NEW CONNECTIONS. NEW OPPORTUNITIES. ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2001 2Review 39 Financial Statements 3 Letter from the Chairman 46 Notes to the Financial Statements 6 Chief Executive’s Outlook 82 Auditors’ Report 10 Group Profile 83 Interests Register 12 New Connections. New opportunities. 84 Other Disclosures 18 Telecom People 87 Shareholder Information 20 Telecom in the Community 22 The Board of Directors 24 The Executive Group 26 Governance at Telecom 28 Management Commentary NEW CONNECTIONS. NEW OPPORTUNITIES. TELECOM WILL FOCUS ON REVENUE GROWTH, COST CONTAINMENT AND EARNINGS IMPROVEMENT ACROSS NEW ZEALAND AND AUSTRALIA. WE HAVE BUILT A STRONG POSITION FROM WHICH TO ACHIEVE THIS... This report is dated 31 August 2001, and is signed on behalf of the Board by: Roderick Deane Chairman Theresa Gattung Chief Executive Officer Telecom Corporation of New Zealand Limited OUR STRATEGIES ARE AIMED AT CAPTURING THE POTENTIAL FOR PROFITABLE GROWTH IN EACH AREA OF OUR BUSINESS. THERESA GATTUNG, CHIEF EXECUTIVE. Revenues EBITDA Reported Net Earnings Return on Total Assets (excluding abnormals) (excluding abnormals) (000’s) (000’s) (000’s) (%) 8,000 3,000 1,200 100 7,000 2,500 1,000 80 5,636 2,070 6,000 2,042 822 820 1,963 1,945 2,000 800 783 5,000 1,776 4,350 60 643 1,500 581 4,000 3,454 600 3,398 3,083 3,000 40 29.80 29.60 1,000 400 27.30 2,000 22.80 19.90 200 20 1,000 500 0 0 0 0 97 98 99 00 01 97 98 99 00 01 97 98 99 00 01 97 98 99 00 01 (financial years) Note: Balance date 30 June 2001 and 2000, 31 March for prior years NEW OPPORTUNITIES 0101 REVIEW Telecom reported net earnings of NZ$643 million for the year ended 30 June 2001, 17.9% down from NZ$783 million in the previous year. The 2000-01 results were after deduction of NZ$192 million in abnormal items (after tax). Net earnings excluding abnormal items were NZ$835 million, 8.3% higher than comparable net earnings of NZ$771 million in the previous year. Telecom is strongly positioned for the future after major initiatives over the past year: • AAPT integrated into the Group after a successful takeover offer to minority shareholders, September- December 2000. • Commonwealth Bank Group contract commenced September 2000, with excellence in delivery of services. • Southern Cross Cable Network switched on November 2000, with strong capacity sales leading to first dividends to Telecom of NZ$221 million (after tax) in March 2001. • Strategic investment made in SKY Network TV (12%), February 2001. • ADSL broadband technology rollout continued in the New Zealand network throughout the year. • Third generation, or 3G, wireless business alliance formed with Hutchison Whampoa Group, May 2001. • Microsoft relationship broadened through the new XtraMSN Internet portal and a NZ$300 million convertible note issue by Telecom, May 2001. • Telecom balance sheet strengthened through the raising of NZ$500 million in new equity, May 2001. • CDMA wireless network launched in New Zealand, July 2001. FIVE YEAR REVIEW As at and for the three As at and for the months ended As at and for the year ended 30 June 30 June year ended 31 March 2001 2000 1999 1999 1998 1997 Operating revenues (excluding abnormals) 5,648 4,335 849 3,438 3,398 3,083 EBITDA1 (excluding abnormals) 2,070 2,042 487 1,959 1,945 1,776 Abnormal items (net, before tax) (268) 15 (7) 1 (37) (152) Taxation (283) (368) (91) (384) (384) (311) Net earnings 643 783 202 822 820 581 Dividends2 372 806 202 806 756 731 Total assets (NZ$m) 8,972 7,981 5,242 5,375 5,165 4,618 Return on assets3 19.9% 22.8% 28.5%* 29.8% 29.6% 27.3% Gearing4 72.4% 78.8% 72.2% 69.4% 70.0% 51.4% Interest cover5 3.7 5.0 7.6 6.8 7.7 10.9 Debt rating6 A1/A+ˆ A1/A+ Aa2/AA Aa2/AA Aa1/AA Aa1/AA Cash flow from operating activities (NZ$m) 1,758 1,545 493 1,574 1,537 1,419 Capital expenditure (NZ$m) 1,525 869 131 564 587 696 Earnings per share (cents) 36.4 44.7 11.5 46.9 45.9 30.8 Dividend per share2 (cents) 20.0 46.0 11.5 46.0 43.0 39.0 1 Earnings before interest, tax, depreciation 3 Normalised earnings before interest 5 Normalised surplus from continuing 6 Long-term foreign currency ratings from and amortisation and tax divided by average total assets operations divided by net interest expense Moody's Investors Services/Standard 2 Excluding supplementary dividends (net of cash and short-term investments) (before interest capitalised) including capital and Poor's 4 Net debt divided by net debt plus equity note coupons * Annualised ˆ Standard and Poor’s advised that this rating would be changed to A from 3 September 2001. 02 NEW CONNECTIONS LETTER FROM THE CHAIRMAN RODERICK DEANE The past year has been one of fundamental change for Telecom and, indeed, for telcos around the world. It is change driven by the arrival of new digital technologies, by the race to deliver valuable new services, and by the growth of competition across industry boundaries and national borders. Successful companies of the those opportunities opening customer focused, online and future in telecommuni- further if the Company communications company cations – and related sectors invested in new technologies, in Australasia. Progress is like information technology formed new strategic easily seen in the major and entertainment - are now relationships and added scale initiatives outlined on page making fundamental changes to its business in Australia as two of this Annual Report. in how, where and with well as New Zealand. At the We are confident that whom they do business. same time, we saw the need transformation will drive Several years ago, the Board for ongoing innovation in future growth in earnings and and Management of Telecom services while remaining shareholder value. recognised the emerging risks committed to excellence in For the year ended 30 and uncertainties in our our core telecommunications June 2001, Telecom lifted sector. And we recognised business. its underlying earnings also huge opportunities for For Telecom, the past year compared with the previous growing the value of Telecom has been one of fundamental year: EBITDA (operating profit if we grasped the drivers for transformation towards the before deduction of interest, change and transformed our goal established in 2000 – to tax, depreciation and business accordingly. We saw become the best performing, amortisation expenses) was NEW OPPORTUNITIES 03 NZ$2,070 million, compared in the business, we other markets. The shares with NZ$2,042 million in strengthened the Telecom were issued in May 2001 at Peter Shirtcliffe 1999-00. However, the balance sheet and moved to a price of NZ$5.50 – a discount Peter Shirtcliffe will Group’s bottomline result for ensure that the Group has the against the market price retire from the Board the latest year was affected funding required for growth consistent with the standard at the Annual Meeting significantly by three specific into the future. During experience when such on 11 October 2001. factors: 2000-01 we took three major placements are made in the On behalf of all of • Costs associated with the steps towards achieving this. world’s major capital markets. Telecom, I pay tribute acquisition of AAPT, First, we reduced the In raising that new capital, to Mr Shirtcliffe’s including additional interest dividend payout so that a the Board assessed all huge contribution costs and the amortisation greater proportion of our cash Telecom’s options and decided to the Company since of goodwill. These expenses flow is reinvested in the that, on balance, a placement he became a founding were partly offset by AAPT's business. Telecom will pay a best served the interests of all Director on 1 April 1987. operating surplus so that the final dividend for 2000-01 of shareholders. The Company’s As Chairman from acquisition had a net impact NZ 5 cents per share, with international spread of holders, September 1990 to on Telecom’s result for the full imputation credits including 24.9% in the hands September 1999, he led year of NZ$185 million; attached. This brings to NZ20 of one United States investor, Telecom through a • Abnormal items arising cents per share the full year would make any pro rata rights period of tremendous largely from the closing dividend. Our policy, as set issue complicated, costly and success for customers, down of the AAPT project down in last year’s Annual protracted. The placement, staff and shareholders. to roll out a CDMA wireless Report, is to target a payout on the other hand, was a rapid Mr Shirtcliffe has network in Australia and ratio of around 50% of net and relatively low cost means contributed a deep from a review of network earnings, with the distribution of raising capital at a time understanding of the assets in New Zealand. in any year dependent on the best suited to our programme Company's role in the The net impact of abnormal level of earnings and cash of investments and alliances. New Zealand economy, items was NZ$192 million flow, and other investment In this period of of the telecommunic- after tax; opportunities that might fundamental change – and ations industry and • Dividends from Telecom’s arise. of volatility in telco share of public company splendid investment in the We are confident that prices worldwide – I want to governance.