AAPT is Australia's third largest
telecommunications carrier offering a wide range of fixed-line, data, Internet
and mobile services. Operating segments included within the "all other" category
generate revenue by developing software, supplying equipment and providing a
network design, build and maintenance service (the network design, build and
maintenance service business was sold in July 2000). These other segments do not
meet the quantitative thresholds for determining reportable segments.
Excluding AAPT, Telecom's reportable segments are aggregations of similar
products and services. This is a basis management uses for making operating
decisions and assessing performance. Since its acquisition, AAPT has been
managed by the Telecom Group as a stand-alone business. The accounting policies
of the segments are the same as those described in the summary of significant
accounting policies disclosed in Note 1, page 43 of the Annual Report.
The AAPT and Wireline segments charge each other for the termination of calls
that originate on the other's network. The network design, build and maintenance
segment charged 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.
The table below summarises reportable segment surplus and segment assets as at
and for the years ended 31 March 1998 and 1999, the three months ended 30 June
1999 and the year ended 30 June 2000.
F39
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
continued
NOTE 24 SEGMENTAL REPORTING (continued)
<TABLE>
<CAPTION>
Eliminations
Wireline Wireless AAPT All Other /Adjustments Consolidated
---------------------------------------------------------------------------------------------------------------------
(Dollars in millions) NZ$ NZ$ NZ$ NZ$ NZ$ NZ$
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external customers (before abnormal items)
30 June 2000 2,951 546 730 104 - 4,331
30 June 1999 684 130 - 34 - 848
31 March 1999 2,881 477 - 76 - 3,434
31 March 1998 2,871 423 - 104 - 3,398
Intersegment revenue
30 June 2000 16 8 6 130 (160) -
30 June 1999 1 1 - 41 (43) -
31 March 1999 8 11 - 184 (203) -
31 March 1998 7 9 - 249 (265) -
Depreciation
30 June 2000 436 99 26 7 15 583
30 June 1999 106 22 - 2 6 136
31 March 1999 428 89 - 10 26 553
31 March 1998 381 83 - 13 87 564
Segment surplus (before interest, taxation and abnormal items)
30 June 2000 1,195 152 24 31 9 a 1,411
30 June 1999 287 50 - 10 2 a 349
31 March 1999 1,159 202 - 16 22 a 1,399
31 March 1998 1,189 200 - 23 (35)a 1,377
Segment fixed assets
30 June 2000 3,189 599 478 - (16)b 4,250c
30 June 1999 3,199 530 - 34 11 b 3,774c
31 March 1999 3,219 518 - 32 11 b 3,780c
31 March 1998 3,192 509 - 40 52 b 3,793c
</TABLE>
The above information is for the years ended 31 March and 30 June except for the
30 June 1999 information which is for a three month period.
(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 As at 30 June
----------------------------------------------------------------------
1998 1999 1999 2000
-----------------------------------------------------------------------------------------------------------------------
(Dollars in millions) NZ$ NZ$ NZ$ NZ$
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed assets - reportable segments 3,741 3,769 3,763 4,266
Fixed assets - eliminations/adjustments 52 11 11 (16)
----------------------------------------------------------------------
Group fixed assets 3,793 3,780 3,774 4,250
Other assets 1,372 1,595 1,468 3,731
----------------------------------------------------------------------
Total group assets 5,165 5,375 5,242 7,981
----------------------------------------------------------------------
</TABLE>
F40
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
continued
NOTE 24 SEGMENTAL REPORTING (continued)
Geographic segments
In each of the fiscal years ended 31 March 1998 and 1999 and the three months
ended 30 June 1999, more than 90% of the Group's total operating revenues,
operating earnings and identifiable assets were generated by operations in New
Zealand. With the acquisition of a controlling stake in AAPT during the fiscal
year ended 30 June 2000, a material proportion of the Group's operations are now
undertaken outside New Zealand. Disclosure of revenues, net earnings, fixed
assets and total assets on a geographical basis is set out below.
As at and for the year ended 30 June 2000
<TABLE>
<CAPTION>
Telecom Group
---------------------------------------------------------------------------
New Zealand Australian Other
operations operations operations Eliminations Consolidated
--------------------------------------------------------------------------------------------------
(Dollars in millions) NZ$
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating revenue
External customers 3,515 741 75 - 4,331
Internal customers 22 15 - (37) -
Abnormal revenue - 15 - - 15
---------------------------------------------------------------------------
Total revenue 3,537 771 75 (37) 4,346
Segment net earnings attributable to
shareholders 757 31 18 (23) 783
Segment fixed assets 3,724 503 45 - 4,272
Segment total assets 5,076 1,083 648 1,174 7,981
</TABLE>
Intersegment sales are priced on an arms length basis.
F41
<PAGE>
Notes to the Financial Statements
Continued
NOTE 25 RECONCILIATION OF NET EARNINGS ATTRIBUTABLE TO SHAREHOLDERS TO NET
CASH FLOWS FROM OPERATING ACTIVITIES
<TABLE>
<CAPTION>
Telecom Group Parent Company
---------------------------------------- ------------------------------
Three Three
months Year months
Year ended ended Year ended ended ended Year ended
31 March 30 June 30 June 31 March 30 June 30 June
---------------------------------------- -----------------------------
1998 1999 1999 2000 1999 1999 2000
---------------------------------------------------------- -----------------------------
(Dollars in NZ$ NZ$ NZ$ NZ$ NZ$ NZ$ NZ$
millions)
---------------------------------------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net earnings attributable to shareholders 820 822 202 783 699 174 722
Adjustments to reconcile net earnings to net
cash flows from operating activities:
Depreciation 564 553 136 583 - - -
Bad and doubtful accounts 34 27 5 43 - - -
Deferred income tax (2) 23 (1) 24 - - -
Share of losses of associate companies - - 7 6 - - -
Minority interests in profits of subsidiaries - 2 - 8 - - -
Capital note distribution costs 26 55 13 54 - - -
Goodwill amortised 4 7 2 43 - - -
Sale of AAPT Sat-Tel Pty Limited - - - (15) - - -
Discontinued operations (30) - - - - - -
Other 1 14 (1) (2) - - -
Changes in assets and liabilities net of effects of
non-cash and investing and financing activities:
(Increase)/decrease in accounts receivable and
related items (108) 23 (15) (127) 20 - (2)
Decrease/(increase) in inventories 20 (1) (9) 6 - - -
Increase/(decrease) in current taxation 106 83 153 61 (53) (15) (49)
(Decrease)/increase in provisions (53) (59) 6 (57) - - -
Increase/(decrease) in accounts payable and
related items 155 25 (5) 135 - - (12)
--------- --------- ---------- --------- --------- --------- ----------
Net cash flows from operating activities 1,537 1,574 493 1,545 666 159 659
========= ========= ========== ========= ========= ========= ==========
</TABLE>
NOTE 26 IMPUTATION CREDIT ACCOUNT
Dividends paid by New Zealand resident companies may include imputation credits
representing the taxation already paid by the Company on the profits
distributed. New Zealand resident shareholders may claim a tax credit equal to
the value of the imputation credit attached to dividends. Overseas shareholders
in general are not entitled to claim the benefit of any imputation credit.
Overseas shareholders may benefit from supplementary dividends.
The movements in the imputation credit accounts are detailed below:
<TABLE>
<CAPTION>
Telecom Group Parent Company
------------------------------------ -----------------------------------
31 March 30 June 31 March 30 June
------------------------------------ -----------------------------------
1999 1999 2000 1999 1999 2000
----------------------------------------------------- -----------------------------------
(Dollars in NZ$ NZ$ NZ$ NZ$ NZ$ NZ$
millions)
----------------------------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance (credit) at the
beginning of the period (116) (126) (1) (17) (3) (10)
New Zealand income tax (paid)/refunded (302) 51 (300) - - -
Imputation credits
attached to dividends received (2) - (1) (280) (81) (267)
Imputation credits
attached to dividends paid 294 74 299 294 74 297
------------------------------------ -----------------------------------
Balance (credit) at the end of the period (126) (1) (3) (3) (10) 20
Minority interests 1 1 - - - -
----------- ----------- ------------ ----------- ----------- -----------
Net balance (credit) at the end of the period (125) - (3) (3) (10) 20
==================================== ===================================
</TABLE>
F42
<PAGE>
Notes to the Financial Statement
continued
NOTE 27 ACQUISITION AND DISPOSAL OF SUBSIDIARIES
The following acquisitions and disposals impacted Telecom's financial
statements in the year ended 30 June 2000:
. On 27 November 1999 Telecom purchased an additional 61.7% stake in
AAPT, bringing the total shareholding at that date to 81.4%.
. On 10 February 2000 AAPT acquired a 60% stake in EC-Pay Pty Limited.
. On 31 March 2000 AAPT disposed of its entire 100% shareholding in AAPT
Sat-Tel Pty Limited.
. On 1 June 2000 Telecom disposed of its entire 100% shareholding in
ConnecTel Limited.
The effect of these acquisitions and disposals on the Group's assets and
liabilities was:
Telecom Group
---------------------------------
(Dollars in millions) NZ$
---------------------------------
ASSETS
Current assets:
Cash 3
Receivables and prepayments 167
Other current assets 1
----------------
Total current assets 171
----------------
Future tax benefit 14
Long-term investments 2
Intangibles 268
Fixed assets 266
----------------
Total assets 721
----------------
LIABILITIES
Current liabilities:
Bank overdraft (1)
Accounts payable and accruals 273
Other current liabilities (2)
----------------
Total current liabilities 270
----------------
Long-term debt 147
----------------
Total liabilities 417
----------------
Minority interests 69
----------------
Net assets acquired 235
================
Net consideration:
Opening investment (385)
Net cash paid (1,113)
Goodwill arising on acquisition 1,279
Profit on disposal (16)
----------------
(235)
================
F43
<PAGE>
Notes to the Financial Statements
continued
NOTE 28 QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Surplus from Net
Net Surplus continuing earnings
abnormal from operations attributable
Operating revenue/ continuing before income to Net earnings
revenues (expense) operations tax shareholders per share
----------------------------------------------------------------------------------------------------------
(NZ dollars in millions, NZ$
except per share amounts)
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Quarter ended:
30 September 1999 887 - 365 337 209 0.119
31 December 1999 993 - 350 311 197 0.112
31 March 2000 1,239 15 380 328 205 0.117
30 June 2000 1,227 - 331 270 172 0.098
----------------------------------------------------------------------------------
Year ended 30 June 2000 4,346 15 1,426 1,246 783 0.447
==================================================================================
Transition period ended:
30 June 1999 - audited 863 (7) 342 320 202 0.115
==================================================================================
Quarter ended:
30 June 1998 826 - 325 300 190 0.109
30 September 1998 869 - 359 328 206 0.118
31 December 1998 859 - 354 325 202 0.115
31 March 1999 896 1 362 337 224 0.128
----------------------------------------------------------------------------------
Year ended 31 March 1999 3,450 1 1,400 1,290 822 0.469
==================================================================================
</TABLE>
Earnings per share is computed independently for each of the quarters
presented. Consequently, the sum of the quarters does not necessarily equal
total annual earnings per share.
F44
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
continued
NOTE 29 COMPARATIVE FINANCIAL INFORMATION (UNAUDITED)
Annual Balance Date Change
Effective 1 April 1999, Telecom changed its annual balance date from 31
March to 30 June. The unaudited consolidated Statement of Financial
Performance for the three months ended 30 June 1998 and the year ended 30
June 1999 is presented below for comparative purposes.
<TABLE>
<CAPTION>
Three months Year ended
ended 30 June 30 June
------------------------------
1998 1999
--------------------------------------------------------------------------------
(Dollars in millions, except per share amounts) NZ$ NZ$
--------------------------------------------------------------------------------
<S> <C> <C>
Operating revenues
Local service 263 1,059
Calling 290 1,140
Interconnection 15 71
Cellular and other mobile services 113 502
Data 81 357
Other operating revenues 64 327
Abnormal revenues - 31
------------------------------
826 3,487
------------------------------
Operating expenses
Labour 124 467
Depreciation 139 551
Cost of sales 109 459
Other operating expenses 129 556
Abnormal expenses - 37
------------------------------
501 2,070
------------------------------
Surplus from operations 325 1,417
Investment income 16 45
Interest expense (41) (152)
------------------------------
Surplus from operations before income tax 300 1,310
Income tax expense (96) (412)
------------------------------
Surplus from operations after income tax 204 898
Share of losses of associate company after income tax - (7)
Minority interests in profits of subsidiaries - (2)
------------------------------
Net surplus 204 889
Capital note distribution costs after income tax (14) (55)
------------------------------
Net earnings attributable to shareholders 190 834
------------------------------
Net earnings per share $0.109 $0.476
==============================
Weighted average number of ordinary shares outstanding (in millions) 1,752 1,752
==============================
</TABLE>
F45
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
continued
NOTE 30 SIGNIFICANT DIFFERENCES BETWEEN NEW ZEALAND AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRACTICE
The consolidated financial statements are prepared in accordance with
generally accepted accounting practice ("GAAP") applicable in New Zealand
("NZ") which differs in certain significant respects from that applicable
in the United States ("US"). These differences and the effect of the
adjustments necessary to restate earnings and shareholders' funds are
detailed below.
EFFECT ON NET EARNINGS OF DIFFERENCES BETWEEN NZ GAAP AND US GAAP
<TABLE>
<CAPTION>
Telecom Group
------------------------------------------------------
Three months
ended Year ended
Year ended 31 March 30 June 30 June
------------------------------------------------------
1998 1999 1999 2000
------------------------------------------------------------------------------------------------------
(Dollars in millions, except per share amounts) NZ$ NZ$ NZ$ NZ$
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net earnings in accordance with NZ GAAP 820 822 202 783
Add: Discontinued operations (30) - - -
----------------------------------------------------
790 822 202 783
US GAAP adjustments:
Depreciation of interest costs capitalised in prior years (a) (9) (9) (2) (9)
Deferred taxation (b) 28 19 (4) 13
Executive share ownership plan (c) - (16) - -
Provision for restructuring (d) (62) - - -
Provision for Year 2000 (e) (14) (48) (7) (17)
Provision for onerous contracts (f) - - 22 (14)
Share of losses of associate company (g) - - - (23)
----------------------------------------------------
Net earnings from continuing operations in
accordance with US GAAP 733 768 211 733
Discontinued operations 30 - - -
----------------------------------------------------
Net earnings in accordance with US GAAP 763 768 211 733
====================================================
Basic earnings per share from continuing
operations in accordance with US GAAP (m) $0.410 $0.438 $0.120 $0.418
Basic earnings per share from discontinued operations
in accordance with US GAAP $0.017 - - -
----------------------------------------------------
Basic net earnings per share in accordance
with US GAAP $0.427 $0.438 $0.120 $0.418
====================================================
Diluted earnings per share from continuing operations
in accordance with US GAAP (m) $0.410 $0.439 $0.120 $0.417
====================================================
</TABLE>
CUMULATIVE EFFECT ON SHAREHOLDERS' FUNDS OF DIFFERENCES BETWEEN NZ GAAP
AND US GAAP
<TABLE>
<CAPTION>
Telecom Group
------------------------------------------------------
Three months Year ended
Year ended 31 March ended 30 June 30 June
------------------------------------------------------
1998 1999 1999 2000
-----------------------------------------------------------------------------------
(Dollars in millions) NZ$ NZ$ NZ$ NZ$
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shareholders' funds in accordance with NZ GAAP 1,063 1,085 1,086 1,130
Capitalisation of interest costs, net of accumulated
depreciation (a) 50 41 39 30
Deferred taxation (b) (46) (27) (31) (18)
Provision for dividend (h) 140 202 202 202
Executive share ownership plan (c) (3) - - -
Provision for Year 2000 (e) 72 24 17 -
Provision for onerous contracts (f) - - 22 8
Share of losses of associate company (g) - - - (23)
Accumulated unrealised holding loss on available-for-sale - - - (8)
securities (n)
------------- ------------- ------------- ------------
Shareholders' funds in accordance with US GAAP 1,276 1,325 1,335 1,321
============= ============= ============= ============
</TABLE>
F46
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
continued
NOTE 30 SIGNIFICANT DIFFERENCES BETWEEN NEW ZEALAND AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRACTICE (continued)
(a) Capitalisation of Interest Costs Relating to the Construction of
Property, Plant and Equipment
Prior to 1 April 1989, Telecom did not capitalise interest costs incurred
in connection with the financing of expenditures for the construction of
telecommunications equipment and other fixed assets. In the year ended 31
March 1990, Telecom changed that policy such that, for each fixed asset
project having a cost in excess of $10 million and a construction period of
not less than 12 months, interest costs incurred during the period that is
required to complete and prepare the fixed asset for its intended use are
capitalised as part of the total cost. In the year ended 31 March 1996,
Telecom changed that policy further such that, for each fixed asset project
having a cost in excess of $100,000 and a construction period of not less
than three months, interest costs incurred during the period that is
required to complete and prepare the fixed asset for its intended use are
capitalised as part of the total cost. The policy was changed again from 1
April 1999 such that interest costs are capitalised for all fixed asset
projects.
Under US GAAP, interest costs incurred in connection with the financing of
all expenditure for the construction of fixed assets are required to be
capitalised during the period required to prepare the fixed asset for its
intended use. For the purpose of compliance with US GAAP, the estimated
amount of interest that would have been capitalised on construction costs
incurred on capital projects not already capitalised in accordance with
Telecom's accounting policy has been determined and depreciated over the
lives of the related assets. As a result of the change in accounting policy
during the year ended 31 March 1996, which brought NZ GAAP accounting
treatment in respect of capitalised interest into alignment with US GAAP in
all material respects, the ongoing reconciling difference within net
earnings will comprise the depreciation charge on interest not capitalised
under NZ GAAP prior to 1 April 1995.
(b) Deferred Taxation
Under NZ GAAP, Telecom uses the partial liability method to account for
taxation whereby all items expected to reverse in the foreseeable future
are recognised, whereas under US GAAP the comprehensive liability method is
used.
The components of the US GAAP net deferred tax liability at 30 June 2000,
30 June 1999 and 31 March 1999 amounting to $31 million, $56 million, and
$27 million respectively, are as follows:
<TABLE>
<CAPTION>
Deferred tax asset Deferred tax liability
------------------------------------ -----------------------------------
31 March 30 June 31 March 30 June
------------------------------------ ----------------------------------
1999 1999 2000 1999 1999 2000
--------------------------------------------------- -----------------------------------
(Dollars in NZ$ NZ$ NZ$ NZ$ NZ$ NZ$
millions)
--------------------------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Depreciation 19 14 14 (119) (113) (145)
Restructuring provisions 12 9 2 - - -
Tax losses in overseas subsidiary
company - - 32 - - -
Provisions, accruals and other 105 90 105 (64) (50) (57)
Valuation allowance (6) (6) (7) - - -
Supplementary dividend tax credit 26 - 25 - - -
------------------------------------ ----------------------------------
156 107 171 (183) (163) (202)
==================================== ==================================
</TABLE>
Included in the net deferred tax liability at 30 June 20 00 of $31 million
is a net current asset of $124 million and a net non-current liability of
$155 million. The net deferred tax liability at 30 June 1999 of $56 million
included a net current asset of $90 million and a net non-current liability
of $146 million. The net deferred tax liability at 31 March 1999 of $27
million included a net current asset of $129 million and a net non-current
liability of $156 million.
F47
<PAGE>
Notes to the Financial Statements
continued
NOTE 30 SIGNIFICANT DIFFERENCES BETWEEN NEW ZEALAND AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRACTICE (continued)
(c) Executive Share Ownership Plan
The liquidation of Telecom's Executive Plan was completed in March 1999.
The Trustee of the Executive Plan had disposed of the 1.9 million
unallocated shares and remitted the proceeds to Telecom. Under NZ GAAP the
net proceeds from the liquidation of the Executive Plan of $16 million were
recorded as abnormal revenue in the Statement of Financial Performance.
Under US GAAP the unallocated shares remaining at the time of liquidating
the Executive Plan must be considered un-issued. Under US GAAP when a
company sells previously un-issued shares in itself, the net proceeds from
the sale are accounted for as paid-in capital.
Under NZ GAAP, compensation expense relating to the Executive Plan was
recognised systematically over the life of the plan based on the actual
cost of the shares of $2 each. Under US GAAP, the Executive Plan would have
been treated as a variable stock award plan and, as such, the compensation
expense recognised over the life of the plan would be adjusted in each
accounting period for changes in the quoted market price of the Company's
shares. Additionally, under US GAAP, the shares issued under the plan would
not have been recognised as share capital until they vested and would not
all have been recognised as outstanding for the purpose of determining the
weighted average number of shares for earnings per share calculations.
Reconciliation of the cumulative effect of the Executive Plan on
shareholders' funds:
<TABLE>
<CAPTION>
Telecom Group
-----------------------------------------
31 March 30 June
-----------------------------------------
1999 1999 2000
-----------------------------------------------------------------
(Dollars in millions) NZ$ NZ$ NZ$
-----------------------------------------------------------------
<S> <C> <C> <C>
Opening balance (3) - -
Shares vested, net 18 - -
US GAAP reversal of NZ GAAP liquidation profit (16) - -
Dividends paid on treasury stock 1 - -
----------------------------------------
- - -
========================================
</TABLE>
(d) Provision for Restructuring
Under US GAAP, provisions for restructuring may only be accrued where a
detailed announcement describing the restructuring has been made prior to
balance date.
(e) Provision for Year 2000
Under US GAAP, the costs relating to Year 2000 modifications should be
expensed as incurred. Consequently, the accrual of such costs is not
permitted.
(f) Provision for Onerous Contracts
Under US GAAP, the costs relating to these onerous contracts should be
expensed as incurred. Consequently, the accrual of such costs is not
permitted.
(g) Share of Losses of Associate Company
Under NZ GAAP where the carrying amount of an equity investment in an
associate falls below zero, the equity method of accounting is suspended
and the investment is recorded at zero. If this occurs, the equity method
of accounting is not resumed until such time as the Group's share of losses
and reserve decrements not recognised during the financial years in which
the equity method was suspended, are offset by the current share of profits
and reserves.
Under US GAAP net losses continue to be accrued until both the equity
investment and any advance balance are reduced to zero.
F48
<PAGE>
Notes to the Financial Statements
continued
NOTE 30 SIGNIFICANT DIFFERENCES BETWEEN NEW ZEALAND AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRACTICE (continued)
(h) Provision for Dividend
Under NZ GAAP, dividends provided by the Board of Directors after the end
of an accounting period, but in respect of that period, are deducted in
arriving at retained earnings at the end of that accounting period. Under
US GAAP, such dividends are provided in the period in which they are
declared by the Board of Directors. The dividend included for the purpose
of the US GAAP reconciliation is net of the effect of the supplementary
dividend and associated tax credit.
(i) Statement of Cash Flows
Under both NZ GAAP and US GAAP, a Statement of Cash Flows, which discloses
cash flows from operating, investing and financing activities, is required
to be presented. Under US GAAP, bank overdrafts would be reclassified as a
financing activity rather than a component of cash position. In addition
short term deposits with original maturities of three months or less would
generally qualify as a component of cash position. Accordingly, the closing
cash position under US GAAP at 30 June 2000, 30 June 1999 and 31 March 1999
would be $342 million, $84 million and $68 million respectively.
(j) Research and Development Expenditure
Under NZ GAAP, research and development costs are charged to expenses as
incurred except where, in the case of development costs, future benefits
are expected beyond any reasonable doubt to exceed these costs. Where
development costs are deferred, they are amortised over future periods on a
basis related to future benefits. For the purpose of compliance with US
GAAP, all research and development costs must be expensed as incurred. As
at 30 June 2000, 30 June 1999 and 31 March 1999 there were no significant
amounts of deferred development costs.
(k) Share Repurchase
Under US GAAP, the share repurchase would have been accounted for
differently such that the amount of the share repurchase would have been
allocated amongst individual components of shareholders' funds.
(l) Share Options
SFAS 123 ("Accounting for Stock-Based Compensation") requires that Telecom
calculate the value of stock options at the date of grant using an option
pricing model. Telecom has elected the "pro-forma disclosure only" option
permitted under SFAS 123 instead of recording a charge to operations, as
shown below:
<TABLE>
<CAPTION>
Telecom Group
-------------------------------------------------------
Three
months Year
ended ended
Year ended 31 March 30 June 30 June
-------------------------------------------------------
1998 1999 1999 2000
--------------------------------------------------------------------------------------------------------------
(Dollars in millions, except per share amounts) NZ$ NZ$ NZ$ NZ$
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
US GAAP:
Net earnings As reported 763 768 211 733
Pro-forma 761 766 210 729
Basic earnings per share As reported $0.427 $0.438 $0.120 $0.418
Pro-forma $0.426 $0.437 $0.120 $0.416
</TABLE>
F49
<PAGE>
Notes to the Financial Statements
continued
NOTE 30 SIGNIFICANT DIFFERENCES BETWEEN NEW ZEALAND AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRACTICE (continued)
The pro forma amounts have been determined using the Black Scholes option
pricing model based on the following weighted average assumptions:
<TABLE>
<CAPTION>
Telecom share options
-------------------------------------------------------
Three
months
ended Year ended
Year ended 31 March 30 June 30 June
-------------------------------------------------------
1998 1999 1999 2000
-------------------------------------------------------
<S> <C> <C> <C> <C>
Risk-free interest rate 7.2% 6.4% 5.95% 6.8%
Expected dividend yield 5.9% 5.1% 6.3% 5.8%
Expected option life (in years) 6.0 6.0 6.0 6.0
Expected stock price volatility 22.6% 24.0% 24.0% 23.0%
Discount to reflect restrictive terms of the options 0% 25.0% 25.0% 25.0%
</TABLE>
<TABLE>
<CAPTION>
AAPT share
options
-----------------
Seven months
ended 30 June
-----------------
2000
-----------------
<S> <C>
Risk-free interest rate 6.5%
Expected dividend yield 0%
Expected option life (in years) 5.0
Expected stock price volatility 41%
</TABLE>
F50
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
continued
NOTE 30 SIGNIFICANT DIFFERENCES BETWEEN NEW ZEALAND AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRACTICE (continued)
(m) Earnings Per Share
SFAS 128 ("Earnings Per Share"), requires companies to present basic
earnings per share and diluted earnings per share. The numerators and the
denominators used in the computation of basic and diluted earnings per
share pursuant to SFAS 128 are reconciled below:
<TABLE>
<CAPTION>
Telecom Group
----------------------------------------------------
Three months
ended Year ended
Year ended 31 March 30 June 30 June
-----------------------------------------------------------------------------------------------
(Dollars in millions, except per share 1998 1999 1999 2000
amounts)
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic EPS Computation
Numerator - net earnings from continuing operations $ 733 $ 768 $ 211 $ 733
Denominator - ordinary shares (in millions) 1,786 1,752 1,753 1,753
------------------------------------------------
Basic EPS - continuing operations $0.410 $0.438 $0.120 $0.418
-------------------------------------------------
Diluted EPS Computation
Numerator:
Net earnings from continuing operations $ 733 $ 768 $ 211 $ 733
Add: Capital note distribution costs after income tax $ 26 $ 55 $13 $ 54
-------------------------------------------------
$ 759 $ 823 $ 224 $ 787
-------------------------------------------------
Denominator (in millions):
Ordinary shares 1,786 1,752 1,753 1,753
Capital notes 65 121 120 135
Options - - 1 -
-------------------------------------------------
1,851 1,873 1,874 1,888
-------------------------------------------------
Diluted EPS - continuing operations $0.410 $0.439 $0.120 $0.417
=================================================
</TABLE>
(n) Comprehensive Income
<TABLE>
<CAPTION>
Telecom Group
----------------------------------------------------
Three months
ended Year ended
Year ended 31 March 30 June 30 June
------------------------------------------------------------------------------
(Dollars in millions) 1998 1999 1999 2000
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net earnings in accordance with US GAAP 763 768 211 733
Other comprehensive income:
Foreign currency translation adjustments (see Note 18) 1 - 1 48
Unrealised holding loss on available-for-sale - - - (8)
securities
----------------------------------------------------
Other comprehensive income, net of taxation 1 - 1 40
----------------------------------------------------
Total comprehensive income 764 768 212 773
====================================================
</TABLE>
F51
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
continued
NOTE 30 SIGNIFICANT DIFFERENCES BETWEEN NEW ZEALAND AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRACTICE (continued)
Accumulated other comprehensive income, a component of shareholders funds
in accordance with US GAAP, totalled $41 million at 30 June 2000 (30 June
1999: $1 million, 31 March 1999: Nil, 31 March 1998: Nil).
SFAS 115 ("Accounting for Certain Investments in Debt and Equity
Securities") requires Equity Securities to be classified as either `trading
securities' or `available-for-sale securities'. Telecom's investments in
INL and eVentures are not held for the purpose of short-term trading and
therefore meet the definition of an available-for-sale security. Available-
for-sale securities must be carried at fair value with unrealised gains and
losses reported as a component of other comprehensive income.
As at 30 June 1999, Telecom's investment in AAPT also met the definition of
an available-for-sale security and an associated holding loss of $49
million was recognised. In the year ended 30 June 2000 Telecom increased
its shareholding in AAPT to 81.4%. As this investment no longer meets the
definition of an available-for-sale security, the loss has been reversed in
the pro forma disclosure for the three months ended 30 June 1999.
(o) Acquisition of AAPT
APB16 "Business Combinations" requires certain unaudited pro forma
disclosures be presented when a subsidiary is acquired. The following pro
forma consolidated results of operations are presented as if the
acquisition of 81.4% of AAPT had taken place at the beginning of the
current and preceding years. The effects of other acquisitions on the
consolidated financial statements are not significant and have been
excluded from the pro forma presentation.
<TABLE>
<CAPTION>
Telecom Group
-------------------------------
Year ended 30 June
-------------------------------------------------------------------
(Dollars in millions, except per 1999 2000
share amounts)
-------------------------------------------------------------------
<S> <C> <C>
Operating revenues 4,384 4,793
Net earnings attributable to shareholders 684 660
Basic earnings per share $0.390 $0.376
Diluted earnings per share $0.391 $0.378
</TABLE>
The pro forma consolidated results of operations include adjustments to
give effect to amortisation of goodwill, interest expense on acquisition
debt and certain other adjustments, together with related income tax
effects. The unaudited pro forma information is not necessarily indicative
of the results of operations that would have occurred had the purchase been
made at the beginning of the periods presented or the future results of the
combined operations.
F52
<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/ Theresa Gattung
---------------------------------
Theresa Gattung
Chief Executive & Managing Director
Dated: 21 December 2000
------------------------------
