<PAGE>
FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Report of Foreign Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the period 20 September 2000 to 28 November 2000
TELECOM CORPORATION OF NEW ZEALAND LIMITED
_______________________________________________________________
(Translation of registrant's name into English)
Telecom Networks House, North Tower, 66-68 Jervois Quay, Wellington,
New Zealand
_______________________________________________________________
(Address of principal executive offices)
The registrant will file annual reports on Form 20-F
(File No. 1-10798)
______________________________________
<PAGE>
CONTENTS
This report on Form 6-K contains the following:
1. Annual Results to 30 September 2000
-----------------------------------
1.1 Condensed Financial Statements
1.2 Management Commentary
1.3 Media Release - 14 November 2000
2. Media Releases
--------------
2.1 Southern Cross Cable Traffic Starts to Flow - 15
November 2000
2.2 Telecom - AAPT Integration Progressed - 27 November 2000
_____________________________________
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorised.
TELECOM CORPORATION OF NEW
ZEALAND LIMITED
By: /s/ Linda Cox
--------------------------
Linda Marie Cox
Company Secretary
Dated: 28 November 2000
<PAGE>
Telecom Corporation of New Zealand Limited and Subsidiaries
Consolidated Statement of Financial Performance
For the three months ended 30 September 2000 (Unaudited)
<TABLE>
<CAPTION>
Year ended Three months ended
30 June 30 September
------------ --------------------
2000 1999 2000 2000
---------------------------------------------------------------------------------- -------------------------------------------
(Dollars in millions, except per share amounts) notes NZ$ NZ$ NZ$ US$
---------------------------------------------------------------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating revenues
Local service 1,064 266 266 109
Calling 2 1,488 277 452 184
Interconnection 90 19 20 8
Cellular and other mobile services 717 136 208 85
Data 535 103 168 69
Other operating revenues 2 437 86 177 72
Abnormal revenues 3 15 - - -
--------------- ---------------------------------------
4,346 887 1,291 527
--------------- ---------------------------------------
Operating expenses
Labour 486 113 130 53
Depreciation 583 137 148 60
Cost of sales 1,079 135 429 175
Other operating expenses 772 137 241 99
--------------- ---------------------------------------
2,920 522 948 387
--------------- ---------------------------------------
Surplus from operations 1,426 365 343 140
Investment income 38 4 12 5
Interest expense (218) (32) (75) (31)
--------------- ---------------------------------------
Surplus from operations before
income tax 1,246 337 280 114
Income tax expense (395) (110) (94) (38)
--------------- ---------------------------------------
Surplus from operations after
income tax 851 227 186 76
Share of losses of associate company after
income tax (6) (4) (11) (5)
Minority interests in profits of subsidiaries (8) (1) (1) -
--------------- ---------------------------------------
Net surplus 837 222 174 71
Capital note distribution costs after income tax (54) (13) (13) (5)
--------------- ---------------------------------------
Net earnings attributable to shareholders 783 209 161 66
=============== =======================================
Net earnings per share $0.447 $0.119 $0.092 $0.038
=============== =======================================
Weighted average number of ordinary
shares outstanding (in millions) 1,753 1,753 1,756 1,756
=============== =======================================
</TABLE>
1
<PAGE>
Telecom Corporation of New Zealand Limited And Subsidiaries
Consolidated Statement of Movements in Capital Funds
For the three months ended 30 September 2000 (Unaudited)
<TABLE>
<CAPTION>
Year ended Three months ended
30 June 30 September
-------------- -----------------------
2000 1999 2000 2000
---------------------------------------------------------------------------- -----------------------
(Dollars in millions) note NZ$ NZ$ NZ$ US$
---------------------------------------------------------------------------- -----------------------
<S> <C> <C> <C> <C>
Capital funds at the beginning of the period 2,035 2,035 2,162 883
Net earnings attributable to shareholders 783 209 161 66
Movement in foreign currency translation reserve 48 1 58 23
------------- ------------------------
Total recognised revenues and expenses for the period 831 210 219 89
Movement in minority interests 82 (1) 2 1
Dividends 4 (906) (227) - -
Tax credit on supplementary dividends 100 25 - -
Discount on capital notes amortised 1 1 1 -
Capital contributed 19 - 14 6
------------- ------------------------
Capital funds at the end of the period 2,162 2,043 2,398 979
============= ========================
Represented by:
Contributed capital 928 909 942 385
Foreign currency translation reserve 49 2 107 44
Minority interests 89 6 91 37
Retained earnings 153 183 314 128
Capital notes 943 943 944 385
------------- ------------------------
2,162 2,043 2,398 979
============= ========================
</TABLE>
2
<PAGE>
TELECOM CORPORATION OF NEW ZEALAND LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
As at 30 September 2000 (Unaudited)
<TABLE>
<CAPTION>
30 June 30 September
-------- ---------------------
2000 1999 2000 2000
---------------------------------------------------------------------- ---------------------
(Dollars in millions) notes NZ$ NZ$ NZ$ US$
---------------------------------------------------------------------- ---------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash 81 39 62 25
Short-term investments 617 107 474 194
Receivables and prepayments 918 704 1,006 410
Inventories 40 42 36 15
--------- ---------------------
Total current assets 1,656 892 1,578 644
Long-term investments 455 540 499 204
Intangibles 1,620 54 1,658 677
Fixed assets 4,250 3,765 4,356 1,779
Other assets - 7 - -
--------- ---------------------
Total assets 7,981 5,258 8,091 3,304
========= =====================
LIABILITIES AND CAPITAL FUNDS
Current liabilities:
Bank overdraft - - 9 4
Accounts payable and accruals 1,242 757 1,247 510
Provisions - current 11 47 8 3
Debt due within one year 1,462 1,197 1,431 584
Provision for dividend 227 227 - -
--------- ---------------------
Total current liabilities 2,942 2,228 2,695 1,101
Deferred taxation 13 25 79 32
Provisions - non-current 3 3 2 1
Long-term debt 2,861 959 2,917 1,191
--------- ---------------------
Total liabilities 5,819 3,215 5,693 2,325
--------- ---------------------
Commitments and contingent liabilities 5,6
Capital funds:
Shareholders' funds 1,130 1,094 1,363 557
Capital notes 943 943 944 385
Minority interests 89 6 91 37
--------- ---------------------
Total capital funds 2,162 2,043 2,398 979
--------- ---------------------
Total liabilities and capital funds 7,981 5,258 8,091 3,304
========= =====================
</TABLE>
3
<PAGE>
TELECOM CORPORATION OF NEW ZEALAND LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the three months ended 30 September 2000 (Unaudited)
<TABLE>
<CAPTION>
Year ended Three months ended
30 June 30 September
----------- -----------------------------------------------
2000 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):
Cash received from customers 4,192 861 1,173 479
Interest income 19 3 12 5
Dividend income 4 - 1 -
Payments to suppliers and employees (2,093) (377) (691) (282)
Restructuring, onerous contracts and Year 2000 payments (58) (17) (1) -
Income tax paid (311) (101) - -
Interest paid on debt (208) (41) (45) (18)
---------- ------------------------------------------
Net cash flows from operating activities 7 1,545 328 449 184
---------- ------------------------------------------
Cash flows from investing activities
Cash was provided from/(applied to):
Sale of fixed assets 57 11 6 2
Purchase of long-term investments (238) (4) (46) (19)
Acquisition of AAPT Limited, excluding cash (1,189) - - -
Sale/(purchase) of short-term investments, net (486) 7 134 54
Purchase of fixed assets (837) (149) (255) (104)
Capitalised interest paid (18) (3) (6) (2)
Proceeds from sale of subsidiary companies 95 - - -
---------- ------------------------------------------
Net cash flows applied to investing activities (2,616) (138) (167) (69)
---------- ------------------------------------------
Cash flows from financing activities
Cash was provided from/(applied to):
Proceeds from long-term debt 1,850 25 56 23
Repayment of long-term debt (246) (112) (81) (33)
(Repayment)/proceeds of short-term debt, net 466 172 (35) (14)
Contributed capital 23 - - -
Dividends paid (894) (226) (212) (87)
Capital note distribution costs paid (77) (39) (38) (16)
---------- ------------------------------------------
Net cash flows (applied to)/from financing activities 1,122 (180) (310) (127)
---------- ------------------------------------------
Net cash flow 51 10 (28) (12)
Foreign currency translation adjustment 1 - - -
Opening cash position 29 29 81 33
---------- ------------------------------------------
Closing cash position (including bank overdrafts) 81 39 53 21
========== ==========================================
</TABLE>
4
<PAGE>
Telecom Corporation of New Zealand Limited and Subsidiaries
Notes to the Condensed Financial Statements
NOTE 1 FINANCIAL STATEMENTS
The condensed consolidated financial statements of Telecom Corporation of New
Zealand Limited (the "Company") together with its subsidiaries and associates
("Telecom") have been prepared in accordance with Financial Reporting Standard
("FRS") No.24: Interim Financial Statements, issued by the Institute of
Chartered Accountants of New Zealand. These financial statements should be read
in conjunction with the financial statements and related notes included in the
Company's Annual Report for the year ended 30 June 2000.
The financial statements for the three months ended 30 September 1999 and 30
September 2000 are unaudited. The financial information for the year ended 30
June 2000 has been extracted from the audited financial statements of Telecom
for that year.
The financial statements are expressed in New Zealand dollars. The amounts
pertaining to the most recent financial period are also expressed in United
States ("US") dollars, the latter being presented solely for convenience and
translated from New Zealand dollars, as a matter of arithmetical computation
only, at a rate on 30 September 2000 of NZ$1.00 to US$0.4083. The US dollar
amounts should not be construed as representations that the New Zealand dollars
have been, could be, or could in the future be converted into US dollars at this
or any other rate. References in these financial statements to "$", and "NZ$",
are to New Zealand dollars, references to "US$" are to US dollars and "A$" are
to Australian dollars.
Accounting Policies
During the three months ended 30 September 2000, Telecom changed its accounting
policy for the recognition of dividends proposed after balance date. Under the
new policy, dividends proposed after balance date are disclosed in the notes to
the financial statements (refer Note 8). Previously, all proposed dividends
were recognised as liabilities in the Statement of Financial Position. This
change has been made to conform to the requirements of the recently issued FRS5
"Events After Balance Date", which Telecom has elected to adopt prior to its
formal effective date of 30 June 2001.
Except for the change in policy relating to dividends, the accounting policies
used in the preparation of the financial statements for the three months ended
30 September 2000 are consistent with those used in the preparation of the
published financial statements for the year ended 30 June 2000.
Reclassifications
Certain reclassifications of prior periods' data have been made to conform to
current period classifications.
NOTE 2 CALLING AND OTHER OPERATING REVENUES
<TABLE>
<CAPTION>
Year ended Three months ended
30 June 30 September
------------------- --------------------------
2000 1999 2000
------------------------------------------------ --------------------------
(Dollars in millions) NZ$ NZ$ NZ$
------------------------------------------------ --------------------------
<S> <C> <C> <C> <C>
Calling
National 932 173 294
International 506 92 145
Other 50 12 13
---------------- -------------------------
1,488 277 452
================ =========================
Other operating revenues
Directories 176 52 56
Equipment revenue 84 24 17
Miscellaneous other services 177 10 104
---------------- -------------------------
437 86 177
================ =========================
</TABLE>
Miscellaneous other services revenue for the three months ended 30 September
2000 includes a gain of $20 million recognised on the prepayment of Telecom's
scheduled payment obligations relating to a cross border finance lease.
5
<PAGE>
Telecom Corporation of New Zealand Limited and Subsidiaries
Notes to the Condensed Financial Statements
NOTE 3 ABNORMAL ITEMS
<TABLE>
<CAPTION>
Year ended Three months ended
30 June 30 September
----------- ---------------------------------
2000 1999 2000
---------------------------------------- --------------------------------
(Dollars in millions) NZ$ NZ$ NZ$
---------------------------------------- ---------------------------------
<S> <C> <C> <C>
Abnormal Revenues
Sale of AAPT Sat-Tel Pty Limited 15 - -
================= ==================================
</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.
NOTE 4 DIVIDENDS
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 30 June
2000 quarterly dividend, 2,172,669 shares, with a total value of $14 million,
were issued in lieu of a cash dividend.
NOTE 5 COMMITMENTS
Operating Leases
Operating lease commitments are mainly in respect of leases of land, buildings
and other telecommunications facilities. At 30 September 2000, minimum rental
commitments for all non-cancellable operating leases (excluding amounts provided
for in respect of restructuring) were $299 million (30 September 1999: $319
million, 30 June 2000: $275 million).
Finance Leases
Telecom has entered into the sale and leaseback of certain assets. At 30
September 2000, the outstanding lease commitments were $83 million (30 September
1999: $94 million, 30 June 2000: $86 million).
Capital Commitments
At 30 September 2000, capital expenditure amounting to $799 million (30
September 1999: $115 million, 30 June 2000: $754 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 include Telecom and AAPT's commitments
relating to Code Division Multiple Access ("CDMA") network build costs.
6
<PAGE>
Telecom Corporation of New Zealand Limited and Subsidiaries
Notes to the Condensed Financial Statements
NOTE 5 COMMITMENTS (continued)
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 constructions 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 September 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, after the construction of the landing
facility in California. 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$70 million to another associate company, over the next 15 months.
NOTE 6 CONTINGENT LIABILITIES
Lawsuits and Other Claims
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 settlement of all proceedings between them.
In proceedings commenced in March 1997 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 the proceedings
had been settled.
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.
7
<PAGE>
Telecom Corporation Of New Zealand Limited and Subsidiaries
Notes to the Condensed Financial Statements
NOTE 6 CONTINGENT LIABILITIES (continued)
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.
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.
Bank Guarantees
AAPT had issued bank guarantees totalling A$78 million as at 30 September 2000.
Cross Border Lease Guarantees
Telecom has entered into two cross border leases in respect of certain
telecommunications assets. Telecom has given certain undertakings in accordance
with limited guarantees entered into as part of the transactions. The
likelihood of losses in respect of these matters is considered to be remote.
NOTE 7 RECONCILIATION OF NET EARNINGS ATTRIBUTABLE TO SHAREHOLDERS TO NET CASH
FLOWS FROM OPERATING ACTIVITIES
<TABLE>
<CAPTION>
Year ended Three months ended
30 June 30 September
------------------ ---------------------
2000 1999 2000 2000
-------------------------------------------------------------------------------- ----------------------
(Dollars in millions) NZ$ NZ$ NZ$ US$
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net earnings attributable to shareholders 783 209 161 66
Adjustments to reconcile net earnings to net cash flows from
operating activities:
Depreciation 583 137 148 60
Bad and doubtful accounts 43 4 8 4
Deferred income tax 24 - 6 2
Share of losses of associate companies 6 4 11 5
Minority interests in profits of subsidiaries 8 1 1 -
Capital note distribution costs 54 13 13 5
Goodwill amortised 43 2 18 7
Sale of AAPT Sat-Tel Pty Limited (15) - - -
Other (2) (2) 7 3
Changes in assets and liabilities net of effects of non-cash
and investing and financing activities:
Increase in accounts receivable and related items (127) (23) (127) (52)
Decrease in inventories 6 4 3 1
Increase in current taxation 61 9 86 35
Decrease in provisions (57) (17) (1) -
Increase/(decrease) in accounts payable and related items 135 (13) 115 48
---------- --------------------------
Net cash flows from operating activities 1,545 328 449 184
========== ==========================
</TABLE>
8
<PAGE>
Telecom Corporation Of New Zealand Limited and Subsidiaries
Notes to the Condensed Financial Statements
NOTE 8 SIGNIFICANT EVENTS AFTER BALANCE DATE
On 9 November 2000, the Board of Directors approved the payment of a total
dividend of $88 million, representing 5 cents per share. In addition, a
supplementary dividend totalling $11 million will be payable to shareholders who
are not resident in New Zealand. In accordance with the Income Tax Act 1994,
Telecom will receive a tax credit from the Inland Revenue Department equivalent
to the amount of supplementary dividends paid.
NOTE 9 QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Net Surplus from Net earnings
abnormal Surplus operations attributable Net
Operating revenues/ from before to earnings
revenues (expenses) operations income tax shareholders per share
-------------------------------------------------------------------------------------------------------------------
(NZ dollars in millions,
except per share amounts) NZ$
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Quarter ended: 1,291 - 343 280 161 0.092
30 September 2000
=============================================================================================
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
=============================================================================================
</TABLE>
Earnings per share is computed independently for each of the quarters presented.
Consequently, the sum of the quarters does not necessarily equal total earnings
per share for the period.
9
<PAGE>
MANAGEMENT COMMENTARY
14 NOVEMBER 2000
FIRST QUARTER RESULTS TO 30 SEPTEMBER 2000
OVERVIEW OF RESULTS
Reported net earnings of NZ$161 million for the quarter ended 30 September 2000
("Q1 2000-01") decreased by NZ$48 million, or 23.0%, from NZ$209 million for the
quarter ended 30 September 1999 ("Q1 1999-2000").
Net earnings for the quarter represented earnings per share ("EPS") of NZ9.2
cents. EPS decreased by 23.1% for the quarter compared with Q1 1999-2000.
In November 1999, Telecom increased its shareholding in AAPT from 19.7% to
approximately 80% (79.9% as at 30 September 2000). Telecom's result for Q1
2000-01 reflects the consolidation of AAPT's earnings, the amortisation of
associated goodwill and the costs of funding the investment in AAPT for the
quarter.
Excluding the effect of the investment in AAPT, Telecom's net earnings would
have been NZ$200 million for the quarter, a decrease of NZ$12 million, or 5.7%,
compared with Q1 1999-2000 earnings (excluding AAPT) of NZ$212 million (see
"Reconciliation of Earnings before and after AAPT").
Net earnings for Q1 2000-01 benefited from a gain of NZ$13 million (after tax)
recognised on the prepayment of Telecom's scheduled payment obligations relating
to a cross-border finance lease (see "Miscellaneous" revenue).
DIVIDENDS
Telecom will pay a fully imputed first quarter dividend of NZ5.0 cents per
ordinary share in December 2000. The first quarter dividend represents a
distribution of approximately 55% of net earnings. The dividend for the quarter
ended 30 September 1999 was NZ11.5 cents per ordinary share.
Shareholders will be able to reinvest dividends in further shares under
Telecom's Dividend Reinvestment Plan. Shares will be offered at a discount of
3% to the price calculated under the terms of the plan.
Telecom is committed to further growth in the Australian market, building on its
shareholding in AAPT and supporting AAPT's network investment programme.
Telecom is also pursuing growth in its New Zealand-based business, including the
roll out of its CDMA mobile network and new broadband technologies, and
expansion of international capacity through the Southern Cross Cable.
These investments for future growth, including those which might arise in the
future but which have yet to be identified, require Telecom to maintain strong
cash flows and financial flexibility. As previously advised, a review of
Telecom's dividend policy has concluded that, in the light of the planned growth
in investment, a change in policy is appropriate.
Consequently, Telecom has decided to implement a new dividend policy, which will
target a dividend payout ratio of around 50% of net earnings. This policy will
be dependent on earnings, cash flow, and other investment opportunities that
might arise in the future.
As a matter of practice, Telecom will look 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 which accommodates the target ratio for the full
year.
=======================================================================
Q1 Dividends
Ordinary shares NZ 5.0 cents
American Depository shares *US 16.33 cents
Supplementary dividend (to non-resident
shareholders)
Per ordinary share NZ 0.88 cents
Per American Depository share *US 2.88 cents
"Ex" dividend dates
NZ Stock Exchange 1 December 2000
Australia Stock Exchange 27 November 2000
New York Stock Exchange 28 November 2000
Books closing dates
NZ, Australia Stock Exchanges 1 December 2000
New York Stock Exchange 30 November 2000
Payment dates
NZ, Australia 15 December 2000
New York 22 December 2000
=======================================================================
* Based on an exchange rate at 30 September 2000 of NZ$1.00 to US$0.4083.
-1-
<PAGE>
EFFECT OF AAPT
AAPT's results have been consolidated with Telecom's results with effect from 1
December 1999. Accordingly Telecom's consolidated results for the quarter
include AAPT's earnings (adjusted for consolidation items including minority
interest and goodwill amortisation) for the quarter to 30 September 2000.
Reconciliation of Earnings before and after AAPT
-------------------------------------------------------------------------------
Quarter Ended 30 September
1999 2000 Change
NZ$M NZ$M %
Reported net earnings 209 161 (23.0)
Add back:
Share of AAPT's loss # - 2 -
Amortisation of
goodwill - 14 -
Funding costs
relating to AAPT
investment (after tax) 3 23 -
---------------------------
Reported net earnings
before AAPT 212 200 (5.7)
# After minority interest and consolidation items.
-------------------------------------------------------------------------------
KEY INDICATORS
-------------------------------------------------------------------------------
Q1 Q1
1999-00 2000-01
INCLUDING AAPT
Operating Margin (%)/1/ 41.2 26.6
Asset Utilisation (%)/2/ 69.5 69.6
Net Interest Cover (times)/3/ 7.2 3.8
Return on Average Total Assets (%)/4/ 28.6 18.5
Earnings Per Share 11.9 9.2
Net Debt/Net Debt plus Capital Funds (%) 49.3 61.2
EXCLUDING AAPT
Operating Margin (%)/1/ 41.1 37.2
Asset Utilisation (%)/2/ 75.2 62.8
Net Interest Cover (times)/3/ 7.9 7.0
Return on Average Total Assets (%)/4/ 30.9 23.4
Earnings Per Share 12.1 11.4
Net Debt/Net Debt plus Capital Funds (%) 43.9 40.1
1 Surplus from operations/operating revenue.
2 Operating revenue (before abnormals)/average total assets (net of cash and
short-term investments).
3 Surplus from operations/net interest expense (before interest capitalised)
inclusive of capital note coupons.
4 Surplus from operations/average total assets (net of cash and short-term
investments).
----------------------------------------------------------------------
FORWARD-LOOKING STATEMENTS
This Management Commentary contains forward-looking statements. The words
"believe", "expect", "will", "estimate", "project", "forecast", "should", "aim",
"anticipate", "intend" and similar expressions may identify forward-looking
statements. Such forward-looking statements are based on the beliefs of the
Company's management as well as on assumptions made by and information currently
available to the Company at the time such statements were made. Actual results
could differ materially from those projected in the forward-looking statements
as a result of the matters discussed herein and certain economic and business
factors, some of which may be beyond the control of the Company. Such factors
include, but are not limited to, competition in the New Zealand
telecommunications market, the outcome of pending litigation, the effect of
current or future government regulation, technological change in the
telecommunications industry, and the state of the New Zealand and Australian
economies.
TELECOM (EXCLUDING AAPT)
Telecom's net earnings (excluding AAPT) of NZ$200 million for Q1 2000-01
decreased by NZ$12 million, or 5.7%, compared with Q1 1999-2000 (excluding AAPT)
of NZ$212 million.
===============================================================================
Earnings Overview (excluding AAPT)
Quarter Ended 30 September
1999 2000 Change
NZ$M NZ$M %
Operating revenues 887 930 4.8
Operating expenses 522 584 11.9
Net earnings 212 200 (5.7)
EBIT* 365 346 (5.2)
EBITDA# 504 485 (3.8)
* Earnings before interest and tax.
# Earnings before interest, tax, depreciation and amortisation.
================================================================================
2
<PAGE>
OVERVIEW OF RESULTS (EXCLUDING AAPT)
Telecom's results before the effect of the investment in AAPT are summarised in
the table on page 12. These results exclude the costs of funding the investment
in AAPT, and the effects of consolidating AAPT (ie. goodwill amortisation and
Telecom's share of AAPT's post-acquisition earnings). Telecom's consolidated
financial statements, accompanying this document, disclose the fully
consolidated result.
Operating Revenues
Total revenue rose by NZ$43 million, or 4.8%, for Q1 2000-01 compared with Q1
1999-2000. Growth in total revenue was driven by growth in data, calling and
other operating revenues.
Local Service
Local service revenues decreased by NZ$5 million, or 1.9%, compared with Q1
1999-2000.
---------------------------------------------------------------------------
Local Service Quarter Ended Change
30 September %
---------------------------------------------------------------------------
1999 2000 00:99
---------------------------------------------------------------------------
Business & residential access
- Revenue (NZ$m) 213 209 (1.9)
- Access lines residential (000s) 1,355 1,342 (1.0)
- Access lines business (000s) 342 326 (4.7)
- Centrex lines (000s) 78 80 2.6
Local calls *
- Revenue (NZ$m) 35 33 (5.7)
- Call minutes (m) 867 863 (0.5)
Smartphone/messaging
- Revenue (NZ$m) 18 19 5.5
* Includes business local calls, residential calls under NZ20 cents local
calling option and Centrex and VPN local calls.
----------------------------------------------------------------------------
The decrease in access revenue of NZ$4 million, or 1.9%, was largely due to a
reduction in business rental revenue reflecting a 4.7% reduction in the number
of business lines.
Local service revenue and access line growth have been affected by the entry of
Saturn Communications (now Telstra Saturn Limited) into the local service
market, the migration of local access to ISDN services and increased use of
cellular phones.
National
National revenue increased by NZ$6 million, or 3.5%, for Q1 2000-01, largely due
to increases in fixed line to cellular revenues partly offset by a reduction in
national calls revenue as a result of national toll price reductions.
----------------------------------------------------------------------------
National Quarter Ended Change
30 September %
----------------------------------------------------------------------------
1999 2000 00:99
----------------------------------------------------------------------------
National calls
- Revenue (NZ$m) 77 71 (7.8)
- Call minutes (m) 538 594 10.4
- Average price (cents) 14.3 12.0 (16.5)
Calls to cellular networks
Revenue (NZ$m) 63 73 15.9
Interconnect cost (NZ$m) 15 19 26.7
-------------------------------
Gross margin (NZ$m) 48 54 12.5
- Call minutes (m) 130 154 18.5
- Average price (cents) 48.5 47.4 (2.2)
National 0800
- Revenue (NZ$m) 30 32 6.7
- Call minutes (m) 165 186 12.7
- Average price (cents) 18.2 17.2 (5.4)
----------------------------------------------------------------------------
National calls revenue decreased by 7.8% largely as a result of a 16.5% decline
in the average price per call minute, reflecting various capped and specials
rate reductions.
Fixed line to cellular revenue increased by 15.9%. The average price per minute
for fixed line to cellular calls declined by 2.2%, but this was more than offset
by a significant increase in call volumes resulting from the strong growth in
cellular penetration.
The growth in fixed line to cellular revenue was partly offset by an increase in
the cost of interconnecting with other cellular carriers (see "Cost of Sales").
The fixed line to cellular margin increased by 12.5% compared with last year.
3
<PAGE>
International
International revenue increased by NZ$12 million, or 13.0%, due largely to
growth in inward call revenue.
-------------------------------------------------------------
International Quarter Ended Change %
30 September
-------------------------------------------------------------
1999 2000 00:99
-------------------------------------------------------------
Outward calls
- Revenue (NZ$m) 51 48 (5.9)
- Call minutes (m) 139 162 16.5
- Average price (cents) 36.7 29.6 (19.2)
Inward calls
- Revenue (NZ$m) 32 46 43.8
- Call minutes (m) 104 119 14.4
- Average price (cents) 30.8 38.7 25.6
Transit call margin
- Margin (NZ$m) 9 10 11.1
- Call minutes (m) 120 179 49.2
- Average margin (cents) 7.5 5.6 (25.5)
-------------------------------------------------------------
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 NZ29.6
cents was 19.2% lower than in Q1 1999-2000.
In February 2000, the price caps on consumer Talk All Day promotions were
reduced from NZ$5 to NZ$4 for Australia and from NZ$10 to NZ$8 for the UK, US,
Canada and Ireland.
The increase in inward call revenue for Q1 2000-01 resulted largely from an
increase in the average price per minute reflecting the significant weakening of
the New Zealand dollar. The increase in inward call revenue was more than
offset by an increase in the international outpayment included in cost of sales.
This outpayment increased by 69.7% over Q1 1999-2000.
The net margin received from Telecom's international business, excluding the
transit call margin (outward and inward call revenue less the international
outpayment), decreased by 24.0%.
The increase in the transit call margin (revenue net of outpayments) was largely
due to higher volumes partly offset by lower average margins per call minute.
The increased volumes from the transit business are attributable to the
utilisation of a variety of outward routing options and to new transit traffic
through Telecom's points of presence ("POPs") in the US, Japan, Australia and
the UK.
------------------------------------------------------------------
International Margin Quarter Ended Change
30 September %
------------------------------------------------------------------
NZ$ millions 1999 2000 00:99
------------------------------------------------------------------
International outwards revenue 51 48 (5.9)
International inwards revenue 32 46 43.8
International outpayment (33) (56) 69.7
-----------------------------
Net international margin
before transits 50 38 (24.0)
-----------------------------
------------------------------------------------------------------
Interconnect
Interconnection revenue decreased by NZ$1 million, or 5.3%, compared with Q1
1999-2000.
Interconnect costs, including the cost of interconnecting with other cellular
carriers, increased by NZ$10 million, or 44.2% (see "Cost of Sales").
Cellular and Other Mobile Services
Revenue from cellular and other mobile services decreased by NZ$2 million, or
1.5%, compared with Q1 1999-2000. Cellular revenue alone decreased by NZ$3
million, or 2.3%.
-------------------------------------------------------------------
Cellular and Other Mobile Quarter Ended Change
Services 30 September %
-------------------------------------------------------------------
1999 2000 00:99
-------------------------------------------------------------------
Cellular and Other Mobile
Total mobile revenue (NZ$m) 136 134 (1.5)
Mobile cost of sales (NZ$m) 34 43 26.5
-----------------------------------
Mobile gross margin (NZ$m) 102 91 (10.8)
Cellular
Cellular revenue (NZ$m) 129 126 (2.3)
Call minutes (m) 243 293 20.6
Connections
- Total at period end (000s) 761 1,031 35.5
- Average during period (000s) 719 1,004 39.6
Average revenue per customer
per month (excl. CPE) - NZ$ 58.2 39.9 (31.4)
-------------------------------------------------------------------
4
<PAGE>
Telecom had 1,031,000 cellular connections at 30 September 2000 compared with
761,000 at 30 September 1999, an increase of 35.5%. The continued strong growth
in connections is largely due to growth in the prepaid cellular business.
Prepaid service has continued to be popular with consumers, but new pricing
plans for postpaid customers, including free minutes and additional services,
have also attracted large numbers of customers. The total number of prepaid
customers, including third party connections, at 30 September 2000 was 548,000,
approximately 53% of total connections.
The total number of cellular connections in New Zealand, including Vodafone New
Zealand's ("Vodafone") connections, represents approximately 41% of the New
Zealand population. This penetration level, when compared with other countries,
suggests scope for continued expansion of this market.
The mobile gross margin (total mobile revenue less cost of sales) decreased by
10.8%, compared with Q1 1999-2000, largely as a result of an increase in cost of
sales. Mobile revenue and the mobile margin, set out in the table above, do not
include revenue from fixed line to cellular calls terminating on Telecom's
cellular network.
Average revenue per cellular customer decreased by approximately 31% compared
with Q1 1999-2000, reflecting the higher proportion of prepaid connections.
Revenue per prepaid connection is generally lower than revenue per postpaid
connection.
Mobile cost of sales increased by 26.5% for the quarter, reflecting the
significant growth in the number of cellular connections over the past year.
Special promotions to attract new connections and encourage existing customers
to upgrade their mobile phones contributed to the increase in mobile cost of
sales.
Data
Data revenue increased by NZ$19 million, or 18.4%, for the quarter. This growth
was driven by demand for bandwidth to support business networking and the
increased penetration of the Internet.
-------------------------------------------------------------------
Data Quarter Ended Change
30 September %
-------------------------------------------------------------------
1999 2000 00:99
-------------------------------------------------------------------
Internet revenue (NZ$m) 15 18 20.0
Xtra registered customers (000s) 228 313 37.3
Xtra dial-up hours (m) 9 15 66.7
Average hours per active
customer (per month) 17.1 21.9 28.1
ISDN revenue (NZ$m) 17 21 23.5
ISDN channels (000s) 61 69 13.1
New World revenue* (NZ$m) 23 31 34.8
Old World revenue* (NZ$m) 47 48 2.1
* Excludes Internet and ISDN revenue.
-------------------------------------------------------------------
Internet revenue increased by NZ$3 million, or 20.0%, for the quarter.
Telecom's Internet service provider "Xtra" had approximately 313,000 registered
customers at 30 September 2000, compared with 228,000 at 30 September 1999, an
increase of 37.3%. Of the registered customers, approximately 77% were active
during the last month of the quarter.
ISDN revenue increased by 23.5% for Q1 2000-01. The increase in ISDN revenue
partly reflected migration from basic access services. The number of ISDN
channels at 30 September 2000 increased by 13.1% from 30 September 1999.
New World revenue (which includes ADSL, LanLink and frame relay) increased by
34.8% for the quarter reflecting the migration of customers to higher bandwidth
and lower cost platforms. New World revenue comprised approximately 37% of data
revenue (excluding Internet and ISDN) in Q1 2000-01 compared with approximately
33% in Q1 1999-2000.
Directories
Directories revenue increased by NZ$4 million, or 7.7%, for the quarter.
Revenue from regional directories increased by approximately 8% for the quarter
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 approximately 9% also as a result of both tariff and volume growth.
5
<PAGE>
Equipment Revenue
Equipment revenue decreased by NZ$7 million, or 29.2%, compared with Q1 1999-
2000, largely as a result of a reduction in equipment sales as Telecom continues
to de-emphasise its equipment sales business. The impact on earnings of this
decrease in revenue was largely offset by a reduction in equipment cost of
sales.
Miscellaneous
Miscellaneous revenue increased by NZ$16 million, or 160%, compared with Q1
1999-2000. Revenue in Q1 2000-01 includes a gain of NZ$20 million recognised on
the prepayment of Telecom's scheduled payment obligations relating to a cross-
border finance lease.
Operating Expenses
Operating expenses increased by NZ$62 million, or 11.9%, for Q1 2000-01. The
increase was largely due to higher cost of sales and other operating expenses.
If cost of sales were excluded, expenses would have increased by 5.9% for Q1
2000-01. The increase in expenses excluding cost of sales reflects increases in
the costs associated with the growth areas such as Xtra, esolutions, the
international points of presence and the costs associated with implementing the
Commonwealth Bank of Australia contract (see "Outsourcing Contract with the
Commonwealth Bank of Australia").
Labour
The decrease in labour costs of NZ$18 million, or 15.9%, for the quarter largely
reflected the outsourcing of information services to EDS effective from 1
September 1999 and the sale of ConnecTel effective from 1 June 2000. The costs
of outsourcing are included in "Other Operating Expenses". These reductions
were partly offset by salary increases arising from Telecom's annual salary
review process.
-------------------------------------------------------
Personnel Numbers
-------------------------------------------------------
September 1999 September 2000 Variation
-------------------------------------------------------
6,799 5,650 (1,149)
-------------------------------------------------------
The decrease in personnel numbers since 30 September 1999 largely reflects the
sale of ConnecTel.
Cost of Sales
Cost of sales increased by NZ$39 million, or 28.9%, for the quarter. This
increase was largely due to higher mobile, international and interconnect cost
of sales partly offset by lower equipment cost of sales.
Mobile cost of sales increased by NZ$9 million, or 26.5% (see "Cellular and
Other Mobile Services").
While the high rate of cellular connection growth is having a negative impact on
short-term earnings performance due to the immediate write-off of cellular
acquisition costs, the Company believes significant future revenue will accrue
from its recent high number of customer acquisitions.
Most Australasian telecommunications companies have adopted the accounting
policy of capitalising cellular acquisition costs and subsequently amortising
these costs over the life of the underlying contracts. Telecom has considered
adopting this policy but has decided against it at this time. Had Telecom
adopted this policy effective from 1 July 2000, mobile cost of sales would have
been lower by approximately NZ$17 million in Q1 2000-01.
Interconnect expense increased by NZ$10 million, or 44.2%, reflecting increased
volumes including the growth in calls from Telecom's fixed line network to
Vodafone's cellular network (see "National").
International cost of sales for outbound calls increased by NZ$23 million, or
69.7%, for the quarter reflecting growth in outward call volumes (see
"International").
Other Operating Expenses
Other operating expenses include occupancy, advertising, computer costs, bad
debts, vehicle costs, office expenses, postage and agency, outsourcing costs and
certain direct costs, which together represented approximately 90% of other
operating expenses before capital recoveries.
Other operating expenses increased by NZ$41 million, or 29.9% compared with Q1
1999-2000. This largely reflected an increase in outsourcing costs, primarily
as a result of the outsourcing of information services to EDS effective from 1
September 1999 and the sale of ConnecTel effective from 1 June 2000. The
outsourcing has resulted in a reduction in labour costs (see "Labour").
6
<PAGE>
Net Interest Expense
Net interest expense (excluding the cost of funding the investment in AAPT)
increased by NZ$4 million, or 17.4%, compared with Q1 1999-2000.
The surplus from operations before abnormal items covered net interest (after
investment income but before interest capitalised) and capital note distribution
costs 7.0 times, compared with 7.9 times in 1999.
Taxation
Income tax expenses decreased by NZ$9 million, or 8.0% compared with Q1 1999-
2000. The effective tax rate for Q1 2000-01 was 32.3% compared with 32.7% for
Q1 1999-2000 and a statutory rate of 33%.
Capital Expenditure
Capital expenditure (excluding AAPT) amounted to NZ$138 million, a decrease of
NZ$4 million, or 2.8%, compared with Q1 1999-2000. Cash applied to capital
expenditure (excluding AAPT) amounted to NZ$153 million, an increase of NZ$4
million, or 2.7%.
Excluding AAPT, Telecom currently expects to spend up to NZ$1 billion on capital
expenditure in the 12 months to 30 June 2001. This includes expected CDMA
capital expenditure and purchases of capacity from Southern Cross Cables Limited
but excludes any potential acquisition of spectrum from the New Zealand
Government.
LIQUIDITY (CONSOLIDATED)
Telecom believes it has adequate internal and external resources available,
including borrowing capacity, to finance its operating requirements, anticipated
capital expenditure, dividends and investments.
Cash Flows from Operating Activities
Net cash flows from operating activities were NZ$449 million, an increase of
NZ$121 million, compared with Q1 1999-2000. A change in the timing of income
tax payments was the main reason for the increase, while an increase in receipts
from customers was offset by an increase in payments to suppliers and employees.
Cash Flows from Investing Activities
Net cash flows used in investing activities amounted to NZ$167 million, compared
with NZ$138 million for Q1 1999-2000. The increase largely reflects an increase
in the purchase of fixed assets partly offset by the net sale of investments.
Cash Flows from Financing Activities
Net cash flows used in financing activities were NZ$310 million, compared with
cash used of NZ$180 million in Q1 1999-00. The increase in Q1 2000-01 was due
to the repayment of short-term debt where in the comparable period there were
proceeds from short-term debt.
Telecom has declared a fully imputed dividend for the first quarter of NZ5.0
cents per share, a total of NZ$88 million, to be paid in December 2000.
A supplementary dividend of NZ$11 million will be paid to shareholders who are
non-resident in New Zealand. Telecom receives an equivalent tax credit from the
Inland Revenue Department for this amount.
ECONOMIC TRENDS
Telecom's operations are significantly affected by the state of the New Zealand
economy. Gross Domestic Product ("GDP") grew in real terms by 4.8% for the year
ended June 2000, after growth of 0.8% in the year ended June 1999.
Growth is forecast to continue over the next three years although with modest
deceleration in the rate of growth. In September 2000 the New Zealand Institute
of Economic Research ("NZIER") reported a consensus among forecasters of 3.1%
for GDP growth in the year to March 2001; consensus forecasts for the years to
March 2002 and March 2003 are 3.2% and 2.8% respectively. These forecasts
reflect expected growth in export sales by primary producers and manufacturers,
along with increases in domestic consumption and investment. Services are an
expanding component of the economy, with communications consistently among the
sectors of fastest growth.
New Zealand's balance of payments deficit declined in the year ended June 2000
(NZ$7.54 billion), and the consensus forecast is for modest further improvement
over the next three years due to growth in the value of exports and reduced
demand for imports. The consumer
7
<PAGE>
price index measure of inflation increased by 3.0% during the year ended
September 2000 and per NZIER's consensus forecasts is forecast to reach 3.1% in
the year to March 2001 before easing again over the following two years. NZIER
consensus forecasts show the official rate of unemployment is forecast to
continue declining from 6.1% in June 2000, to 5.6% in March 2003. The New
Zealand population was around 3.8 million in September 2000.
COMPETITIVE ENVIRONMENT
New Zealand has highly competitive markets in telecommunications services,
governed by the Telecommunications Act 1987 and the Commerce Act 1986. There
have been no statutory entry barriers to telecommunications markets since 1989
and services are provided by substantial network operators in addition to
Telecom. These include Vodafone, Telstra Saturn Limited ("Telstra Saturn") and
Clear Communications Limited ("Clear"), a wholly owned subsidiary of British
Telecom. Telecom has extensive interconnection arrangements with 11 other
operators in New Zealand, and these cover international services, national and
local voice services, data services, cellular services, Internet services and
mobile trunked services. Of the 11 operators, eight have the ability to offer
local services. In each case 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.
In October 2000, Telecom reached a comprehensive agreement with Clear on
interconnection and all other outstanding matters. This agreement established a
new, more open commercial relationship with an initial 12-month term. In July
2000, Telecom reached a new agreement with Telstra Saturn on interconnection,
wholesale services, Internet traffic, pole-sharing and settlement of litigation
on rebilling. Telecom and Vodafone renewed and amended their interconnection
arrangements during the year ended 30 June 2000.
In addition to 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. As at 30 September 2000
approximately 150 Internet Service Providers ("ISPs") operate in New Zealand.
Telecom competes in the ISP market through its Xtra operation.
Telecom faces competition also in leased-line services, paging, directory
publishing and supply, and installation and maintenance of customer premises
equipment ("CPE"). Telecom expects strong competition to continue in New
Zealand telecommunications markets.
Telecom continues to be subject to Kiwi Share Obligations ("KSO") under which it
must maintain a free local calling option for residential customers in all areas
of New Zealand where such services were provided in 1990. A Government-appointed
Ministerial Inquiry into Telecommunications issued a final report in September
2000, proposing a new Electronic Communications Act that would introduce new
regulations for the sector. The Government has indicated it does not favour
establishment of an industry-specific regulator and Telecom expects further
consultation before final decisions are made on changes to the current
framework, by 31 December 2000. Telecom has indicated its willingness to re-
examine the KSO in recognition of industry developments since 1990.
Under the Telecommunications (Information Disclosure) Regulations 1999, Telecom
issued an audited calculation of the cost of residential service subsidies under
the KSO in September 2000. The calculation showed a total annual cost to
Telecom of NZ$167 million for providing service to subsidised customers.
Disclosure on the financial results of Telecom's local access network business,
separate from all other operations, is expected to be made in the near future.
LITIGATION
In various proceedings commenced since 1996, 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
settlement of all proceedings between them.
In proceedings commenced in March 1997 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
8
<PAGE>
under Part IV of the Australian Trade Practices Act. On 11 September 2000, the
parties announced the proceedings had been settled.
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.
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.
OTHER MATTERS
Southern Cross
Southern Cross was established in October 1998 to build, own, operate and
maintain a trans-Pacific fibre optic cable network (called the Southern Cross
Cable Network) as well as market capacity on the cable. Telecom, Cable &
Wireless Optus and MCI WorldCom are the shareholders in Southern Cross. Telecom
holds a 50% equity interest.
Testing is currently underway as Southern Cross prepares to bring its 31,000 km
trans-Pacific cable into service in November 2000. Southern Cross expects to
deliver a network incorporating a full fibre ring linking Australia, New
Zealand, Fiji and Hawaii, and a direct link from Hawaii to Oregon and to
California (which are terrestrially linked).
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 September 2000 Telecom had advanced US$120
million (excluding accrued interest) as part of this interim funding
arrangement. Southern Cross plans to refinance the external credit facility,
and repay all outstanding interim funding from shareholders after the
construction of the landing facility in California.
Based on current capacity commitments and expected revenue forecasts, it is
expected that Southern Cross will repay borrowings in the first few years after
completion of construction.
Acquisition of remainder of AAPT shares
Telecom's wholly owned subsidiary TCNZ Australia Investments Pty Limited ("TNZ
Australia") closed its takeover offer to acquire shares in AAPT on 30 October
2000, having acquired relevant interests in 99.15% of AAPT shares. TNZ Australia
is in the process of acquiring the remaining AAPT shares by compulsory
acquisition.
Outsourcing Contract with the Commonwealth Bank of Australia
Telecom, in conjunction with AAPT and EDS Australia, has entered into a
contract with the Commonwealth Bank of Australia ("CBA") to provide outsourced
telecommunications to support CBA's online leadership position in a five year,
A$500 million deal. Under the outsourcing arrangement Telecom is leading a
consortium that provides CBA's telecommunication services including: IP-anywhere
network capability; managed network services for data, voice, video, and
EFTPOS; remote access and international network services; consulting on all
telecommunications requirements; and risk, security and performance management.
9
<PAGE>
AAPT
AAPT Earnings for the quarter to 30 September 2000
------------------------------------------------------
Q1 2000-01
A$M
------------------------------------------------------
Operating revenues 284
Operating costs 278
EBIT 6
EBITDA 17
Net profit/(loss) after tax (5)
------------------------------------------------------
AAPT recorded a loss for the quarter to 30 September 2000 of A$5 million. AAPT's
loss resulted in a reduction of NZ$2 million in Telecom's consolidated net
earnings for the quarter. This reduction was after allowing for minority
interests in AAPT's net earnings and consolidation adjustments for differences
in accounting policies.
Equity Accounted Losses
AAPT's result for the quarter includes equity accounted losses relating to
AAPT's investment in AOL Australia ("AOLA"). AAPT has taken a long-term view in
relation to AOLA and will continue to equity account losses from AOLA to the
extent of its investment.
AAPT Capital Expenditure
Capital expenditure for the quarter was A$80 million. This included expenditures
for the CDMA, LMDS and CBD fibre networks as well as a payment for backbone
capacity from Optus.
AAPT OTHER MATTERS
Business, Corporate and Government Tenders
AAPT's Business, Corporate and Government ("BCG") division continued to expand
its presence in the Australian market place by winning a number of large tenders
including Woolworths, the Bendigo Community Telco Group, Exxon Mobile, Toll
Industries and Bond University. In addition to winning these tenders, AAPT was
selected for the NSW Government `preferred' supplier panel during the period.
New AAPT Smartchat Call Centre Site
During the quarter AAPT acquired a new site for its Call Centre in Bendigo,
Victoria and has committed over A$6 million for the purchase and re-development
of this site.
AAPT Smartchat and Ansett Australia
AAPT and Ansett Australia have joined forces to bring more benefits to their
customers. As part of the partnership, which was announced during the quarter,
AAPT Smartchat's `Full Service' customers will be able to accumulate Global
Rewards points in the Ansett Australia's frequent flyer program, Global
Rewards(TM).
Further Developing First Mile Access Capabilities
AAPT remains focused on further developing its first mile access capabilities as
this will enable AAPT to deliver more services to its customers over its own
network.
Local Multipoint Distribution System (LMDS)
Following the failure of SpectraPoint to develop and deliver second generation,
IP-capable LMDS equipment as contracted, AAPT is exploring alternative options
and has conducted an evaluation of available LMDS technology. AAPT has signed a
Memorandum of Understanding with Ericsson in relation to LMDS equipment. The
Ericsson equipment is being trialed and has passed all tests to date.
Site acquisition, preparation and back-haul arrangements have been completed for
19 of the first 20 LMDS hub sites. It is anticipated that 6 hubs will be
commissioned and carrying commercial services this calendar year with the
remaining 14 hubs commissioned during the first quarter of next year.
First generation SpectraPoint LMDS equipment is currently being used
commercially by customers in Melbourne, including the provision of high speed
Internet access to a number of schools on the VicOne network and the provision
of voice data and high speed Internet to a number of CBD based corporate
customers.
CBD and Metropolitan Fibre
AAPT is building a fibre optic network in the 6 Capital City CBD areas which
directly connects high-volume
10
<PAGE>
customers to AAPT's network via a high-speed link. As at 30 September 2000 AAPT
had fibred 243 buildings.
DSL
AAPT successfully completed its trials of DSL services with Telstra and
deployment of capability has now commenced. AAPT expects its customer trials to
begin in November 2000.
This DSL service will have capacity of up to 6 Mbps down stream information and
will be initially targeted at corporate, business and SME customers and
complement AAPT's LMDS rollout, which is used to serve business customers.
AAPT expects to contract a DSL equipment supplier in the near future.
Code Division Multiple Access (CDMA) Mobile Network Roll Out
Initial roll-out of the CDMA network has been slower than planned, and AAPT aims
to launch a network in selected areas in the second half of calendar 2001.
Settlement of Litigation with Telstra
During the quarter, AAPT and Telstra agreed to settle the longstanding Federal
Court litigation between them and confirm that the settlement is on terms
favourable to both corporations which do not adversely affect their respective
financial positions. AAPT and Telstra welcomed the resolution of this litigation
and look forward to further developing their commercial relationship.
GLOSSARY
ADSL (Asymmetric Digital Subscribers Line) - A technology for delivering a high
bit rate link to customers over ordinary copper wire. 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).
DSL - A reference to any of the many Digital Subscribers Line technologies, e.g.
ADSL.
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 that 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.
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,
which operates as a private local exchange, typically providing reduced-digit
dialling 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.
11
<PAGE>
OVERVIEW OF NET EARNINGS (EXCLUDING AAPT)
<TABLE>
<CAPTION>
Quarter Ended Variation
30 September 00:99
-------------------------------------------------------------------------------------------------------------------------------
/(in NZ$ millions, except percentages)/
1999 % 2000 % $ %
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues
Local service 266 30.0 261 28.1 (5) (1.9)
Calling
National 173 19.5 179 19.2 6 3.5
International 92 10.4 104 11.2 12 13.0
Other 12 1.4 13 1.4 1 8.3
---------------------------------------------------------------------
277 31.2 296 31.8 19 6.9
Interconnection 19 2.1 18 1.9 (1) (5.3)
Cellular and other mobile 136 15.3 134 14.4 (2) (1.5)
Data 103 11.6 122 13.1 19 18.4
Other operating revenues
Directories 52 5.9 56 6.0 4 7.7
Equipment 24 2.7 17 1.8 (7) (29.2)
Miscellaneous 10 1.2 26 2.8 16 160.0
---------------------------------------------------------------------
86 9.8 99 10.6 13 15.1
---------------------------------------------------------------------
Total operating revenues 887 100.0 930 100.0 43 4.8
---------------------------------------------------------------------
Operating expenses
Labour 113 12.7 95 10.2 (18) (15.9)
Depreciation 137 15.4 137 14.7 - -
Cost of sales 135 15.2 174 18.7 39 28.9
Other operating expenses 137 15.4 178 19.1 41 29.9
---------------------------------------------------------------------
Total operating expenses 522 58.9 584 62.8 62 11.9
Surplus from operations 365 41.1 346 37.2 (19) (5.2)
Net financing costs (23) (2.6) (27) (2.9) (4) (17.4)
---------------------------------------------------------------------
Surplus from operations before tax 342 38.6 319 34.3 (23) (6.7)
Income tax expense (112) (12.6) (103) (11.1) 9 (8.0)
---------------------------------------------------------------------
Surplus from operations after tax 230 25.9 216 23.2 (14) (6.1)
Minority interests in profits of subsidiaries (1) (0.1) (1) (0.1) - -
Share of profits/(losses) of associate company
after income tax (4) (0.5) (2) (0.2) 2 (50.0)
---------------------------------------------------------------------
Net Surplus 225 25.4 213 22.9 (12) (5.3)
Distribution of capital note coupons after income
tax (13) (1.5) (13) (1.4) - -
---------------------------------------------------------------------
Net earnings attributable to shareholders 212 23.9 200 21.5 (12) (5.7)
=====================================================================
</TABLE>
-12-
