<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
31 MARCH 1999
RESULTS OF OPERATIONS - 31 MARCH 1999
Overview Of Results
Telecom's reported earnings for the year ended 31 March 1999 ("1999") were
NZ$822 million compared with NZ$820 million for the year ended 31 March 1998
("1998"). Reported earnings per share ("EPS") increased by 2.2% to NZ46.9 cents,
compared with NZ45.9 cents in 1998.
Normalised earnings (reported earnings excluding the effect of abnormal items
and discontinued operations) were NZ$816 million compared with NZ$815 million
for 1998, an increase of NZ$1 million, or 0.1%. Normalised EPS increased by 2.1%
to NZ46.6 cents, compared with NZ45.6 cents in 1998.
==============================================================================
Earnings Overview
Years Ended 31 March
---------------------------
Change
1998 1999 %
NZ$M NZ$M 99:98
------- -------- ----------
Operating revenues
(before abnormals) 3,398 3,434 1.1
Net earnings (reported) 820 822 0.2
Abnormal revenue - (16) -
Abnormal expenses
(after tax) 25 10 -
Discontinued operations (30) - -
------- -------- ----------
Normalised earnings 815 816 0.1
------- -------- ----------
EBIT (before abnormals) 1,377 1,399 1.6
EBITDA (before abnormals) 1,945 1,959 0.7
Reported earnings per
share (cents) 45.9 46.9 2.2
Normalised earnings
per share (cents) 45.6 46.6 2.1
Dividends per share
(cents) 43.0 46.0 7.0
Weighted average
number of shares 1,786 1,752 -
outstanding (millions)
==============================================================================
EPS growth was greater than net earnings growth because Telecom's share
repurchase programme, which was completed in December 1997, reduced the average
number of shares on issue. The effect on EPS of the lower number of issued
shares was partially offset by additional funding costs of the shares
repurchased.
Telecom's result for 1999 was adversely affected by price declines in the face
of intense competition, particularly in the tolls market, and the weak New
Zealand economy.
Net cash flows from operating activities increased by NZ$37 million, or 2.4%,
from NZ$1,537 million in 1998.
OVERVIEW OF SURPLUS FROM CONTINUING OPERATIONS
The table on page 10 shows the major components of Telecom's operating revenues
and expenses for the years ended 31 March 1998 and 1999.
Surplus from continuing operations before abnormal items as a percentage of
revenue was 40.5% and 40.7% for 1998 and 1999, respectively.
Abnormal Items
------------------------------------------------------------------------------
1998 1999
NZ$M NZ$M
------------------------------------------------------------------------------
Abnormal costs
Restructuring costs - 15
Reorganisation of First
Media Limited 37 -
-------- -------
37 15
======== =======
Abnormal Revenue
Liquidation of executive
share ownership plan - 16
======== =======
Restructuring
During 1999, Telecom announced it had reached an agreement with specialist call
centre operator SITEL Asia Pacific to contract out the provision of operator
services. Operator services manages directory assistance, operator assistance
and audio conferencing calls as well as passing 111 calls to emergency services.
The decision to outsource operator services resulted in approximately 560
redundancies (total severance costs of NZ$15 million) at the Auckland,
Palmerston North and Christchurch call centres. Of the NZ$15 million, NZ$7
million was still to be paid at 31 March 1999.
Redundancy and other restructuring costs of NZ$11 million and NZ$33 million
incurred during 1999 and 1998 respectively were charged against the
restructuring provision.
1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
31 MARCH 1999
Reorganisation of First Media Limited ("First Media")
The estimated costs (NZ$37 million) associated with the termination of the
residential hybrid fibre/coax cable roll-out and the reorganisation of First
Media were identified and provided for at 31 March 1998.
The decision to close First Media with effect from 31 July 1998 was announced on
4 June 1998. The costs associated with this decision were accommodated by the
existing provision.
Liquidation of the Executive Share Ownership Plan
Liquidation of Telecom's executive share ownership plan was completed in March
1999. The Trustee of the plan had disposed of the 1.9 million unallocated shares
on trust and remitted the net proceeds to Telecom as the residuary beneficiary.
The net proceeds received were NZ$16 million.
Telecom continues to operate an executive share option scheme whereby certain
key executives are granted a number of options to purchase ordinary shares in
the Company.
Operating Revenues (Before Abnormals)
-------------------------------------------------------------------------------
Variation - Increase NZ$ %
millions
-------------------------------------------------------------------------------
1999:1998 36 1.1
Revenue growth for 1999 was driven largely by growth in cellular connections,
access lines, data and Internet revenue. Growth in national and international
call volumes did not fully offset large price reductions, resulting in a decline
in national and international revenues.
Volume Growth
===============================================================================
As at and for the year Change
ended %
31 March
---------------------------------------
1998 1999 99:98
---------------------------------------
Access Lines 1,840,000 1,864,000 1.3
Centrex lines 65,800 74,900 13.8
ISDN lines 28,400 46,900 65.1
Call minutes (millions)
Local calls* 3,088.6 3,177.7 2.9
National calls # 2,028.0 2,101.8 3.6
Fixed line to cellular
calls 356.5 404.8 13.5
National 0800 calls 453.4 526.7 16.2
International outward
calls 304.0 442.2 45.5
International inward
calls 322.1 333.0 3.4
Cellular calls 614.0 744.0 21.2
Cellular connections
Total at end of year 476,200 608,900 27.9
Average during the year 453,720 529,440 16.7
Call minder mailboxes 228,700 269,900 18.0
Registered XTRA customers 107,000 180,300 68.5
* Includes business local calls, residential calls under the NZ20 cents local
calling option and Centrex and VPN local calls.
# Includes Centrex and VPN national calls. Excludes calls from Telecom's fixed
line to cellular networks.
Certain reclassifications of prior years' data were made to conform to current
year classifications.
===============================================================================
Local Service
Local service revenues consist of business and residential access, local call
charges (predominantly paid by business customers) including Centrex and VPN,
and enhanced network services products (Smartphone, messaging and call track).
-------------------------------------------------------------------------------
Variation - Increase NZ$ %
millions
-------------------------------------------------------------------------------
1999:1998 33 3.2
-------------------------------------------------------------------------------
Local Service Change %
99:98
-------------------------------------------------------------------------------
Business & residential access
- Revenue 0.5
- Access lines 1.3
Local calls
- Revenue 18.0
- Call minutes 2.9
-------------------------------------------------------
Business and residential access revenue for 1999 increased by NZ$4 million, or
0.5%, which reflected an increase in access lines partially offset by the net
effect of pricing changes.
2
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results
of Operations
31 MARCH 1999
Local service revenue and access line growth were affected by the entry of
Saturn Communications into the local service market and increased use of
cellular phones.
Pricing changes that affected the year on year comparisons included:
. Increases in residential line rental of 2.9% and 1.9% which took effect
from 1 August 1997 and 1 October 1998 respectively.
. The option, since August 1997, for residential customers to continue with
the standard monthly line rental and unlimited free local calling or pay a
lower monthly rental and NZ20 cents per local call. At 31 March 1999,
approximately 67,000 residential customers had switched to the new pricing
option.
. Operator services charges introduced in December 1997 for residential
customers. The monthly residential line rental was reduced by NZ$1.25 to
NZ$35.66 at the same time.
. A reduction in business line rentals of 3.3% in December 1997 in
conjunction with an increase in business local call prices.
. A reduction in the monthly rental for new second line connections by
NZ$5.71 to NZ$29.95 from 1 July 1998.
Revenue from local calls increased by NZ$20 million, or 18.0%, for 1999 due to
growth in call volumes and the full year effect of the price increase for
business local calls, which took place in December 1997.
Revenue from Smartphone, messaging and call track increased by NZ$9 million, or
16.7%, for 1999.
National
National revenue includes calls to a location outside the caller's local calling
area including Centrex and VPN, calls to cellular networks originating within
the fixed line network, National 0800 calls and operator services charges.
--------------------------------------------------------------------------------
Variation - Decrease NZ$ millions %
--------------------------------------------------------------------------------
1999:1998 (23) (3.1)
The decrease for 1999 was largely due to national toll price reductions. While
price reductions resulted in higher call volumes, volume growth rates were
affected by the slower growth of the New Zealand economy and the migration of
calls into Telecom's cellular network. The effect of national toll price
reductions was partially offset by increased revenue from calls from the fixed
line to cellular networks and National 0800.
--------------------------------------------------------------------------------
Change %
National 99:98
--------------------------------------------------------------------------------
National calls *
- Revenue (11.2)
- Call minutes 3.6
Calls to cellular networks
- Revenue 10.9
- Call minutes 13.5
National 0800
- Revenue 5.7
- Call minutes 16.2
* Includes national VPN and Centrex calls.
--------------------------------------------------------------------------------
Compared with 1998, the annual average per minute price of national calls,
excluding National 0800 and those made to cellular networks, declined by
approximately 14% to around NZ18 cents.
During the period from 1 April to 30 June 1998, Telecom's NZ$5 cap on national
calls for residential customers, offered through the NZ$5 Weeknights and NZ$5
Weekends, was extended to apply all day on weekdays. From 1 February 1998, the
NZ$5 caps were available only to those residential customers who choose Telecom
as their preferred tolls provider.
From August 1998, business national toll prices were reduced on average by 16%
for both peak and off peak calling on key routes.
Two new calling packages (HomeFree 200 and HomeFree 400) were launched in
December 1998 for residential customers in seven geographic areas. These
packages combine a low access charge, either 200 or 400 free (peak/off-peak)
minutes and a low flat rate (NZ15 cents per minute) for all local and national
calls once the free minutes have been used.
3
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results
of Operations
31 MARCH 1999
Further initiatives include Favourite Place New Zealand and Favourite Place
Neighbouring Area which provide a flat fee option for unlimited off-peak calling
to another area in New Zealand chosen by the customer. As at 31 March 1999,
approximately 34,000 customers were enrolled in these plans.
A Talking Points loyalty programme, which rewards residential customers for
using Telecom's services, was introduced in May 1996. Approximately 653,000
customers had joined the programme at 31 March 1999. The School Connection
loyalty programme, where residential customers nominate schools to receive
sponsorships from Telecom based on customers' usage of Telecom's services, had
599,000 customers at 31 March 1999.
Revenue from calls to cellular networks grew by 10.9% in 1999, with a high
proportion of this growth in the last quarter of 1999. Strong growth in the last
quarter reflects the significant increase in cellular connections during the
last four months of 1999.
International
International revenue includes outgoing international calls made in New Zealand,
collect, credit card and "New Zealand Direct" calls to New Zealand, receipts
from overseas telecommunications administrations and companies for calls to New
Zealand that use Telecom's facilities, and calls from international switched
traffic transiting Telecom's facilities.
--------------------------------------------------------------------------------
Variation - Decrease NZ$ millions %
--------------------------------------------------------------------------------
1999:1998 (50) (11.1)
--------------------------------------------------------------------------------
Change %
International 99:98
--------------------------------------------------------------------------------
Outward calls
- Revenue (24.6)
- Call minutes 45.5
Inward calls
- Revenue 7.0
- Call minutes 3.4
Transit call margin
- Margin 31.3
- Call minutes 50.1
--------------------------------------------------------------------------------
Growth in outward call minutes reflected the volume stimulation from price
specials offered to New Zealand customers and significant price reductions over
the past year. The annual average per minute charge for outward calls of around
NZ48 cents was approximately 48% lower than in 1998, reflecting price reductions
and frequent weekend specials.
From 1 January 1998, international toll prices for residential customers fell by
an average of almost 20%. Further price reductions took place for residential
customers to over 30 destinations from 1 April 1998. International toll calling
prices for Telecom business customers decreased on average by 15% from 1
February 1998. Further significant price reductions reducing the average price
of outward international tolls by 20% were announced in July 1998.
During May and June 1998 Telecom offered "talk for as long as you like"
residential promotions of NZ$10 to Australia and NZ$15 to UK, US, Canada and
Ireland. This offer was extended to the end of calendar 1999. For the last
weekend in November 1998, four weekends in December 1998 and three weekends in
March 1999, the rates were reduced further to NZ$4.99 to Australia and NZ$9.99
to UK, US, Canada and Ireland.
Growth in inward call revenue for 1999 resulted from increased volumes and
increases in the average price per inward call minute. The average price per
minute for inward calls increased by approximately 4% for 1999 primarily as a
result of the weakening New Zealand dollar. The impact of the weaker New Zealand
dollar was partially offset by a reduction in the rates negotiated for incoming
calls. In response to intense competition in the international market, Telecom
has negotiated agreements with the major foreign carriers which, while reducing
rates, have improved inward volumes.
The increase in the transit call margin (revenue net of outpayments) for 1999
was largely attributable to:
. Strong growth in calls from international switched traffic transiting
Telecom's facilities, reflecting intensive efforts to utilise Telecom's
lower cost outward routes to win new refile business;
. The weakening of the New Zealand dollar which increases the New Zealand
dollar equivalent of the foreign margin; and
4
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
31 MARCH 1999
. Increased revenue from transit calls for information services.
Telecom's point of presence ("POP") in the US enables it to participate in the
world's most competitive wholesale international market. The low cost routing
option provided by the US POP has enabled Telecom to become more competitive in
the transit call business. Telecom has recently commissioned its own switch in
the US and continues to expand its role in this market by interconnecting with
an increasing number of other carriers in order to secure additional volumes and
further reduce costs.
Other Calling
Other calling revenue is derived principally from Payphones, National 0900,
teleconference, and analogue and dedicated digital voice service.
-------------------------------------------------------------------------------
Variation - Decrease NZ$ %
millions
-------------------------------------------------------------------------------
1999:1998 (8) (13.3)
The decreases for 1999 and 1998 were due largely to a reduction in Payphone
revenue as the use of cellular phones increased.
Interconnect
Interconnect revenue is derived from charges for delivering to and accepting
from other service providers local, national, international and 0800 calls.
Installation charges and rental of interconnecting links and service delivery
point charges are also included.
-------------------------------------------------------------------------------
Variation - Increase NZ$ %
millions
-------------------------------------------------------------------------------
1999:1998 9 16.1
The increase for 1999 was largely due to new interconnect carriers (eg. Compass
Communications and WorldxChange) and increased activity with existing carriers,
partially offset by reductions in the average charge per call.
Cellular and Other Mobile Services
Cellular and other mobile services revenue comprises access and airtime charges
for calls originating from Telecom's cellular network (excluding international
calls), and revenue from paging and mobile radio services.
-------------------------------------------------------------------------------
Variation - Increase NZ$ %
millions
-------------------------------------------------------------------------------
1999:1998 53 12.3
-------------------------------------------------------------------------------
Cellular Change
%
99:98
-------------------------------------------------------------------------------
Revenue 13.5
Call minutes 21.2
Connections
Total at period end 27.9
Average during the period 16.7
-------------------------------------------------------------------------------
The increased revenue includes the impact of the acquisition of the cellular
reselling businesses of Motorola, Ericsson and Cellnet in June 1997, October
1997 and April 1998, respectively.
Telecom had 608,900 cellular connections at 31 March 1999 compared with 476,200
at 31 March 1998, an increase of 27.9%. The continued strong growth in
connections was largely due to the introduction of prepaid cellular (including
the Freedom connections sold through The Warehouse), and the "Telecom 2 GO"
promotion. The total number of active prepaid customers (including Freedom
connections) at 31 March 1999 was 112,700. Approximately 46% of total
connections were connected to the "Telecom 2 GO" rate plans (excluding GO
Prepaid connections) at 31 March 1999.
Average revenue per customer decreased by approximately 3% compared to 1998,
reflecting the recent high number of prepaid connections. Average revenue per
prepaid connection is initially lower as customers utilise their free airtime
minutes.
The total number of cellular connections in New Zealand, including Vodafone's
connections, was estimated to represent approximately 21% of the New Zealand
population at 31 March 1999. This penetration level, when compared with other
relevant countries, suggested scope for continued expansion of this market.
In March 1998, Telecom cut call prices and introduced new call pricing plans for
mobile phone business customers in
5
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
31 MARCH 1999
response to similar moves by BellSouth (now Vodafone). Existing business call
pricing plans were replaced with five new plans to cover the needs of business
customers - from those who use mobile phones only occasionally, through to high-
volume business customers.
Data
Data revenue consists principally of revenue from data transmission services,
dedicated leased lines and Internet access.
-------------------------------------------------------------------------------
Variation - Increase NZ$ %
millions
-------------------------------------------------------------------------------
1999:1998 37 12.1
Data revenue growth for 1999 was driven by demand for bandwidth to support
business networking and the increased penetration of the Internet.
Telecom's Internet service provider "XTRA" had approximately 180,300 registered
customers at 31 March 1999, compared with 107,000 at 31 March 1998. Of the
registered customers, 81% were active within the last month of 1999.
ISDN revenues increased by 37.4% for 1999 partly reflecting migration from basic
access services. The number of ISDN lines increased by 65.1%.
In February 1999 Telecom introduced a series of data pricing initiatives aimed
at stimulating data growth by making greater bandwidth more affordable. The
initiatives, which were targeted at key corporate and business data users, aimed
to simplify the data pricing structure, by reducing the number of distance
steps, and make wide-area networking more affordable.
Directories
Directories revenue is derived largely from local advertising by businesses in
both The Telephone Book and YELLOW PAGES(R) directories and various database
services.
-------------------------------------------------------------------------------
Variation - Increase NZ$ %
millions
-------------------------------------------------------------------------------
1999:1998 13 8.8
Revenue from regional directories increased by 8.5% in 1999 as a result of both
tariff and volume growth in both The Telephone Book and YELLOW PAGES(R)
products. Revenues from specialised and LOCAL DIRECTORIES(TM) increased by
19.3%.
Equipment Revenue
Equipment revenue includes equipment sales and installation, and CPE rental.
-------------------------------------------------------------------------------
Variation - Decrease NZ$ %
millions
-------------------------------------------------------------------------------
1999:1998 (35) (24.3)
The decreases for 1999 and 1998 reflected lower CPE rental and the full-year
effect of the outsourcing of cellular equipment sales in November 1997.
Miscellaneous Other Services
Miscellaneous other services revenue is derived principally from software
development, telecommunications services provided in the Cook Islands and Samoa
and an international outside plant project.
-------------------------------------------------------------------------------
Variation - Increase NZ$ %
millions
-------------------------------------------------------------------------------
1999:1998 7 14.6
The increase for 1999 reflects a one-off receipt from Ameritech to cover costs
incurred by Telecom in the sale by Ameritech of its Telecom shareholding,
completed in April 1998. This increase was partly offset by the winding down of
the international outside plant project.
6
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
31 MARCH 1999
Operating Expenses (Before Abnormals)
-------------------------------------------------------------------------------
Variation - Increase NZ$ %
millions
-------------------------------------------------------------------------------
1999:1998 14 0.7
Operating expenses (excluding abnormal costs) for 1999 remained relatively
stable. An increase in cost of sales was largely offset by reductions in other
cost items.
Operating expenses excluding abnormal costs as a percentage of revenue were
59.5% and 59.3% for 1998 and 1999, respectively.
Labour
-------------------------------------------------------------------------------
Variation - Decrease NZ$ %
millions
-------------------------------------------------------------------------------
1999:1998 (15) (3.0)
The decrease in labour costs for 1999 reflected a reduction of 337 in personnel
numbers between 31 March 1998 and 1999.
The effect of this decrease on labour costs was partially offset by increases
arising from the following factors:
. Salary increases for personnel on individual contracts;
. Negotiated settlements for personnel covered by collective contracts; and
. The acquisition of the cellular reselling businesses of Motorola, Ericsson
and Cellnet, and the associated staff increases.
-------------------------------------------------------------------------------
Personnel Numbers
-------------------------------------------------------------------------------
Decrease 99:98
------------------------------
1998 1999 Number %
------------------------------
Operations 6,551 6,289 (262) (4.0)
Other 1,585 1,510 (75) (4.7)
------- ------ -------- ------
8,136 7,799 (337) (4.1)
------- ------ -------- ------
Depreciation
-------------------------------------------------------------------------------
Variation - Decrease NZ$ %
millions
-------------------------------------------------------------------------------
1999:1998 (11) (2.0)
The decrease in depreciation expense for 1999 was largely due to high
depreciation in 1998 following a fixed asset review which identified a number of
under-depreciated assets.
This decrease was partially offset by the impact of the increasing fixed asset
base resulting from capital expenditure, and a higher proportion of expenditure
on information technology assets which have shorter depreciable lives compared
with network assets.
Cost of Sales
Cost of sales are costs directly attributable to revenue earned from
international outward calls and leased circuits, equipment sales, cellular
services and directories.
--------------------------------------------------------------------------------
Variation - Increase NZ$ %
millions
--------------------------------------------------------------------------------
1999:1998 53 13.3
The increase for 1999 was largely due to growth in the cellular business,
including the acquisition of the cellular reselling businesses. Special
promotions to attract new connections and encourage existing customers to
upgrade their mobile phones also contributed to the increase in cost of sales.
International cost of sales for outbound calls increased by 23.3% for 1999,
primarily due to significantly higher outbound minutes. International outward
minutes increased by 45.5% reflecting the volume stimulation created by price
specials offered to New Zealand customers.
The proportionally lower increase in international cost of sales (relative to
the increase in outward minutes) reflects the negotiation of favourable
outpayment terms for the short period of price specials, partially offset by the
effect of the weakening New Zealand dollar.
7
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results
of Operations
31 MARCH 1999
Other Operating Expenses
Other operating expenses include occupancy, advertising, computer costs, bad
debts, vehicle costs, office expenses, postage and agency, outsourcing costs and
certain direct costs, which together represented approximately 80% of other
operating expenses before capital recoveries.
----------------------------------------------------
Variation - Decrease NZ$ millions %
----------------------------------------------------
1999:1998 (13) (2.3)
The decrease in other operating expenses for 1999 was largely due to lower bad
debts and legal expenses. The reduction in legal expenses was due to an
allowance for certain litigation costs which increased expenses in the first
half of 1998.
This decrease was partially offset by increased outsourcing expenses and a lower
level of overhead recoveries relating to capital work.
Net Interest Expense
-----------------------------------------------------
Variation - Increase/(decrease) NZ$ millions %
-----------------------------------------------------
1999:1998
Interest expense 4 2.6
Investment income 21 75.0
------------- ------
Net interest expense (17) (13.4)
-----------------------------------------------------
The decrease in net interest expense for 1999 was largely due to a lower average
level of net debt in 1999 compared to 1998. Average debt was higher in 1998 as
short-term debt was used to fund the share repurchase programme for parts of the
year prior to the issue of capital notes (TeleNotes and US Restricted Capital
Securities).
The hedging costs related to the US capital notes were reclassified from
interest expense to capital note distribution costs.
The surplus from continuing operations before abnormals covered net interest
(after investment income but before interest capitalised) and capital note costs
6.9 times, compared with 7.6 times in 1998.
Taxation
------------------------------------------------------
Variation - Increase NZ$ millions %
------------------------------------------------------
1999:1998 14 3.5
The increase in income tax expense for 1999 was largely due to the NZ$77
million, or 6.3%, increase in the surplus from continuing operations before
income tax. The effective tax rate was 31.9% compared with 32.7% for 1998 and a
statutory rate of 33%.
GLOSSARY
ADSL (Asymmetric Digital Subscribers Line) - A technology for delivering a high
bit rate link to customers over ordinary copper. Data rates can reach 8 Mbit/s
from the exchange to the customer and 640 bit/s in the other direction.
Bandwidth - Transmission capacity. The larger the bandwidth, the greater the
capacity of voice, video or data that can be carried.
CDMA (Code Division Multiple Access) - An advanced radio spectrum sharing
technique used in new digital mobile networks.
Centrex - The use of conventional PSTN lines and phones so that they appear to
be part of a private network. Features include traditional PBX features. Centrex
is offered to businesses as an alternative to buying or leasing their own PBXs.
CPE (Customer Premises Equipment) - Any telecommunications equipment that
resides in the customer's premises and does not constitute part of the network
(e.g. telephones, fax machines, PBX's).
IP (Internet Protocol) - A principal communications protocol used in the
Internet.
ISDN (Integrated Services Digital Network) - Switched digital transmission
system that can carry a range of digitised voice, data and images. Basic Rate
Access offers 128 Kbit/s capacity on two channels and Primary Rate Access offers
2 Mbit/s capacity on 30 channels.
LAN (Local Area Network) - A local area network is one which spans a limited
geographical area (usually within one building or site) and interconnects a
variety of computers and terminals, usually at very high data rates.
8
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
31 MARCH 1999
LanLink - A group of Telecom services that link customer LANs together via a
Wide Area Network (WAN). Solutions involve a degree of customisation in each
case.
LMDS (Local Multipoint Distribution System) - A wireless system for distribution
of broadband services that functions in the 26 to 29 GHz band.
PBX (Private Branch Exchange) - Customer premises switch, connected to the PSTN,
that operates as a private local exchange, typically providing reduced-digit
dialing for internal calls.
PSTN (Public Switched Telephone Network) - A nationwide switched fixed line
voice telephone network.
VPN (Virtual Private Network) - A carrier provided service in which the public
switched network provides the equivalent of a privately established customer
network.
xDSL - A generic reference to any of the many Digital Subscribers Line
technologies, e.g. ADSL.
3G (Third Generation - mobile network) - Digital mobile network based on CDMA
standards that is capable of delivering data rates up to 2Mbit/s.
9
<PAGE>
Telecom Corporation of New Zealand Limited and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
31 MARCH 1999
<TABLE>
<CAPTION>
YEARS ENDED 31 MARCH VARIATION
99:98
------------------------------------------------------------------------------------------------------------------------------
(in NZ$ millions, except percentages) 1998 % 1999 % $ %
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues
Local service 1,025 30.2 1,058 30.8 33 3.2
Calling
National 732 21.6 709 20.7 (23) (3.1)
International 450 13.2 400 11.6 (50) (11.1)
Other 60 1.8 52 1.5 (8) (13.3)
------------------------------------------------------
1,242 36.6 1,161 33.8 (81) (6.5)
Interconnection 56 1.6 65 1.9 9 16.1
Cellular and other mobile services 431 12.6 484 14.1 53 12.3
Data 305 9.0 342 10.0 37 12.1
Other operating revenues
Directories 147 4.3 160 4.7 13 8.8
Equipment 144 4.3 109 3.2 (35) (24.3)
Miscellaneous other services 48 1.4 55 1.5 7 14.6
------------------------------------------------------
339 10.0 324 9.4 (15) (4.4)
------------------------------------------------------
Total operating revenues (before abnormals) 3,398 100.0 3,434 100.0 36 1.1
------------------------------------------------------
Operating expenses
Labour 494 14.5 479 14.0 (15) (3.0)
Depreciation 564 16.6 553 16.1 (11) (2.0)
Cost of sales 398 11.7 451 13.1 53 13.3
Other operating expenses 565 16.7 552 16.1 (13) (2.3)
------------------------------------------------------
Total operating expenses (before abnormals) 2,021 59.5 2,035 59.3 14 0.7
------------------------------------------------------
Surplus from continuing operations (before abnormals) 1,377 40.5 1,399 40.7 22 1.6
Abnormal revenue -- -- 16 0.5 16 --
Abnormal costs (37) (1.1) (15) (0.4) 22 59.5
------------------------------------------------------
Surplus from continuing operations 1,340 39.4 1,400 40.8 60 4.5
------------------------------------------------------
</TABLE>
KEY PERFORMANCE INDICATORS
YEARS ENDED 31
MARCH
1998 1999
Operating Margin (%) * 40.5 40.7
Asset Utilisation (%) # 73.0 73.0
Net Interest Cover (times) . 7.6 6.9
Return on Average Total Assets (%) + 29.6 29.8
Net Debt/Net Debt plus Capital Funds (%) 43.6 42.9
* Normalised surplus from continuing operations/operating revenue (before
abnormals)
# Operating revenue (before abnormals)/average total assets (net of
cash and short-term investments)
. Normalised surplus from continuing operations/net interest expense (before
interest capitalised) inclusive of capital note coupons
+ Normalised surplus from continuing operations/average total assets (net of
cash and short-term investments)
10
