<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 14 March 2000 to 16 May 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. Third Quarter Result to 31 March 2000
-------------------------------------
1.1 Condensed Financial Statements
1.2 Appendix One-Segmental Reporting as at and for nine months
ended 31 March 2000
1.3 Management Commentary
1.4 Media Release-16 May 2000
2. Miscellaneous Media Releases
-----------------------------
2.1 Telecom acquires INL stake-23 March 2000
2.2 Standard & Poor's recognize Telecom's strengths-24 March 2000
2.3 Telecom appoints new Chief Financial Officer-27 March 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/ Malcolm Ross Gillespie
---------------------------
Malcolm Ross Gillespie
Company Secretary
Dated: 16 May 2000
<PAGE>
Telecom Corporation of New Zealand Limited and Subsidiaries
CONSOLIDATED STATEMENT OF FINANCIAL PERFORMANCE
For the nine months ended 31 March 2000 (Unaudited)
<TABLE>
<CAPTION>
Year ended Nine months ended
30 June 31 March
------------- ------------------------------------------
1999 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 1,059 796 796 399
Calling 2 1,140 870 1,053 527
Interconnection 71 51 66 33
Cellular and other mobile services 502 370 508 254
Data 357 261 382 191
Other operating revenues 2 327 260 299 150
Abnormal revenues 3 31 16 15 8
------------------ ------------------------------------------
3,487 2,624 3,119 1,562
------------------ ------------------------------------------
Operating expenses
Labour 467 355 354 177
Depreciation 551 414 436 218
Cost of sales 459 341 702 352
Other operating expenses 556 424 532 267
Abnormal expenses 3 37 15 - -
------------------ ------------------------------------------
2,070 1,549 2,024 1,014
------------------ ------------------------------------------
Surplus from operations 1,417 1,075 1,095 548
Investment income 45 33 24 12
Interest expense (152) (118) (143) (71)
------------------ ------------------------------------------
Surplus from operations before
income tax 1,310 990 976 489
Income tax expense (412) (314) (318) (159)
------------------ ------------------------------------------
Surplus from operations after
income tax 898 676 658 330
Share of losses of associate company after
income tax (7) - - -
Minority interests in profits of subsidiaries (2) (2) (6) (3)
------------------ ------------------------------------------
Net surplus 889 674 652 327
Capital note distribution costs after income tax (55) (42) (41) (21)
------------------ ------------------------------------------
Net earnings attributable to shareholders 834 632 611 306
================== ==========================================
Net earnings per share $0.476 $0.361 $0.349 $0.175
================== ==========================================
Weighted average number of ordinary
shares outstanding (in millions) 1,752 1,752 1,753 1,753
================== ==========================================
</TABLE>
1
<PAGE>
Telecom Corporation of New Zealand Limited and Subsidiaries
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
As at 31 March 2000 (Unaudited)
<TABLE>
<CAPTION>
30 June 31 March
---------------- -------------------------------------------
1999 1999 2000 2000
- ---------------------------------------------------------------------------------- ----------------------------------------
(Dollars in millions) notes NZ$ NZ$ NZ$ US$
- ---------------------------------------------------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash 29 21 85 43
Short-term investments 114 673 101 51
Receivables and prepayments 691 754 1,029 515
Inventories 48 42 40 20
--------------- ----------------------------------------
Total current assets 882 1,490 1,255 629
Investments 530 47 284 142
Fixed assets 3,774 3,780 4,214 2,110
Intangibles 56 58 1,557 780
Other assets - - 8 4
--------------- ----------------------------------------
Total assets 5,242 5,375 7,318 3,665
=============== ========================================
LIABILITIES AND CAPITAL FUNDS
Current liabilities:
Bank overdraft - 9 - -
Accounts payable and accruals 821 801 1,036 519
Provisions - current 64 58 25 12
Debt due within one year 1,064 1,130 2,584 1,294
Provision for dividend 4 227 228 227 114
--------------- ----------------------------------------
Total current liabilities 2,176 2,226 3,872 1,939
Deferred taxation 25 - 29 14
Accounts payable - - 129 65
Provisions - non-current 3 3 2 1
Long-term debt 1,003 1,112 1,192 597
--------------- ----------------------------------------
Total liabilities 3,207 3,341 5,224 2,616
--------------- ----------------------------------------
Commitments and contingent liabilities 5,6
Capital funds:
Shareholders' funds 1,086 1,085 1,072 537
Capital notes 942 942 943 472
Minority interests 7 7 79 40
--------------- -----------------------------------------
Total capital funds 2,035 2,034 2,094 1,049
--------------- -----------------------------------------
Total liabilities and capital funds 5,242 5,375 7,318 3,665
=============== =========================================
</TABLE>
2
<PAGE>
Telecom Corporation of New Zealand Limited and Subsidiaries
CONSOLIDATED STATEMENT OF MOVEMENTS IN CAPITAL FUNDS
For the nine months ended 31 March 2000 (Unaudited)
<TABLE>
<CAPTION>
Year ended 30 Nine months ended
June 31 March
---------------- -----------------------------
1999 1999 2000 2000
- ------------------------------------------------------------------------------ -----------------------------
(Dollars in millions) notes NZ$ NZ$ NZ$ US$
- ------------------------------------------------------------------------------ -----------------------------
<S> <C> <C> <C> <C> <C>
Capital funds at the beginning of the period 1,999 1,999 2,035 1,019
Net earnings attributable to shareholders 834 632 611 306
Movement in foreign currency translation reserve 1 - (24) (12)
----------------- -----------------------------
Total recognised revenues and expenses for the period 835 632 587 294
Movement in minority interests - - 72 36
Dividends 4 (909) (682) (679) (340)
Tax credit on supplementary dividends 4 103 78 75 37
Discount on capital notes amortised 1 1 1 1
Contributed capital 6 6 3 2
----------------- -----------------------------
Capital funds at the end of the period 2,035 2,034 2,094 1,049
================= =============================
Represented by:
Contributed capital 909 909 912 457
Foreign currency translation reserve 1 - (23) (12)
Minority interests 7 7 79 40
Retained earnings 176 176 183 92
Capital notes 942 942 943 472
----------------- -----------------------------
2,035 2,034 2,094 1,049
================= =============================
</TABLE>
3
<PAGE>
Telecom Corporation of New Zealand Limited and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
For the nine months ended 31 March 2000 (Unaudited)
<TABLE>
<CAPTION>
Year ended Nine months ended
30 June 31 March
---------- ---------------------------------------
1999 1999 2000 2000
- ------------------------------------------------------------------------------ ---------------------------------------
(Dollars in millions) NZ$ NZ$ NZ$ US$
- ------------------------------------------------------------------------------ ---------------------------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities
Cash was provided from/(applied to):
Cash received from customers 3,433 2,561 2,928 1,466
Proceeds from cross border lease 15 - - -
Proceeds from liquidation of Executive Plan, net 16 16 - -
Interest income 41 30 19 10
Payments to suppliers and employees (1,410) (1,011) (1,422) (712)
Restructuring, redundancy and Year 2000 payments (64) (48) (40) (20)
Income tax paid (254) (305) (275) (138)
Interest paid on debt (160) (119) (116) (58)
---------------- -----------------------------------
Net cash flows from operating activities 1,617 1,124 1,094 548
---------------- -----------------------------------
Cash flows from investing activities
Cash was provided from/(applied to):
Sale of fixed assets 18 17 16 8
(Purchase)/sale of long-term investments, net (75) 29 (68) (34)
Acquisition of AAPT Limited, excluding cash acquired (385) - (1,181) (591)
Sale/(purchase) of short-term investments, net 490 (70) 13 7
Purchase of fixed assets (585) (443) (635) (318)
Capitalised interest paid (9) (6) (11) (6)
---------------- -----------------------------------
Net cash flows applied to investing activities (546) (473) (1,866) (934)
---------------- -----------------------------------
Cash flows from financing activities
Cash was provided from/(applied to):
Proceeds from long-term debt 17 8 179 90
Repayment of long-term debt (201) (152) (128) (64)
Proceeds from short-term debt, net 106 241 1,515 759
Contributed capital 6 6 20 10
Dividends paid (912) (684) (680) (341)
Dividends paid to minority interests (1) (1) (3) (2)
Capital note distribution costs paid (79) (79) (77) (39)
---------------- -----------------------------------
Net cash flows from/(applied to) financing activities (1,064) (661) 826 413
---------------- -----------------------------------
Net cash flow 7 (10) 54 27
Foreign currency translation adjustment - - 2 1
Opening cash position (including bank overdrafts) 22 22 29 15
---------------- -----------------------------------
Closing cash position (including bank overdrafts) 29 12 85 43
================ ===================================
..............................................Supplementary Cash Flow Data...........................................
<CAPTION>
Reconciliation of net earnings attributable to shareholders to net cash flows from operating activities
<S> <C> <C> <C> <C>
Net earnings attributable to shareholders 834 632 611 306
Adjustments to reconcile net earnings to net cash flows from
operating activities:
Depreciation 551 414 436 218
Bad and doubtful accounts 25 20 22 11
Deferred income tax 10 (15) 20 10
Share of losses of associate company 7 - - -
Minority interests 2 2 6 3
Capital note distribution costs 55 42 41 21
Intangibles amortised 7 5 28 14
Sale of AAPT Sat-Tel Pty Limited - - (15) (8)
Other 12 14 6 3
Changes in assets and liabilities net of effects of non-cash
and investing and financing activities:
Increase in accounts receivable and related items (54) (39) (166) (83)
Decrease/(increase) in inventories (8) 1 6 3
Increase in current taxation 153 26 22 11
Decrease in provisions (36) (42) (40) (20)
Increase in accounts payable and related items 59 64 117 59
------------- -----------------------------------
Net cash flows from operating activities 1,617 1,124 1,094 548
============= ===================================
</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 three
month transition period to 30 June 1999.
Effective 1 April 1999, the Company changed its annual balance date from
31 March to 30 June. The comparative periods presented in these financial
statements have been restated to facilitate meaningful comparisons with
the Company's new financial reporting periods.
The financial statements for the nine months ended 31 March 1999 and 31
March 2000, and the year ended 30 June 1999 are unaudited. The restated
figures for the year ended 30 June 1999 are calculated from two audited
periods, the year ending 31 March 1999 and the three month transition
period ending 30 June 1999.
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 31 March 2000 of NZ$1.00 to
US$0.5008. The US dollar amounts should not be construed as
representations that the New Zealand dollars have been, could be, or
could in the future be converted into US dollars at this or any other
rate. References in these financial statements to "$" and "NZ$" are to
New Zealand dollars, references to "US$" are to US dollars and "AUD$" are
to Australian dollars.
Accounting Policies
The accounting policies used in the preparation of the financial
statements for the nine months ended 31 March 2000 are consistent with
those used in the preparation of the published financial statements for
the three month transition period ended 30 June 1999.
Reclassifications
Certain reclassifications of prior periods' data have been made to
conform to current period classifications.
NOTE 2 CALLING AND OTHER OPERATING REVENUES
<TABLE>
<CAPTION>
Year ended Nine months ended
30 June 31 March
---------------------- ----------------------------
1999 1999 2000
--------------------------- ---------------------- ----------------------------
(Dollars in millions) NZ$ NZ$ NZ$
--------------------------- ---------------------- ----------------------------
<S> <C> <C> <C>
Calling
National 704 534 658
International 385 297 356
Other 51 39 39
------------ -----------------------------
1,140 870 1,053
============ =============================
Other operating revenues
Directories 161 141 152
Equipment revenue 109 81 65
Miscellaneous other services 57 38 82
------------ -----------------------------
327 260 299
============ =============================
</TABLE>
5
<PAGE>
Telecom Corporation of New Zealand Limited and Subsidiaries
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
continued
NOTE 3 ABNORMAL ITEMS
<TABLE>
<CAPTION>
Year ended Nine months ended
30 June 31 March
---------------- --------------------------
1999 1999 2000
------------------------------------ --------------------------
(Dollars in millions) NZ$ NZ$ NZ$
------------------------------------ --------------------------
<S> <C> <C> <C>
Abnormal Revenues
Cross border lease 15 - -
Liquidation of executive share ownership plan 16 16 -
Sale of AAPT Sat-Tel Pty Limited - - 15
---------------- -----------------------
31 16 15
================ =======================
Abnormal Expenses
Onerous contract buy-out costs 22 - -
Restructuring costs 15 15 -
--------------- -----------------------
37 15 -
=============== =======================
</TABLE>
Abnormal Revenues
Cross Border Lease
During the year ended 30 June 1999, a gain of $15 million was recognised on
the prepayment and early extinguishment of Telecom's obligations relating
to a cross border finance lease.
Liquidation of the Executive Share Ownership Plan (the "Executive Plan")
The liquidation of Telecom's Executive Plan was completed in March 1999.
The Trustee of the Executive Plan disposed of the 1.9 million unallocated
shares held on trust and remitted the net proceeds to Telecom as the
residuary beneficiary. The net proceeds received were $16 million.
Sale of AAPT Sat-Tel Pty Limited
In March 2000, AAPT Limited ("AAPT") finalised the sale of its wholly-owned
subsidiary AAPT Sat-Tel Pty Limited to New Skies Networks Australia Pty
Limited. Telecom's share of the post acquisition profits relating to this
sale, before minority interests, amounted to $15 million.
Abnormal Expenses
Onerous Contract Buy-out Costs
During the year ended 30 June 1999, the costs of buying-out the terms of
certain onerous contracts were identified and provided for. The contracts
are onerous as the unavoidable costs of meeting the contractual obligations
exceed their economic benefits.
Restructuring Costs
During the year ended 30 June 1999, Telecom announced it had reached an
agreement with specialist call centre operator SITEL Asia Pacific to
contract out the provision of operator services. The decision to outsource
operator services resulted in approximately 560 redundancies at a cost of
$15 million.
6
<PAGE>
Telecom Corporation of New Zealand Limited and Subsidiaries
NOTES TO THE CONDENSED FINANCIAL
STATEMENTS
continued
NOTE 4 DIVIDENDS
Total dividends for the three months ended 31 March 2000 of $202 million
have been provided for, representing a dividend of 11.5 cents per share. In
addition, and in accordance with the Income Tax Act 1994, a supplementary
dividend totalling $25 million has been provided for which will be payable
to shareholders who are not resident in New Zealand, for which Telecom will
receive an equivalent tax credit from the Inland Revenue Department.
NOTE 5 COMMITMENTS
Operating Leases
Operating lease commitments are mainly in respect of leases of land,
buildings and other telecommunications facilities. At 31 March 2000,
minimum rental commitments for all non-cancellable operating leases
(excluding amounts provided for in respect of restructuring) were $372
million (31 March 1999: $293 million, 30 June 1999: $322 million).
Finance Leases
Telecom has entered into the sale and leaseback of certain assets. At 31
March 2000, the outstanding lease commitments were $81 million (31 March
1999: $90 million, 30 June 1999: $95 million).
Capital Commitments
At 31 March 2000, capital expenditure amounting to $604 million (31 March
1999: $55 million, 30 June 1999: $65 million) had been committed under
contractual arrangements, with substantially all payments due within two
years. The capital expenditure commitments principally relate to
telecommunications network assets and at 31 March 2000 included Telecom and
AAPT's commitments relating to Code Division Multiple Access (CDMA) mobile
network build costs.
In addition, Telecom has signed an agreement with other international
telecommunications organisations to build and operate a trans-Pacific
submarine optical fibre cable, called the Southern Cross Cable Network
("Southern Cross"), linking Australia and New Zealand with Hawaii, Fiji and
the West Coast of the United States. In March 1998, Telecom contractually
committed to purchase capacity on Southern Cross of approximately US$140
million. The first payment of approximately US$70 million is due on the
first ready-for-service date ("RFS"), now expected to be in November 2000.
The second payment of approximately US$57 million is due on the first
anniversary of RFS with the balance payable over the following two years.
In November 1999, Telecom committed to purchase further capacity at a cost
of US$69 million. Payments of US$12 million, US$23 million, US$23 million
and US$11 million are due on 31 January 2002, 2003, 2004 and 2005
respectively. In addition AAPT has committed to purchase capacity of
approximately US$40 million within the next two years.
The Board of Directors has approved a 50% equity investment in Southern
Cross which commits Telecom to provide up to US$75 million by way of equity
or shareholder advances. Pursuant to this a shareholders' advance of US$69
million (excluding accrued interest) has been provided to Southern Cross as
at 31 March 2000.
Funding the Construction of the Southern Cross Cable Network
To date Southern Cross has signed capacity purchase commitments with
customers totalling US$1.1 billion. Southern Cross cable construction costs
are being funded through a US$640 million external credit facility and
interim funding provided by the shareholders. Telecom has committed to
provide up to US$150 million as part of this interim funding.
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.
7
<PAGE>
Telecom Corporation of New Zealand Limited and Subsidiaries
NOTES TO THE CONDENSED FINANCIAL
STATEMENTS
continued
NOTE 6 CONTINGENT LIABILITIES
In proceedings commenced in November 1996, Clear Communications Limited
("Clear") alleges breaches of the Commerce Act in relation to Telecom's
bundling practices, as well as claiming the existence of arrangements
between Telecom and Bell Atlantic and Ameritech that breach the Commerce
Act. Unspecified damages are sought.
In April 1997, Telecom issued proceedings against Clear for withholding
certain payments for services supplied under Clear's 1996 interconnection
agreement with Telecom. Telecom seeks a declaration that the outstanding
amounts are payable and an injunction requiring Clear to pay for services
provided under the interconnection agreement. Clear's defence and
counterclaim allege that both its 1991 and 1996 interconnection agreements
are invalid and unenforceable because the interconnection terms (including
charges payable by Clear) have an anti-competitive purpose and effect in
breach of the Commerce Act, as does Telecom's retail pricing. Clear seeks
unspecified damages and other relief under the Commerce Act. Clear's
counterclaim also includes a claim against Telecom for unspecified damages
based on breach of "undertakings" allegedly given by Telecom in the late
1980s regarding the provision of interconnection, and incorporates other
allegations previously raised in separate proceedings.
In proceedings commenced by Telstra NZ Limited ("Telstra NZ") in May 1999,
it is alleged that Telecom's cessation of certain carrier rebilling
arrangements with Telstra NZ breaches the Commerce Act. Telstra NZ seeks
injunctive relief together with unspecified damages.
In June 1999 a claim was filed against Telecom in the Employment Court by
representative and individual plaintiffs. The plaintiffs allege breach of
various express and implied terms of their employment contracts. The claim
is not fully quantified.
In March 1997 Telstra Corporation commenced proceedings against AAPT in the
Commercial Division of the Supreme Court of New South Wales, Australia.
These proceedings were later transferred to the Federal Court of Australia
in Sydney. Telstra Corporation claims approximately AUD$123 million plus
interest and costs for unpaid charges for telecommunications services and
restitution for the benefits received in relation to those
telecommunication services. AAPT has cross-claimed asserting claims
including breach of contract, negligence, misleading and deceptive conduct,
misuse of confidential information, unconscionable conduct and abuse of
market power under Part IV of the Australian Trade Practices Act. AAPT
currently claims damages of AUD$580 million. Trial of these proceedings has
commenced and the hearing will resume in June 2000.
In April 2000, CallPlus Limited ("CallPlus") and two other companies issued
proceedings against Telecom alleging breach of contract and the Commerce
Act in relation to Telecom's 0867 service. Clear also commenced proceedings
against Telecom in April 2000, alleging breach of contract in relation to
the number portability agreement between Telecom and Clear and breach of
the Commerce Act in relation to Telecom's 0867 service. CallPlus and Clear
each seek injunctive relief and an inquiry into damages.
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.
8
<PAGE>
Telecom Corporation of New Zealand Limited and Subsidiaries
NOTES TO THE CONDENSED FINANCIAL
STATEMENTS
continued
NOTE 7 ACQUISITION OF AAPT LIMITED
On 27 November 1999 Telecom purchased an additional 61.7% shareholding in
AAPT, bringing the total shareholding at that date to 81.4%. Telecom's
share of the operating results of AAPT have been included in the Statement
of Financial Performance from 27 November 1999.
A fair value exercise is proceeding and the majority of AAPT's assets and
liabilities have been restated to their fair values at the date of
acquisition. Final allocation of the purchase price will be made before 30
June 2000. Any further differences between the fair value of assets and
liabilities acquired and the values recorded below will result in a change
to the amount of goodwill recorded in connection with the acquisition.
Summary of Effect of Acquisition of AAPT as at 27 November 1999
--------------------------------
(Dollars in millions) NZ$
--------------------------------
Net assets acquired:
Net current assets 30
Fixed assets 295
Other long-term assets 323
Non-current accounts payable (136)
Long-term debt (147)
-----
365
Minority interest (68)
-----
297
Goodwill on acquisition 1,277
-----
Consideration 1,574
=====
NOTE 8 QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Surplus from
Net abnormal Surplus operations Net earnings
Operating revenues/ from before income attributable Net earnings
revenues (expenses) operations tax to shareholders per share
---------------------------------------------------------------------------------------------------------------
(NZ dollars in millions,
except per share amounts) NZ$
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Quarter ended:
30 September 1999 887 - 365 337 209 0.119
31 December 1999 993 - 350 311 197 0.112
31 March 2000 1,239 15 380 328 205 0.117
----------------------------------------------------------------------------------------------
Nine months ended 31 March 2000 3,119 15 1,095 976 611 0.349
==============================================================================================
Quarter ended:
30 September 1998 869 - 359 328 206 0.118
31 December 1998 859 - 354 325 202 0.115
31 March 1999 896 1 362 337 224 0.128
30 June 1999 863 (7) 342 320 202 0.115
-------------------------------------------------------------------------------------------
Year ended 30 June 1999 3,487 (6) 1,417 1,310 834 0.476
==============================================================================================
</TABLE>
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>
Appendix One
Telecom Corporation of New Zealand Limited Segmental Reporting
As at and for the nine months ended 31 March 2000
Geographical Segments
- ---------------------
<TABLE>
<CAPTION>
New Zealand Australian Other
Operations Operations Operations Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Operating revenue 2,655 405 44 - 3,104
Abnormal revenue - 15 - - 15
Internal revenue 15 12 - (27) -
------------------------------------------------------------------------------------
Total revenue 2,670 432 44 (27) 3,119
Segment net surplus 588 25 14 (16) 611
Segment assets 4,892 977 240 1,209* 7,318
</TABLE>
In the nine months to 31 March 1999 more than 90% of the Telecom Group's total
operating revenues, operating earnings and identifiable assets were generated by
operations in New Zealand, therefore no comparative period information has been
presented.
* Includes goodwill arising on consolidation of AAPT Limited.
<PAGE>
[LOGO]
MANAGEMENT COMMENTARY
16 May 2000
Third Quarter Results to 31 March 2000
In November 1999, Telecom increased its shareholding in AAPT from 19.8% to more
than 80% (80.3% as at 31 March 2000). Telecom's result for the period to 31
March 2000 reflects the consolidation of AAPT's earnings from 1 December 1999,
the amortisation of associated goodwill from 1 December 1999 and the costs of
funding the investment in AAPT for the reported period.
Telecom's consolidated net earnings of NZ$611 million for the nine months ended
31 March 2000 decreased by NZ$21 million, or 3.3%, from NZ$632 million for the
same period last year. Net earnings of NZ$205 million for the quarter ended 31
March 2000 ("Q3 1999-2000") decreased by NZ$19 million, or 8.5%, compared with
the same quarter last year.
Net earnings for the nine months and quarter represented earnings per share
("EPS") of NZ34.9 cents and NZ11.7 cents respectively. EPS decreased by 3.4%
for the nine months and decreased by 8.5% for the quarter compared with the same
periods last year.
Excluding the effect of the investment in AAPT, Telecom's net earnings would
have been NZ$644 million for the nine months, an increase of NZ$18 million, or
2.9%, and NZ$222 million for Q3 1999-2000, an increase of NZ$4 million, or
1.8%, respectively compared with the same periods last year (after excluding
abnormal items of NZ$6 million from the comparable period last year).
Telecom will pay a fully imputed Q3 1999-2000 dividend of NZ11.5 cents per
ordinary share in June 2000. The dividend for the quarter ended 31 March 1999
("Q3 1998-99") was also NZ11.5 cents per ordinary share.
<PAGE>
2
DIVIDENDS
The quarterly dividend of NZ11.5 cents per share represents a distribution of
approximately 91% of third quarter net earnings before amortisation costs.
Since Telecom's earnings vary from quarter to quarter, owing to seasonality and
other factors, the dividend payout percentage resulting from the NZ11.5 cents
dividend for the third quarter is not necessarily indicative of distribution
levels for the remainder of the year.
<TABLE>
<S> <C>
========================================================================================================
Q3 dividends
Ordinary shares NZ11.5 cents
American Depositary Shares *US46.07 cents
Supplementary dividend (to non-resident holders)
Per ordinary share NZ2.03 cents
Per American Depositary Share *US8.13 cents
Books closing dates
New Zealand, Australia Stock Exchanges# 2 June 2000
New York Stock Exchange 1 June 2000
Payment dates
New Zealand, Australia 16 June 2000
New York 23 June 2000
* Estimated based on an exchange rate at 31 March 2000 of NZ$1.00 to US$0.5008.
# Australian shares go `ex' dividend on 29 May 2000.
========================================================================================================
</TABLE>
FORWARD-LOOKING STATEMENTS
This management commentary contains forward-looking statements. The words
"believe", "expect", "will", "estimate", "project", "forecast", "should",
"anticipate" and similar expressions may identify forward-looking statements.
Such forward-looking statements are based on the beliefs of the Company's
management as well as on assumptions made by and information currently available
to the Company at the time such statements were made. Actual results could
differ materially from those projected in the forward-looking statements as a
result of the matters discussed herein and certain economic and business
factors, some of which may be beyond the control of the Company. Such factors
include, but are not limited to, competition in the New Zealand
telecommunications market, the outcome of litigation pending between Telecom and
certain of its competitors, the effect of current or future government
regulation, technological change in the telecommunications industry, and the
state of the New Zealand and Australian economies.
<PAGE>
3
EFFECT OF AAPT
AAPT's results have been consolidated with Telecom's results with effect from 1
December 1999. Accordingly Telecom's consolidated results for the nine months
include AAPT's earnings (adjusted for consolidation items including minority
interest and goodwill amortisation) for the four months to 31 March 2000.
<TABLE>
<CAPTION>
=============================================================================================================
RECONCILIATION OF EARNINGS BEFORE AND AFTER AAPT
Nine Months Ended Quarter Ended
31 March 31 March
----------------------------------- ----------------------------------
1999 2000 Change 1999 2000 Change
NZ$m NZ$m % NZ$m NZ$m %
----------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net earnings including AAPT 632 611 (3.3) 224 205 (8.5)
deduct share of AAPT's earnings#:
Net earnings before abnormals - 6 - 4
Abnormals - 12 - 12
----------------------------------- ----------------------------------
- 18 - 16
add back:
Amortisation of goodwill - 19 - 14
Funding costs relating to
AAPT investment (after tax) - 32 - 19
----------------------------------- ----------------------------------
Net earnings before AAPT
(including Telecom abnormals) 632 644 1.9 224 222 (0.9)
deduct Telecom abnormals* 6 - 6 -
----------------------------------- ----------------------------------
Net earnings before AAPT
(before abnormals) 626 644 2.9 218 222 1.8
----------------------------------- ----------------------------------
# After minority interest and group level adjustments.
* Telecom abnormals of NZ$6 million in the prior period represented the proceeds from the liquidation of the
executive share ownership plan (NZ$16 million) less restructuring costs (NZ$10 million after tax).
=============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
KEY PERFORMANCE INDICATORS (INCLUDING AAPT)
Q3 Q3 Nine Months Nine Months
1998-99 1999-00 1998-99 1999-00
<S> <C> <C> <C> <C>
Operating Margin (%) * 41.0 29.8 41.2 34.8
Asset Utilisation (%) # 75.9 - 69.8 - 75.1 - 67.7 -
Net Interest Cover (times) ^ 7.8 4.8 7.0 5.7
Return on Average Total Assets (%) + 31.1 - 20.8 - 30.9 - 23.5 -
Net Debt/Net Debt plus Capital Funds (%) 42.9 63.0 42.9 63.0
</TABLE>
KEY PERFORMANCE INDICATORS (EXCLUDING AAPT)
<TABLE>
<CAPTION>
Q3 Q3 Nine Months Nine Months
1998-99 1999-00 1998-99 1999-00
<S> <C> <C> <C> <C>
Operating Margin (%) * 41.0 40.1 41.2 40.1
Asset Utilisation (%) # 75.9 - 74.5 - 75.1 - 74.0 -
Net Interest Cover (times) ^ 7.8 8.3 7.0 7.7
Return on Average Total Assets (%) + 31.1 - 29.8 - 30.9 - 29.7 -
Net Debt/Net Debt plus Capital Funds (%) 42.9 45.9 42.9 45.9
</TABLE>
* Normalised surplus from operations/operating revenue
# Normalised operating revenue/average total assets (net of cash and short-term
investments)
^ Normalised surplus from operations/net interest expense (before interest
capitalised) inclusive of capital note coupons
+ Normalised surplus from operations/average total assets (net of cash and
short-term investments)
- - Annualised
<PAGE>
4
TELECOM (EXCLUDING AAPT)
Telecom's net earnings (excluding AAPT) of NZ$644 million for the nine months
ended 31 March 2000 increased by NZ$18 million, or 2.9%, from NZ$626 million for
the same period last year, after excluding abnormal items of NZ$6 million from
the prior period.
Net earnings (excluding AAPT) of NZ$222 million for Q3 1999-2000 increased by
NZ$4 million, or 1.8%, compared with the same quarter last year, after excluding
abnormal items from the prior period.
On a reported basis, earnings (excluding AAPT) increased by NZ$12 million, or
1.9%, for the nine months and decreased by NZ$2 million, or 0.9%, for the
quarter.
<TABLE>
<CAPTION>
==============================================================================================================
EARNINGS OVERVIEW (EXCLUDING AAPT AND ABNORMALS)
Nine Months Ended Quarter Ended
31 March 31 March
---------------------------------- -----------------------------------
1999 2000 Change 1999 2000 Change
NZ$m NZ$m % NZ$m NZ$m %
---------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues 2,608 2,705 3.7 880 921 4.7
Operating expenses 1,534 1,620 5.6 519 552 6.4
Operating expenses excluding
cost of sales 1,193 1,192 (0.1) 404 406 0.5
EBIT* 1,074 1,085 1.0 361 369 2.2
EBITDA# 1,494 1,512 1.2 503 516 2.6
Net earnings 626 644 2.9 218 222 1.8
*Earnings before interest and tax. #Earnings before interest, tax, depreciation and amortisation.
==============================================================================================================
</TABLE>
Revenue (excluding AAPT) rose by 3.7% in the nine months to 31 March 2000 and by
4.7% in Q3 1999-2000 compared with the same periods last year. Revenue growth
largely reflected strong growth in cellular, fixed line to cellular,
interconnection and data revenues. Higher revenue growth in the third quarter
also reflected a reversal of the decline in national and international revenue,
with both national and international revenue increasing in the third quarter,
compared with the same period last year.
Operating expenses (excluding AAPT) increased by 5.6% in the nine months to 31
March 2000 and by 6.4% in Q3 1999-2000 compared with the same periods last year.
The increases were largely due to higher cost of sales and other operating
expenses, partly offset by lower labour costs. If cost of sales were excluded,
expenses declined by 0.1% for the nine months and increased by 0.5% for Q3 1999-
2000.
<PAGE>
5
OVERVIEW OF RESULTS (EXCLUDING AAPT)
Telecom's results before the effect of the investment in AAPT are summarised in
the tables on pages 27 and 28. 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 condensed financial statements, accompanying this document, disclose
the fully consolidated result.
Revenue
Revenue rose by 3.7% in the nine months to 31 March 2000 and by 4.7% in Q3 1999-
2000 compared with the same periods last year. Revenue growth largely reflected
strong growth in cellular, fixed line to cellular, interconnection and data
revenues. Higher revenue growth in the third quarter also reflected a reversal
of the decline in national and international revenue, with both national and
international revenue increasing in the third quarter, compared with the same
period last year.
Volume Growth
<TABLE>
<CAPTION>
=================================================================================================
As at and for the nine Variation
months ended 31 March 00:99
----------------------------------------------------
1999 2000 %
----------------------------------------------------
<S> <C> <C> <C>
Local Service
- -------------
Access lines 1,864,000 1,889,000 1.3
Local call minutes (millions) 2,393.4 2,517.1 5.2
Centrex lines 74,900 79,100 5.6
Calling
- -------
Call minutes (millions)
National calls 1,567.1 1,632.0 4.1
Fixed line to cellular calls 313.8 422.4 34.6
National 0800 calls 398.5 502.9 26.2
International outward calls 343.7 435.1 26.6
International inward calls (excl. Transits) 252.1 313.2 24.2
Cellular
- --------
Cellular call minutes (millions) 582.1 775.4 33.2
Cellular connections at end of period
Total at period end 608,900 921,600 51.4
Average for the nine months 542,750 804,350 48.2
Data
- ----
Registered Xtra customers 180,300 268,100 48.7
Xtra dial-up hours (millions) 10.7 32.1 200.0
Average hours per active customer (monthly) 9.9 18.8 89.9
ISDN lines 46,900 73,000 55.7
Certain reclassifications of prior period's data have been made to conform to current period
classifications.
=================================================================================================
</TABLE>
<PAGE>
6
<TABLE>
<CAPTION>
=================================================================================================
For the quarter Variation
ended 31 March 00:99
-------------------------------------------
1999 2000 %
-------------------------------------------
<S> <C> <C> <C>
Local Service
- -------------
Local call minutes (millions) 795.9 814.8 2.4
Calling
- -------
Call minutes (millions)
National calls 524.4 544.9 3.9
Fixed line to cellular calls 110.2 149.0 35.2
National 0800 calls 136.7 171.8 25.7
International outward calls 111.8 148.1 32.5
International inward calls (excluding 83.3 99.8 19.8
Transits)
Cellular
- --------
Cellular call minutes (millions) 208.1 268.1 28.8
Average cellular connections during quarter 586,850 889,750 51.6
Data
- ----
Xtra dial-up hours (millions) 4.0 12.4 210.0
Average hours per active customer 9.7 20.2 108.2
Certain reclassifications of prior period's data have been made to conform to current period
classifications.
=================================================================================================
</TABLE>
Revenue Reclassification
During Q3 1999-2000 Telecom has reclassified wholesale revenue, previously
included with interconnection revenue, into national, international and data
revenues. Volumes and prior periods' revenue have been restated for the revenue
reclassifications.
Local Service
Local service revenues decreased for the nine months and the quarter by NZ$4
million, or 0.5%, and NZ$5 million, or 1.9%, respectively compared with the same
periods last year.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Local Service (Variation 00:99) Nine months Third Quarter
% %
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Access
- Revenue (1.5) (2.1)
- Access lines 1.3 1.3
Local calls
- Revenue 1.1 (1.8)
- Call minutes 5.2 2.4
- ---------------------------------------------------------------------------------------
</TABLE>
The decrease in access revenue of NZ$10 million, or 1.5%, for the nine months
and NZ$5 million, or 2.1%, for the quarter, was largely the result of a decrease
in business line rental reflecting price reductions for business customers from
January 1999.
<PAGE>
7
Local service revenue and access line growth have been affected by the entry of
Saturn Communications into the local service market, the migration of local
access to ISDN and increased use of cellular phones.
Revenue from local calls increased by NZ$1 million, or 1.1%, for the nine months
but decreased by NZ$1 million, or 1.8%, for the quarter. Revenue from
Smartphone, messaging and Call Track increased by NZ$5 million, or 10.6%, for
the nine months and NZ$1 million, or 7.3%, for the quarter.
National
National revenue remained stable for the nine months but increased NZ$7 million,
or 4.0%, for the quarter, largely due to increases in fixed line to cellular
revenues but partly offset by a reduction in national calls revenue as a result
of national toll price reductions.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
National (Variation 00: 99) Nine months Third quarter
% %
- ---------------------------------------------------------------------------------------
<S> <C> <C>
National calls *
- Revenue (16.0) (12.6)
- Call minutes 4.1 3.9
- Price per minute (19.3) (15.9)
Calls to cellular networks
- Revenue 27.3 27.3
- Call minutes 34.6 35.2
- Price per minute (5.4) (5.8)
National 0800
- Revenue 8.8 17.8
- Call minutes 26.2 25.7
- Price per minute (13.8) (6.2)
* Includes national VPN and Centrex calls.
- ---------------------------------------------------------------------------------------
</TABLE>
The average per minute price of national calls, excluding National 0800 and
those made to cellular networks, declined by approximately 19% and 16% for the
nine months and third quarter respectively to approximately NZ14 cents.
The BEST (Business Enjoy Savings on Tolls) pricing option was launched in
February 1999 and was open for enrollment until 30 April 1999. This plan
provided a ceiling to business market customers on the cost of their tolls until
31 March or 30 April 2000, depending on when they enrolled. The ceiling was 10%
lower than the customer's average monthly spend.
In May 1999, new calling plans for residential customers were introduced.
These plans offer different combinations of NZ$3 or NZ$5 capping and/or maximum
off-peak and peak calling rates.
The effect of national toll price reductions was partly offset by increased
revenue from calls from the fixed line to cellular networks and National 0800 as
a result of increased call volumes.
<PAGE>
8
Fixed line to cellular revenue increased by NZ$44 million, or 27.3%, for the
nine months and NZ$16 million, or 27.3%, for the quarter. The average price per
minute for fixed line to cellular calls has declined by 5.4% for the nine months
and 5.8% for the third quarter, but has been more than offset by a significant
increase in call volumes resulting from the strong growth in cellular
penetration.
International
Total international revenue decreased by NZ$6 million, or 2.0%, for the nine
months but increased by NZ$3 million, or 3.3%, for the quarter compared with the
same periods last year. The improvement in the third quarter largely reflects
higher growth in inward calls revenue.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
International (Variation 00:99) Nine months Third quarter
% %
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Outward calls
- Revenue (5.4) (8.7)
- Call minutes 26.6 32.5
- Price per minute (25.3) (31.1)
Inward calls
- Revenue 10.2 32.9
- Call minutes 24.2 19.8
- Price per minute (11.3) 10.9
Transit call margin
- Margin (19.7) (14.8)
- Call minutes 56.7 57.0
- Margin per minute (48.7) (45.7)
- ------------------------------------------------------------------------------------------
</TABLE>
Growth in outward call minutes reflected the volume stimulation from price
specials offered to New Zealand customers and significant price reductions over
the past year. The average per minute charges for outward calls of
approximately NZ34 cents for the nine months and NZ32 cents for the quarter were
around 25% and 31% lower respectively than in the same periods last year.
The reduction in the average price reflects price reductions and frequent
weekend specials. The rate of average price decline was higher in the third
quarter as the price caps on consumer Talk All Day promotions were reduced in
February 2000 from NZ$5 to NZ$4 for Australia and from NZ$10 to NZ$8 for the UK,
US, Canada and Ireland.
The increase in inward call revenue for the nine months resulted largely from
increased call minutes, partly offset by reductions in the average price per
minute. Revenue growth was higher in the third quarter as the average price per
minute increased compared with the same period last year, partly as a result of
the lower New Zealand dollar in Q3 1999-2000 compared with the same period last
year and increases in the rates for mobile originated inward calls.
<PAGE>
9
The increase in inward revenue has been offset by an increase in the
international outpayment included in cost of sales. This outpayment increased
by 8.3% for the nine months and 30.2% for the quarter.
The net margin received from Telecom's international business, excluding
transits (outward and inward call revenue less the international outpayment),
decreased by 5.5% and 9.4% for the nine months and quarter respectively (see
"Tolls Margin"). This reduction reflected the increasing competition in all
areas of international business.
The decrease in the transit call margin (revenue net of outpayments) was largely
due to lower average margins per call minute. The increased volumes from the
transit business are attributable to the utilisation of a variety of outward
routing options and Telecom's point of presence ("POP") in the US winning new
refile traffic.
Tolls Margin
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Tolls Margin
Nine Months Ended 31 March Quarter Ended 31 March
--------------------------------------------------------------------------
1999 2000 Change 1999 2000 Change
NZ$M NZ$M % NZ$M NZ$M %
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
National calls * 273.8 230.1 (16.0) 87.1 76.1 (12.6)
--------------------------------------------------------------------------
International Margin
- --------------------
International outwards revenue 158.1 149.6 (5.4) 51.5 47.0 (8.7)
International inwards revenue 101.7 112.1 10.2 28.3 37.6 32.9
International outpayment (117.5) (127.2) 8.3 (31.1) (40.5) 30.2
--------------------------------------------------------------------------
Net international margin before transits 142.3 134.5 (5.5) 48.7 44.1 (9.4)
--------------------------------------------------------------------------
Total tolls margin 416.1 364.6 (12.4) 135.8 120.2 (11.5)
--------------------------------------------------------------------------
* Excludes National 0800 and calls from fixed line to cellular networks.
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Telecom expects the decline in the tolls margin to continue but considers that
the absolute value of the decline is likely to diminish.
Interconnection
Interconnection revenue is derived from charges for delivering to and accepting
from other service providers local, national, international, cellular and 0800
calls.
Interconnection revenue increased by NZ$13 million, or 25.5%, for the nine
months and NZ$7 million, or 43.8%, for the quarter, largely due to increased
activity with existing carriers.
<PAGE>
10
During Q3 1999-2000 Telecom has reclassified wholesale revenue, previously
included with interconnection revenue, into national, international and data
revenues. Volumes and prior periods' revenue have been restated for the revenue
reclassifications.
Cellular and Other Mobile Services
Revenue from cellular and other mobile services grew by NZ$42 million, or 11.4%,
for the nine months and by NZ$7 million, or 5.5%, for the quarter compared with
the same periods last year. Cellular revenue grew by NZ$44 million, or 12.5%,
for the nine months and by NZ$8 million, or 6.3%, for the quarter.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Cellular (Variation 00:99) Nine Months Third quarter
% %
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue 12.5 6.3
Call minutes 33.2 28.8
Mobile cost of sales 43.6 6.3
Cellular gross margin (revenue less cost of sales) 4.4 6.2
Connections
Total at period end 51.4 51.4
Average during the period 48.2 51.6
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Telecom had 921,600 cellular connections at 31 March 2000 compared with 608,900
at 31 March 1999, an increase of 51.4%. The continued strong growth in
connections is largely due to growth in the prepaid cellular business.
Prepaid phones have continued to be popular with consumers, but new pricing
plans for contract customers, which include free minutes and additional
services, have also attracted large numbers of customers. The total number of
prepaid customers at 31 March 2000 was 450,000, approximately 49% of total
connections.
Average revenue per cellular customer decreased by approximately 24% for the
nine months and by approximately 30% for the third quarter compared with the
same periods last year, reflecting the recent high number of prepaid
connections. Average revenue per prepaid connection is generally lower than
average revenue per postpaid connection.
The total number of cellular connections in New Zealand, including Vodafone's
connections, represents approximately 37% of the New Zealand population. This
penetration level, when compared with other countries, suggests scope for
continued expansion of this market.
<PAGE>
11
The cellular gross margin (cellular revenue less cost of sales) increased by
NZ$12 million, or 4.4%, for the nine months and by NZ$6 million, or 6.2%, for
the quarter compared with the same periods last year.
Cellular cost of sales increased by 43.6% for the nine months and 6.3% 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
cellular cost of sales.
Data
Data revenue increased by NZ$58 million, or 22.2%, for the nine months and by
NZ$22 million, or 25.0%, for the quarter. This growth was driven by demand for
bandwidth to support business networking and the increased penetration of the
Internet.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Data (Variation 00: 99) Nine months Third quarter
% %
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Internet revenue 61.3 43.1
Xtra registered customers 48.7 48.7
Xtra dial-up hours 200.0 210.0
Average hours per active customer 89.9 108.2
ISDN revenue 41.0 42.1
ISDN lines 55.7 55.7
LANLink revenue 68.8 88.7
- ---------------------------------------------------------------------------------------------------
</TABLE>
Internet revenue increased by NZ$18 million, or 61.3%, for the nine months and
by NZ$5 million, or 43.1%, for the quarter.
Telecom's Internet service provider "Xtra" had approximately 268,100 registered
customers at 31 March 2000, compared with 180,300 at 31 March 1999, an increase
of 48.7%. Of the registered customers, approximately 80% were active during the
last month of the period.
ISDN revenue increased by NZ$16 million, or 41.0%, for the nine months and by
NZ$6 million, or 42.1%, for the quarter. The increase in ISDN revenues partly
reflected migration from basic access services. The number of ISDN lines at 31
March 2000 increased by 55.7% from 31 March 1999.
LANLink (Managed Network Services) revenue increased by NZ$15 million, or 68.8%,
for the nine months and by NZ$7 million, or 88.7%, for the quarter.
<PAGE>
12
Directories
Total directories revenue increased by NZ$11 million, or 7.8%, for the nine
months and NZ$5 million, or 8.2%, for the quarter compared with the same periods
last year.
Revenue from regional directories increased by 7.5% for the nine months and 9.6%
for the quarter as a result of tariff and volume growth in both The Telephone
Book and YELLOW PAGES products.
Miscellaneous Other Services
Miscellaneous other services revenue remained stable for the nine months but
increased NZ$2 million, or 12.5%, for the quarter. This revenue is derived
principally from software development and telecommunications services provided
in the Cook Islands and Samoa.
Expenses
Operating expenses increased by NZ$86 million, or 5.6%, for the nine months and
by NZ$33 million, or 6.4%, for the quarter. A decrease in labour costs was more
than offset by increased cost of sales and other operating expenses. If cost of
sales are excluded, operating expenses decreased by NZ$1 million, or 0.1%, for
the nine months but increased by NZ$2 million, or 0.5%, for the quarter.
Compared with the same periods last year, operating expenses as a percentage of
revenue have increased from 58.8% to 59.9% for the nine months and from 59.0% to
59.9% for the quarter.
Labour
The decrease in labour costs of NZ$43 million, or 12.1%, for the nine months and
NZ$11 million, or 9.7%, for the quarter reflected a reduction of 1,025 in
personnel numbers between 31 March 2000 and 31 March 1999. The lower personnel
numbers are due largely to the outsourcing of information services to EDS
effective from 1 September 1999. The costs of outsourcing are included in "Other
Operating Expenses". The effect of the reduced personnel numbers was partly
offset by salary increases arising from Telecom's annual salary review process.
<PAGE>
13
<TABLE>
<CAPTION>
=============================================================================================================
Personnel Numbers
(Excluding AAPT)
Variation to March 2000
-------------------------------------------------------------------------------------
March June March March June
1999 1999 2000 1999 1999
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operations 6,289 5,994 5,533 (756) (461)
Other 1,510 1,485 1,241 (269) (244)
-------------------------------------------------------------------------------------
Total 7,799 7,479 6,774 (1,025) (705)
-------------------------------------------------------------------------------------
=============================================================================================================
</TABLE>
Depreciation
Depreciation expense increased by NZ$7 million, or 1.7%, for the nine months and
NZ$5 million, or 3.6%, for the quarter. The year on year comparison reflects the
impact of the increasing fixed asset base resulting from capital expenditure.
Cost of Sales
Cost of sales increased by NZ$87 million, or 25.5%, for the nine months and
NZ$31 million, or 27.0%, for quarter. This increase was largely due to higher
cellular and interconnect cost of sales.
Cellular cost of sales increased by approximately 43.6% for the nine months and
6.3% for the quarter (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 value accretion will accrue
from its recent high number of customer acquisitions. Recent valuations of
cellular companies suggest that the value per customer is many times the cost
Telecom is incurring to acquire them.
Most Australasian telecommunications companies have adopted the accounting
policy of capitalising cellular acquisition costs and amortising them 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 January 2000, cellular cost of sales would have been lower by
approximately NZ$15 million in Q3 1999-2000.
Interconnect expense increased by approximately 91.0% for the nine months and
82.3% for the quarter reflecting increased volumes including the growth in calls
from Telecom's fixed line network to Vodafone's cellular network.
<PAGE>
14
International cost of sales for outbound calls increased by 8.3% for the nine
months and increased by 30.2% for the quarter. Higher growth in Q3 1999-2000
reflected higher growth in call volumes and the lower New Zealand dollar in Q3
1999-2000 compared with the same period last year and increases in the rates for
mobile originated outward calls (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 more than 80% of other
operating expenses.
Other operating expenses increased by NZ$35 million, or 8.3%, for the nine
months and NZ$8 million, or 5.3%, for the quarter. There were a number of
offsetting increases and decreases among the components of other operating
expenses, the most significant being an increase in outsourcing costs. This
increase reflected the outsourcing of operator services to SITEL in the year
ended 30 June 1999 and the outsourcing of information services to EDS effective
from 1 September 1999.
Advertising costs increased by 9.0% for the nine months and by 7.5% for the
quarter, compared with the same periods last year. The increase largely
reflected Telecom's efforts to increase cellular connections.
Net Interest Expense and Taxation
Net interest expense excluding the costs of funding the investment in AAPT
decreased by NZ$13 million, or 15.3%, for the nine months and NZ$2 million, or
8.0%, for the quarter compared with the same periods last year. The decreases in
net interest expense were partly due to lower short-term interest rates.
Income tax expense increased by NZ$8 million, or 2.5%, for the nine months and
increased NZ$6 million, or 5.8%, for the quarter compared with the same periods
last year. The effective tax rates for the nine months and quarter were 32.3%
and 31.8% respectively compared with 32.3% and 31.0% for the same periods last
year and a statutory rate of 33%.
Capital Expenditure
Capital expenditure for the nine months amounted to NZ$458 million, a decrease
of NZ$25 million, or 5.2%, compared with the same period last year. Cash applied
to capital expenditure for the nine months amounted to NZ$458 million, an
increase of NZ$15 million, or 3.4%.
<PAGE>
15
In February 2000, Telecom announced that US communications networking company
Lucent Technologies had been chosen to build a mobile phone network based on the
code division multiple access ("CDMA") standard. AAPT also chose Lucent
Technologies as its CDMA supplier. Telecom and AAPT selected Lucent Technologies
as a result of independent evaluations, but Telecom believes that there are
significant synergies and obvious customer benefits with both companies choosing
the same vendor.
Telecom currently expects to spend approximately NZ$700 million on capital
expenditure in the 12 months to 30 June 2000. This includes expected CDMA
capital expenditure but excludes any purchases of capacity from Southern Cross
Cables Limited and any potential acquisition of spectrum that may be available
to purchase from the Government.
LIQUIDITY AND CAPITAL RESOURCES (INCLUDING AAPT)
Net cash flows from operating activities for the nine months were NZ$1,094
million, a decrease of NZ$30 million compared with the same period last year.
Net cash flows used in investing activities were NZ$1,866 million, an increase
of NZ$1,393 million compared with the same period last year. This increase
largely reflects the acquisition of shares in AAPT and an increase in cash
applied to the purchase of fixed assets.
Net cash from financing activities amounted to NZ$826 million, compared with
cash used of NZ$661 million in the nine months to 31 March 1999. The increase is
largely due to an increase in net proceeds from short-term and long-term debt to
fund the AAPT acquisition.
The net debt to net debt plus capital funds ratio was 63.0% at 31 March 2000,
compared with 48.3% at 30 June 1999. In calculating this ratio, net debt is
deemed to consist of total long and short-term debt, net of cash and short-term
investments and a term deposit of NZ$31 million. Capital funds include
shareholders' funds, capital notes (TeleNotes and Restricted Capital Securities)
and minority interests.
Cash and short-term investments were NZ$186 million at 31 March 2000 compared
with NZ$143 million at 30 June 1999. As at 31 March 2000 Telecom had available
un-utilised committed facilities of NZ$400 million and US$200 million, as well
as substantial uncommitted other borrowing capacity.
As at 31 March 2000 total interest-bearing long-term and short-term liabilities
amounted to NZ$3,776 million, compared with NZ$2,067 million at 30 June 1999.
Capital notes totalled NZ$943 million at 31 March 2000.
<PAGE>
16
On 24 March 2000 Standard & Poors ("S & P") downgraded Telecom's long-term
ratings from AA to A+ and also downgraded Telecom's short-term rating from A-1+
to A-1. S & P stated "the ratings reflect Telecom's higher-risk business
profile and more aggressive financial profile following TCNZ's NZ$1.6 billion
debt-funded acquisition of an 80% interest in AAPT Limited". S & P stated that
"TCNZ's still-strong credit ratings reflected Telecom's superior market position
as the only full-service provider in the relatively low-growth New Zealand
telecommunications market, which underpins strong cash generating ability, a
sensible strategy to diversify its activities into the larger, more competitive,
and stronger growing Australian market, and moderate financial profile".
Telecom is rated A1/P1 by Moody's Investors Service. The outlook for both
rating agencies is stable.
THE NEW ZEALAND ECONOMY
The majority of Telecom's operations are in New Zealand and growth in Telecom's
business is affected by the state of the New Zealand economy.
Production based Gross Domestic Product ("GDP") increased 2.2 percent in the
December 1999 quarter. For the year to 31 December 1999, the economy grew by
3.5 percent. This is the strongest annual growth rate since the year ended March
1996. The Government Statistician said economic growth was broadly based across
the economy, with the largest rises recorded in manufacturing, transport and
communications, construction, farming and wholesale and retail trade.
The Government Statistician said the communications industry continued to
outperform the economy, with activity increasing 4.0 percent in the December
quarter.
While New Zealand will continue to be reliant on exports for a material portion
of its GDP, dependence on commodity products has slowly declined over the past
two decades, being supplemented by tourism, manufacturing and services.
Inflation measured by the Consumers Price Index rose 0.7% for the March 2000
quarter. On an annual basis, the Consumers Price Index inflation measure is 1.5%
higher than a year ago.
COMPETITIVE FRAMEWORK
The Telecommunications Act 1987 allows the establishment and maintenance of
telecommunications networks by any person. There have been no statutory entry
barriers to any part of the New Zealand telecommunications industry since 1989,
with all telecommunications companies subject to ordinary commercial law (e.g.
Companies Act, Fair Trading Act, Commerce Act).
<PAGE>
17
Competitors with whom Telecom has interconnection agreements offer business and
residential access, international, national and local voice services, cellular
services, data services, Internet services and mobile trunked radio services.
Telecom has interconnection agreements with 12 other parties including large
multi-national corporations or their affiliates, including Telstra, British
Telecom and Vodafone. Nine of these interconnection agreements include local
service. Telecom also has nine number portability agreements enabling carriers
to provide customers with the option of changing carriers without changing
numbers.
In addition to the companies with which Telecom has interconnection agreements,
numerous other organisations offer voice calling services from overseas or by
re-selling services provided by New Zealand's network operators. Several
Internet service providers based in New Zealand operate networks and offer
telecommunications services. Telecom also faces competition in leased-line
services, paging, directory publishing and supply, and installation and
maintenance of customer premises equipment ("CPE").
Competition in New Zealand's telecommunications market is expected to remain
intense, with the prospect of existing participants extending their activities
and new competitors entering the market.
The Government has reviewed telephone numbering issues and in December 1998
agreement was reached between the Government and some industry participants
(including Telecom) for independent administration and allocation of numbers. In
November 1999 the eight companies who are signatories to the Number
Administration Deed appointed M-Co as independent administrator for the
telecommunications numbering plan. The parties to the Number Administration deed
are: CLEAR Communications, Newcall Communications, Saturn Communications,
Teamtalk, Telecom New Zealand, Telstra New Zealand, The Internet Group and
Vodafone New Zealand.
The Government has announced its intention to amend the Commerce Act including
changes to the provisions regarding penalties, indemnification of officers and
competition thresholds. An enhanced Telecommunications Disclosure Regime came
into effect on 1 January 2000. The new regime will focus on disclosure of costs
involved in providing local access and Kiwi Share services.
A Government Ministerial Inquiry into Telecommunications began in March 2000.
The inquiry is assessing the regulatory regime for telecommunications, and may
recommend to the Government legislative or regulatory changes. The inquiry has
been asked to investigate and comment on a range of issues, including: the
environment for telecommunications network access and interconnection, including
Telecom's 0867 initiative, the development of an
<PAGE>
18
information economy, Telecom New Zealand's Kiwi Share obligations, and
numbering. The inquiry is due to report at the end of September 2000.
LITIGATION
Telecom is currently involved in a number of legal proceedings, including
lawsuits brought against and by Clear Communications ("Clear") relating to a
variety of issues, including the terms on which Telecom provides
interconnection, Clear's failure to make payment of certain charges under its
interconnection agreement, Telecom's bundling practices and Telecom's 0867
service. Telstra NZ Limited has proceedings against Telecom relating to
Telecom's cessation of certain carrier rebilling arrangements. CallPlus Limited
and two other companies have proceedings against Telecom in relation to
Telecom's 0867 service. AAPT is currently involved in lawsuits brought by and
against Telstra Corporation. See Note 6 to the condensed financial statements
for further comment on these proceedings.
The legal proceedings pending against Telecom and AAPT involve claims for
substantial damages and other relief. There can be no assurance that such
litigation will not have a material adverse effect on Telecom's and AAPT's
business, financial condition or results of operations.
OTHER MATTERS
Sale of ConnecTel
During April, Telecom announced the sale of Connectel, its network, design,
build and maintenance subsidiary, to Downer Group Limited. Many
telecommunications companies already use outside contractors and it is no longer
necessary for Telecom to own a contractor in order to maintain the high quality
of its service. Telecom will continue to work closely with ConnecTel, which has
won a significant number of Telecom's design, build and maintenance contracts in
a competitive tendering process.
The transaction is scheduled to settle on 1 June 2000. Telecom currently
expects that the sale will have a minor favourable impact on Telecom's earnings.
Investment in Independent Newspapers Limited ("INL")
Telecom has recently purchased a small stake in INL. Through this small
strategic position, Telecom hopes to build a closer relationship over time, in
order to provide a further opportunity for accessing potential synergies in the
future. This relationship will enhance Telecom's transition from a traditional
telecommunications company to an online and esolutions provider.
<PAGE>
19
Corporate Venture Capital Fund
Telecom has recently launched TMT Ventures, a corporate venture capital fund
with a target of NZ$150 million to be invested in new growth businesses in the
technology, media, and telecommunications sectors of New Zealand and Australia.
Telecom will make a cornerstone investment of NZ$40 million in TMT Ventures and
has appointed a joint venture between United States-based Advent International
and Direct Capital (New Zealand's largest venture capitalist), to manage the
fund.
Southern Cross
Southern Cross Cables Limited ("SCCL") 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.
In March 2000, Southern Cross announced that the 29,000 kilometre cable network,
was expected to be Ready For Service ("RFS") on 15 November 2000.
At RFS date, Southern Cross will deliver a network incorporating a full fibre
ring linking Australia, New Zealand, Fiji and Hawaii and a direct link from
Hawaii (Oahu) to Nedonna Beach in Oregon, USA and Morro Bay in California, USA.
The landing at Nedonna Beach in Oregon, USA was completed on 17 April 2000. The
last significant section of submarine cable laying is now being completed,
before RFS date.
Telecom New Zealand, Cable & Wireless Optus and MCI WorldCom are the
shareholders in SCCL. Telecom New Zealand holds a 50% interest, which commits
Telecom to provide up to US$75 million by way of equity or shareholder's
advances. Pursuant to this a shareholder's advance of US$69 million (excluding
accrued interest) had been provided by Telecom to SCCL as at 31 March 2000.
To date Southern Cross has signed capacity purchase commitments with customers
totalling approximately US$1.1 billion. Southern Cross cable construction costs
are being funded through a US$640 million external credit facility and interim
funding provided by the shareholders. Telecom has committed to provide up to
US$150 million as part of this interim funding and as at 30 April 2000 Telecom
had advanced US$120 million as part of this interim funding arrangement.
<PAGE>
20
Based on current capacity commitments and expected revenue forecasts, it is
expected that Southern Cross will repay borrowings in the first few years after
completion of construction.
Prior to Q2 1999-2000, the accumulated equity accounted losses of the Southern
Cross group included a provision against Telecom's advance to Southern Cross
Cables Holdings Limited, a Southern Cross group company. Now that capacity
sales commitments have largely covered the cable construction costs, there is no
longer a requirement to maintain the provision against this advance.
AAPT
AAPT earnings for the quarter ended March 2000
<TABLE>
<CAPTION>
======================================================================================================
AAPT EARNINGS OVERVIEW
Quarter Ended 31 March
---------------------------------------
1999 2000 Change
A$m A$m %
---------------------------------------
<S> <C> <C> <C>
Operating revenues 189.3 243.4 28.6
Operating costs 182.5 233.9 28.1
EBIT 6.8 9.5 40.4
EBITDA 14.8 20.8 40.9
Net earnings before abnormals 5.3 4.6 (13.2)
Abnormal items after tax - 21.3 -
Net earnings including abnormals 5.3 25.9 387.4
======================================================================================================
</TABLE>
AAPT's reported net earnings before abnormals for Q3 1999-2000 were A$4.6
million. AAPT contributed NZ$4 million of net earnings before abnormals to
Telecom's consolidated net earnings for Q3 1999-2000. This contribution was
after allowing for minority interests in AAPT's reported net earnings before
abnormals and adjusting for differences in accounting policies.
Allowing for minority interests and the amounts required to be applied to
Telecom's fair value of AAPT's assets at the time of acquisition, AAPT's
abnormal items of A$21.3 million (see "Abnormals") resulted in a NZ$12 million
contribution to Telecom's consolidated net earnings for Q3 1999-2000.
Operating Revenues
AAPT's total revenue increased by 28.6% for the quarter compared with the same
period last year, driven largely by growth in national, data and mobile
revenues.
<PAGE>
21
National revenue increased by 88.0%, as a result of continued strong customer
growth and the introduction of preselection for fixed to mobile services in
September 1999.
Despite strong growth in international volumes, competitive pricing pressures
during the period resulted in a decrease in international revenue of 9.7%.
Data revenue, including Internet and satellite revenues, increased by 92.6% and
mobile revenue increased by 34.1%, compared with the same period last year as
AAPT captured growth opportunities in the Internet, e-commerce, data and mobile
markets.
Operating Costs
Operating costs increased by 28.1% for the quarter compared with the same period
last year. This included cost increases from the fixed wire business arising
from strong revenue growth, increases in costs to support the 32.4% increase in
mobile subscribers, the inclusion of the connect.com.au and CommerceSolutions
businesses for the full quarter and increased depreciation.
AAPT has continued to achieve cost savings through better utilisation of
company-owned network infrastructure (in particular through its regional points
of presence and the higher proportion of traffic carried on its own network).
Depreciation and amortisation costs increased by 41.2% compared with the same
period last year, reflecting AAPT's strategy of investing in infrastructure,
particularly access, to improve margins. Significant increases in depreciation
and amortisation resulted from the depreciation of the new Siemens EWSD
switches, the central business district (CBD) fibre in six capital cities and
additional infrastructure to support an increase of more than 100% in minutes
carried compared to the same period last year.
EBITDA
AAPT's EBITDA increased by 40.9% for the quarter compared with the same period
last year, reflecting AAPT's continuing focus on driving revenue growth, while
achieving significant improvements in the cost-effective management of AAPT's
network, traffic and operating costs.
<PAGE>
22
Abnormals
AAPT reported the following abnormal income and expense items:
<TABLE>
<CAPTION>
Abnormal items (A$M) Quarter ended
31 March 2000
-----------------------
<S> <C>
Net contributions from gain on sale of Sat-Tel 42.0
Changes in accounting policy (20.7)
-----------------------
Net abnormal items 21.3
</TABLE>
In March 2000, AAPT finalised the sale of wholly-owned subsidiary AAPT Sat-Tel
Pty Limited ("Sat-Tel") to New Skies Networks Australia Pty Ltd.
As part of this sale, AAPT and New Skies have entered into a strategic alliance
in which AAPT will lease satellite services from New Skies and continue to
provide its customers with bundled satellite solutions. This strategic alliance
with New Skies allows AAPT to provide full service solutions to its customers.
AAPT has changed its accounting policies relating to certain subscriber
acquisition costs and the recognition of future benefits arising from
international return traffic. AAPT reviewed its accounting policies and has
determined that a more conservative approach is more appropriate for these
costs.
Net Earnings
Net earnings, including abnormal items, increased by 387.4 % for the quarter
compared with the same period last year, driven by continued strong growth from
AAPT's traditional business and realisation of the substantial value generated
in AAPT Sat-Tel Pty Limited over the two years prior to its sale.
AAPT Capital Expenditure
Capital expenditure for the period was A$100 million. Major expenditure during
the period included the acquisition of a national high bandwidth network from
Cable & Wireless Optus and further expenditure for the construction of AAPT's
CBD fibre, local multi-point distribution system (LMDS) and code division
multiple access (CDMA) networks.
Projected Capital Expenditure for the quarter to 30 June 2000
Based on current forecasts AAPT expects to spend in excess of A$40 million in
the quarter to 30 June 2000 as it continues to pursue the development of its
access networks via technologies such as LMDS, CBD Fibre, CDMA and to a lesser
extent xDSL together with the network and computer systems upgrades required to
support new products and services. In addition AAPT will incur further costs in
preparation for the introduction of Goods & Services Tax ("GST") on 1 July 2000.
<PAGE>
23
Credit Rating
During March 2000, AAPT Limited was assigned `A+' long-term and `A-1' short-term
corporate credit ratings by Standard and Poors, with a stable outlook for the
company. This follows a request by AAPT to obtain a credit rating in order to
assess its debt-funding opportunities. Having received this favourable credit
rating, AAPT should be able to source debt funding at a lower cost. The rating
expands the options available to AAPT to meet current and future capital
expenditure requirements.
AAPT Other Matters
CDMA Mobile Network
AAPT owns an 800MHz spectrum with an addressable market of more than 55% of the
Australian population and is developing a wireless access network based on CDMA
technology.
AAPT signed a contract with US communications networking company Lucent
Technologies to build and support its A$500 million CDMA mobile network. AAPT
selected and contracted Lucent, following detailed evaluation of tenders made by
some of the world's leading wireless technology companies.
The base station acquisition programme is on track and AAPT plans to launch the
CDMA network in the last quarter of calendar 2000.
Joint Venture with America Online
As part of AAPT's strategy of enhancing its Internet and e-commerce growth
opportunities through strategic alliances and partnerships, AAPT entered into a
50/50 joint venture with America Online during March 2000.
The joint venture has been established to operate the existing AOL Australia
retail Internet service and launch a new Internet portal for wireless content
services. It will have exclusive rights to offer AOL and CompuServe services on
both PC and mobile wireless platforms throughout Australia.
AAPT believes it will derive significant benefits from the joint venture,
including provision of wireless content for CDMA cellular network; the ability
to exploit AAPT's network infrastructure, existing customer base and
distribution channels; cross marketing and selling opportunities; and expansion
of connect.com.au's current network.
<PAGE>
24
EC-Pay Investment
During February 2000, AAPT acquired a 60% stake in EC-Pay Pty Ltd (EC-Pay),
through its wholly owned subsidiary, connect.com.au, as part of AAPT's strategy
to further enhance business to business e-commerce offerings.
EC-Pay was established by Tradegate Electronic Commerce Australia Limited to
develop and market EC-Net, an Internet based software solution for the
superannuation industry. EC-Net enables superannuation fund administrators to
electronically receive superannuation contributions from small and medium
enterprises. This represents a valuable addition to the current suite of e-
business solutions offered by connect.com.au to Australian businesses.
Acquisition of National High Bandwidth Network
During the period, AAPT and Cable & Wireless Optus signed an agreement under
which AAPT will acquire a high bandwidth network on Optus' national backbone
linking Cairns, Brisbane, Sydney, Canberra, Melbourne, Adelaide and Perth. This
additional capacity will meet AAPT's requirements for interstate transmission
over the major routes for the next 15 to 20 years.
As part of this agreement, Optus will provide 50 regional drop off points and
AAPT will install equipment to link the drop off points with AAPT's regional
points of presence (POPs).
This acquisition will provide AAPT with significant additional capacity on its
own network, further reducing interconnect costs.
Expanding Access Networks
AAPT is committed to expanding its access networks in order to exploit growth
opportunities in the growing data and Internet markets, significantly penetrate
the local telephony market and further leverage infrastructure and technology
investments. Further expansion of access capabilities will enable AAPT to
capture growth opportunities in these expanding markets.
CBD Fibre
AAPT is building a fibre optic network in the six capital city CBD areas to
directly connect high-volume customers to AAPT's network. This will enable AAPT
to offer an enhanced range of telephony, including local and data services, and
significantly reduce AAPT's access costs. This network also provides savings by
eliminating high-cost leased circuits connecting other carriers' gateway
exchanges to AAPT's switches.
<PAGE>
25
AAPT has laid 357 km of CBD fibre in the six capital city CBD areas, and as at
31 March 2000 had fibred more than 155 buildings, with approximately 70% of
these having electronics installed and available for customer connections. AAPT
plans to have 336 buildings fibred by the end of the third quarter of calendar
2000.
Local Multipoint Distribution System ("LMDS")
AAPT is the only licensed LMDS carrier in Australia. The LMDS network provides
wireless access technology through which AAPT will be able to provide voice,
high-speed data and Internet Protocol (IP) based services and emerging multi-
media applications (video on demand, information content, etc). LMDS technology
is complementary to CBD fibre infrastructure as it provides cost effective CBD
fibre infill and access to non-CBD and regional small and medium enterprise
customers.
AAPT is on track to complete 20 LMDS nodes by the end of the third quarter of
calendar 2000.
New AAPT Smartchat Call Centre
In March 2000, AAPT announced that it was establishing a second 300-seat call
centre in Bendigo, Victoria, to support its expanding consumer business. The
success of AAPT's 15 cent local call offer and its marketing push into regional
Australia have accelerated AAPT's need to open a large regional call centre.
The staff for this new call centre are currently in training and AAPT expects
this centre to be fully operational by September 2000. An interim 90-seat
facility will start operations by the end of May 2000.
GLOSSARY
ADSL (Asymmetric Digital Subscribers Line) - A technology for delivering a high
bit rate link to customers over ordinary copper. Data rates can reach 8mbps
from the exchange to the customer and 640kbps in the other direction.
Bandwidth - Transmission capacity. The larger the bandwidth, the greater the
capacity of voice, video or data that can be carried.
Centrex - A service that provides PBX capabilities to customers using Telecom's
network. Centrex is offered to businesses as an alternative to buying or
leasing their own PBXs.
<PAGE>
26
CPE (Customer Premises Equipment) - Equipment, such as phones, fax machines and
modems that connect with the network at the customer's premises.
EWSD - The brand name for Siemens telephone exchanges.
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.
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) - The nationwide fixed line voice
telephone network accessible to anyone who has a telephone and an account with a
phone company.
Trade Direct - The Telecom product name for a range of bilateral agreements for
exchanging international traffic. A Trade Direct Agreement is a formal
commitment between two carriers to terminate an agreed volume of traffic at an
agreed rate over the life of the contract. The agreements provide for the
establishment of rates for exchanging traffic which reflect market conditions.
VPN (Virtual Private Network) - A carrier provided service in which the public
switched network provides the equivalent of a privately established customer
network.
xDSL - A generic reference to any of the many Digital Subscribers Line
technologies, e.g. ADSL.
<PAGE>
27
TELECOM (EXCLUDING AAPT)
EARNINGS OVERVIEW
<TABLE>
<CAPTION>
Nine Months Ended Variation
31 March 00.99
- ------------------------------------------------------------------------------------------------------------------
/(in NZ$ millions, except percentages)/
1999 % 2000 % $ %
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues
Local service 796 30.5 792 29.3 (4) (0.5)
Calling
National 534 20.5 534 19.7 - -
International 297 11.4 291 10.8 (6) (2.0)
Other 39 1.5 38 1.4 (1) (2.6)
----------------------------------------------------------
870 33.4 863 31.9 (7) (0.8)
Interconnection 51 1.9 64 2.4 13 25.5
Cellular and other mobile 370 14.2 412 15.2 42 11.4
Data 261 10.0 319 11.8 58 22.2
Other operating revenues
Directories 141 5.4 152 5.6 11 7.8
Equipment 81 3.1 65 2.4 (16) (19.8)
Miscellaneous other 38 1.5 38 1.4 - -
----------------------------------------------------------
260 10.0 255 9.4 (5) (1.9)
----------------------------------------------------------
Total operating revenues 2,608 100.0 2,705 100.0 97 3.7
----------------------------------------------------------
Operating expenses
Labour 355 13.6 312 11.5 (43) (12.1)
Depreciation 414 15.9 421 15.6 7 1.7
Cost of sales 341 13.1 428 15.8 87 25.5
Other operating expenses 424 16.2 459 17.0 35 8.3
----------------------------------------------------------
Total operating expenses 1,534 58.8 1,620 59.9 86 5.6
----------------------------------------------------------
Surplus from operations 1,074 41.2 1,085 40.1 11 1.0
Net financing costs (85) (3.3) (72) (2.6) 13 15.3
----------------------------------------------------------
Surplus from operations before income tax 989 37.9 1,013 37.5 24 2.4
Income tax expense (319) (12.2) (327) (12.1) (8) (2.5)
----------------------------------------------------------
Surplus from operations after income tax 670 25.7 686 25.4 16 2.4
Abnormal items 6 0.2 - - (6) (100.0)
Minority interests in profits of subsidiaries (2) (0.1) (2) (0.1) - -
----------------------------------------------------------
Net surplus 674 25.8 684 25.3 10 1.5
Capital note distribution cost after income (42) (1.6) (40) (1.5) 2 4.8
tax
----------------------------------------------------------
Net earnings attributable to shareholders 632 24.2 644 23.8 12 1.9
----------------------------------------------------------
</TABLE>
Certain reclassifications of prior period data have been made to conform to
current period classifications
<PAGE>
28
TELECOM (EXCLUDING AAPT)
EARNINGS OVERVIEW
<TABLE>
<CAPTION>
Third Quarter Ended Variation
31 March 00:99
- ------------------------------------------------------------------------------------------------------------------
/(in NZ$ millions, except percentages)/
1999 % 2000 % $ %
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues
Local service 266 30.2 261 28.3 (5) (1.9)
Calling
National 175 19.9 182 19.8 7 4.0
International 91 10.3 94 10.2 3 3.3
Other 13 1.5 13 1.4 - -
----------------------------------------------------------------
279 31.7 289 31.4 10 3.6
Interconnection 16 1.8 23 2.5 7 43.8
Cellular and other mobile 128 14.5 135 14.7 7 5.5
Data 88 10.0 110 11.9 22 25.0
Other operating revenues
Directories 61 6.9 66 7.2 5 8.2
Equipment 26 3.0 19 2.1 (7) (26.9)
Miscellaneous other 16 1.9 18 1.9 2 12.5
----------------------------------------------------------------
103 11.8 103 11.2 - -
----------------------------------------------------------------
Total operating revenues 880 100.0 921 100.0 41 4.7
----------------------------------------------------------------
Operating expenses
Labour 113 12.8 102 11.1 (11) (9.7)
Depreciation 140 15.9 145 15.7 5 3.6
Cost of sales 115 13.1 146 15.8 31 27.0
Other operating expenses 151 17.2 159 17.3 8 5.3
----------------------------------------------------------------
Total operating expenses 519 59.0 552 59.9 33 6.4
----------------------------------------------------------------
Surplus from operations 361 41.0 369 40.1 8 2.2
Net financing costs (25) (2.8) (23) (2.5) 2 8.0
----------------------------------------------------------------
Surplus from operations before income tax 336 38.2 346 37.6 10 3.0
Income tax expense (104) (11.8) (110) (12.0) (6) (5.8)
----------------------------------------------------------------
Surplus from operations after income tax 232 26.4 236 25.6 4 1.7
Abnormal items 6 0.7 - - (6) (100.0)
Minority interests in profits of subsidiaries (1) (0.1) (1) (0.1) - -
----------------------------------------------------------------
Net surplus 237 27.0 235 25.5 (2) (0.8)
Capital note distribution cost after income (13) (1.5) (13) (1.4) - -
tax
----------------------------------------------------------------
Net earnings attributable to shareholders 224 25.5 222 24.1 (2) (0.9)
----------------------------------------------------------------
</TABLE>
Certain reclassifications of prior period data have been made to conform to
current period classifications
<PAGE>
[LOGO OF TELECOM]
16 May 2000
MEDIA RELEASE
Telecom reports $205 million third quarter earnings
(Embargoed until 9.00am, 16 May 2000)
Telecom today reported after-tax earnings of $205 million for the three months
to 31 March 2000 and $611 million for the nine months to 31 March 2000. Telecom
will pay an 11.5 cents per share third quarter dividend.
"Net earnings excluding AAPT and abnormal items in the comparative period,
increased 1.8% to $222 million for the quarter and increased 2.9% to $644 for
the nine month period," Telecom Chief Executive Theresa Gattung said.
Performance Overview
--------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Nine months 3rd quarter
Result % change Result % change
<S> <C> <C> <C> <C>
Operating revenues * $2,705 million + 3.7% $921 million + 4.7%
Operating expenses * $1,620 million + 5.6% $552 million + 6.4%
Earnings before interest and tax * $1,085 million + 1.0% $369 million + 2.2%
Net earnings * $644 million + 2.9% $222 million + 1.8%
Net earnings including AAPT $611 million - 3.3% $205 million - 8.5%
Earnings per share 34.9 cents - 3.4% 11.7 cents - 8.5%
Dividends per share 11.5 cents unchanged
* excluding AAPT and abnormal items from the comparative period
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Ms Gattung said third quarter reported earnings decreased 8.5% because of the
$17 million net impact on earnings of, interest costs, goodwill amortisation and
profits associated with Telecom's investment in AAPT and because the comparable
period was inflated by $6 million of abnormal items.
"Consolidation of AAPT reduced reported earnings, which is what we expected. We
believe Telecom's investment in AAPT will make a positive contribution to the
group's earnings in two or three years. AAPT is making good progress, with
revenue up 28.6% for the quarter and earnings before interest, tax, depreciation
and amortisation up 40.9%," Ms Gattung said.
<PAGE>
"Telecom's investment in AAPT is an investment in a strong growth business that
fits well with our trans-Tasman strategies," she said.
"Third quarter revenue was $921 million excluding AAPT, up 4.7% from the
corresponding period, as our customers spent more time web surfing, emailing,
and talking on their mobile and fixed phones," Ms Gattung said.
"International calling prices for the quarter have fallen 31.1% from the
corresponding period to an average of 32 cents a minute and national calling
prices have fallen 15.9% to an average of 14 cents per minute. This is great for
our customers and has boosted international calling volumes 32.5% and national
calling volumes 3.9% for the quarter," Ms Gattung said.
"The whole market is booming. Statistics New Zealand found that the
communications sector grew 16.5% in calendar 1999," she said.
Volume growth #
-------------
- --------------------------------------------------------------------------------
Period on period Total as at and for
% change 9 months to 31 March 2000
Cellular connections + 51.4% 921,600
Cellular call minutes + 33.2% 775.4 million
Fixed line to cellular call minutes + 34.6% 422.4 million
XTRA customers + 48.7% 268,100
XTRA usage (per active customer) + 89.9% 18.8 hours/month
ISDN lines + 55.7% 73,000
Telephone access lines + 1.3% 1.89 million
National call minutes + 4.1% 1,632.0 million
International outward call minutes + 26.6% 435.1 million
International inward call minutes* + 24.2% 3132.2 million
* excludes transit minutes
# All volume figures exclude AAPT
- --------------------------------------------------------------------------------
Telecom's Internet Service Provider, Xtra, had 268,100 customers, up 48.7% from
a year ago, and Xtra's customers had more than doubled their monthly usage to an
average of 21.4 hours online each in March.
"It is particularly pleasing that independent surveys by A.C. Nielsen confirmed
that Xtra is New Zealand's leading Internet Service Provider and Internet
portal," Ms Gattung said.
<PAGE>
A.C. Nielsen found that Xtra is the most popular web site visited by New
Zealanders web surfing from home, with more visits by these web surfers than any
international site, outranking even Yahoo! and AOL.
"There are about 535,000 residential Internet accounts in New Zealand and 41% of
people with these accounts visited Xtra in March," Ms Gattung said.
"Almost three out of eight people now have a mobile phone," Ms Gattung said.
Telecom had 921,600 mobile customers, up 51.4% from a year ago. More and more
New Zealanders had embraced the convenience of being mobile and 37% of the
population had mobile phones.
Media Enquiries:
Martin Freeth, Finance & Media Communications Manager
Telecom New Zealand Phone 04-498-9361
[email protected]
- ---------------------------
Recent media releases can be found at the Telecom Home Page at
http://www.telecom.co.nz
- ------------------------
Click on "Media Releases" under the "About Telecom" heading.
Disclaimer
- ----------
This media release may contain forward looking statements about Telecom
Corporation of New Zealand Limited (TCNZ) and the environment in which the
company operates. Because these statements are forward looking, TCNZ's actual
performance could differ materially. TCNZ's quarterly earnings announcement
media releases, management commentaries and various documents filed with the US
Securities & Exchange Commission, including the Annual Report on Form 20-F,
contain additional information about matters which could cause TCNZ's
performance to differ from any forward looking statements in this release.
Please read this release in the wider context of material previously published
by TCNZ and filed with the SEC.
<PAGE>
23 March 2000
TELECOM ACQUIRES INL STAKE
Telecom New Zealand today purchased a 5.7 percent shareholding in the INL Group.
Telecom purchased 21.2 million shares overnight, at $4.25 per share,
representing 5.1 percent and remained in the market today. A total of 22.3
million shares, or 5.7 percent was acquired.
"We were wanting to achieve a shareholding in the company of somewhere between 5
and 10 percent and so we are very comfortable with the level we have acquired,"
Telecom Chief Executive Theresa Gattung said.
"It is indicative of a small strategic position, which will allow us to build a
closer relationship over time."
The total purchase has cost approximately $94.6 million.
Ms Gattung said the move recognises there are potential synergies between the
content and Internet industries. "It is further evidence of Telecom's transition
from a traditional telecommunications company to a serious on-line and solutions
player," she said. "It is also a good fit with other strategic initiatives,
including the EDS, Microsoft alliance and the investment in AAPT.
"We are operating in a converging, global industry, with several world players
in New Zealand. This represents a sound investment for us, with good prospects
for the future.
<PAGE>
24 March 2000
STANDARD & POOR'S RECOGNISES TELECOM'S STRENGTHS
In re-rating Telecom New Zealand (TCNZ) today credit rating agency Standard &
Poor's acknowledged the company's growth strategies and recognised TCNZ's good
prospects for the future.
Standard and Poor's said: "TCNZ's still strong credit ratings reflect the
company's superior market position . . . which underpins strong cash generating
ability, a sensible strategy to diversify its activities into the larger, more
competitive and stronger growing Australian market, and moderate financial
profile".
The New York based credit rating agency started its review of TCNZ's credit
ratings on 15 September last year as a result of TCNZ's takeover bid for
Australian telecommunications company AAPT. Standard & Poor's lowered its long
term corporate credit rating on TCNZ guaranteed senior unsecured debt issues to
A+ from AA. At the same time, TCNZ's short-term rating was moved to A-1 from A-
1+.
Standard and Poor's said all of TCNZ's ratings had now been removed from Credit
Watch and the ratings outlook for the company is stable. The Standard and Poor's
ratings match those assigned to Telecom recently by Moody's Investor Service.
Telecom Chief Financial Officer Jeff White said TCNZ was pursuing strategic
growth opportunities in Australia through its investment in AAPT. He noted that
TCNZ's investment in AAPT had more than doubled in value, adding more than $1.5
billion of value to the company.
He also re-iterated statements made at the company's half-year earnings
announcement; that TCNZ was examining the structure of its various businesses
and actively considering several options, including share floats, to make the
embedded value of TCNZ's businesses more transparent to investors.
"While we have increased TCNZ's debt profile, our investment in AAPT has proven
very successful at increasing the value of the company and some options
available to us in future would also increase value while providing TCNZ with
fresh equity capital," Mr White said.
"TCNZ has very strong interest cover and we are using our financial strength to
help fund growth. We expect that as our growth strategies deliver tangible
financial results, Standard and Poor's will reflect that in future ratings," Mr
White said.
Standard & Poor's said Telecom "has considerable flexibility to raise equity
which, if realised, would improve credit protection measures." Standard & Poor's
also said that it "expects TCNZ to continue to focus on cost control, efficiency
improvements, and capture a greater share of the growth in higher margin mobile
and data services in the short to medium term."
<PAGE>
27 March 2000
TELECOM APPOINTS NEW CHIEF FINANCIAL OFFICER
Telecom New Zealand Chief Executive Theresa Gattung today said she was delighted
to announce the appointment of Marko Bogoievski as Chief Financial Officer. He
will replace Jeff White, who is returning to the United States for family
reasons.
Mr Bogoievski, (pronounced Bog-o-ev-ski) is currently Chief Financial Officer
for United States start-up company Dispatch Management Services. He was
previously Chief Financial Officer for Ansett New Zealand and before that was
Finance Director, then Sales Director, of New Zealand Wines and Spirits.
He is a Victoria University graduate with a BCA in economics and accounting, and
an MBA from Harvard.
"Marko has broad experience in a wide variety of disciplines in finance and
investment, but he also comes with hands-on experience in sales in some highly
competitive industries," Ms Gattung said. "In addition, he has learned an
enormous amount through working in US capital markets," she said.
"He is very experienced and highly regarded for his strategic and leadership
abilities. I am sure he will make a huge contribution to our business," Ms
Gattung said.
Mr Bogoievski has held a variety of financial and investment positions with
First Boston Corporation, Elders Finance Group and Price Waterhouse in New York
and had earlier worked for Price Waterhouse in New Zealand and Australia.
A New Zealander, Mr Bogoievski, 36, is the son of Yugoslav and Greek parents who
grew up in Petone. He will take up his position with Telecom on 1 May.
