Group Interim Results for the Six Months Ended September 30, 2003
Group highlights JOHANNESBURG, South Africa, Nov. 24
/PRNewswire-FirstCall/ -- Chief Executive Officer's statement Sizwe
Nxasana, Chief Executive Officer said: "The Group has delivered an
excellent performance across all areas of our business with
financial results exceeding our expectations. We continue to
benefit from the exceptional customer growth in our mobile business
and the margin expansion and strong growth of cash generation in
the fixed-line business. "In the period under review, we have
successfully grown our revenue in selected markets by expanding our
integrated product and service offerings; we have increased
profitability and cash flows through strict cost discipline. Telkom
has significantly reduced indebtedness and are pleased to be
reinstating our dividend policy." Operational review The six months
under review saw the continued delivery on group financial targets,
yielding results ahead of expectations. Significant progress has
been made in improving the competitiveness of the fixed-line
business by streamlining the cost structures and increasing
employee efficiencies, with resultant improvements to the customer
experience. The Group has continued to benefit from the strong
growth in the mobile business in South Africa and other African
countries. Fixed-line The fixed-line segment delivered solid
revenue growth, driven largely by data volume growth. Margin
expansion was achieved through a strong focus on cost cutting,
improving productivity, and enhancing the segment's
competitiveness. Capital expenditure has been further reduced, with
future investment focused in areas that drive revenue growth and
efficiencies. In the period under review, good growth was achieved
in value-added services, with these services penetrating 58% of the
residential customer base. In particular, there has been a strong
take-up of products such as ADSL, residential ISDN and basic
voicemail. Prepaid revenue growth remained strong, although growth
in prepaid customers slowed to 4% due to a clean up of all inactive
customers. Prepaid distribution was further improved through
signing contracts with groups such as Standard Bank, First National
Bank and Vodacom. The Group continued to make great strides in its
strategy of becoming the data service provider of choice, with
several new product launches such as VPN Supreme, a dedicated IP
service, CyberTradeMall and TelkomInternet powered by Satellite.
Telkom has started an intensive WiFi feasibility study, having
commissioned the first few hotspots in a pilot programme that will
include 100 sites around South Africa. The data business was
further improved through additional business sales force training,
system upgrades and improved key account management. Operational
efficiency enhancements gained momentum, with the successful
rollout of workforce management by the Operational Support Systems
(OSS) organisation. Fixed-line reduced costs, excluding
depreciation and amortisation, by R536 million mainly through
reductions in payments to other operators, materials and
maintenance, property management costs, operating leases and
employee expenses. Fixed-line employees were reduced by 11% through
a controlled and responsible retrenchment programme and increased
employee productivity was reflected in growth to 142 lines per
employee (September 30, 2002: 129). Mobile Vodacom again delivered
excellent results and maintained its market leadership position
despite increased competition. Vodacom achieved 20% growth in
customers in South Africa, record gross connections of 2.2 million
and contract churn of 11%. Vodacom made good progress in the
realisation of its African strategy, reflecting a 98% increase in
customers to over 1 million and remains strongly positioned for
further African expansion. Having cleared several regulatory
hurdles, Vodacom is planning to launch as the second licensed
mobile operator in Mozambique in December 2003. Vodacom is also
currently considering a proposed investment in Nigeria's second
largest mobile operator, which may see it entering this rapidly
expanding market. Vodacom repaid its shareholder loans of R920
million (Telkom share: R460 million) in June 2003, and paid an
interim dividend of R600 million (Telkom share: R300 million) in
September 2003. Regulatory developments On July 15, 2003, the
Department of Communications communicated their plans to introduce
a Convergence Act that will provide a licensing and regulatory
framework for a converged telecommunications, broadcasting and
information technology industry. This will supplement or replace
current sector-specific legislation. No formal timeline for the
tabling in Parliament of the new legislation has been communicated,
but Government will continue to interact with the industry in its
development. On November 4, 2003, the Minister of Communications
announced her intention to licence the second national operator
(SNO) within eight weeks. The license will be issued to an entity
consisting of an integrated 30% of state-owned enterprises Transtel
and Eskom, 19% to the empowerment consortium, Nexus Connexion and
51% to a suitable investor to be identified. On November 12, 2003
Government tabled in Parliament a proposed amendment to the
Telecommunications Act to define the multi-media and
carrier-of-carriers licensee Sentech as a public operator. On
November 14, 2003, Telkom filed its fixed-line average tariff
adjustments of 2.7% effective from January 2004 with ICASA. BEE
achievements Black Economic Empowerment (BEE) is an important
business imperative for Telkom, with procurement forming the
cornerstone of its strategy. The Group's BEE procurement programme
involved more than R5 billion in the 2003 financial year and is
based on empowering small and medium businesses through a developed
sustainable procurement programme. The Group considers itself a
leader in a number of BEE strategic initiatives in South Africa and
has been actively involved in the development of the ICT BEE
Charter. Telkom's commitment to BEE and corporate social investment
as a progressive leader in the ICT sector has been recognised over
the last six months through eight awards including the Black
Business Quarterly Corporate Social Investment Award, the 2002
Current Achiever Award in the Corporate Category of the
Metropolitan Eastern Cape Awards, the Digital Partnership Award,
four awards and citations under the Professional Management Review
Africa Corporate Care Awards and the African ICT Achiever Award for
the most progressive company in the ICT sector. Financial review
The Group has delivered a strong set of interim financial results
demonstrating management's commitment to meet targets. Group
operating revenue increased 9.8% to R20,110 million and operating
profit increased 51.2% to R4,250 million for the six months ended
September 30, 2003. EBITDA margins during the same period expanded
to 37.8% compared to 32.3% in the prior period primarily as a
result of the strict cost discipline in the fixed-line business.
Headline earnings per share grew 171.1% to 335.9 cents per share
(September 30, 2002: 123.9 cents) and basic earnings per share grew
158.2% to 298.5 cents (September 30, 2002: 115.6 cents). Strong
earnings growth was delivered despite the net losses of R561
million (September 30, 2002: R367 million) arising from measuring
derivatives at fair value and the relative volatility of the
currency during the period. Net cash from operating activities was
R5,771 million which fully covered cash requirements for group
capital expenditure of R1,763 million and facilitated the repayment
of R3,458 million in net debt. The balance sheet was strengthened
with net debt to equity of 85.1% at September 30, 2003. Impact of
the appreciation of the Rand The appreciation of the Rand is
positive for Telkom in the long-term as a significant portion of
capital and operating expenditure is denominated in foreign
currency. The value of the Rand as measured against the Dollar has
appreciated 27.6% in the six month period ended September 30, 2003
to an average of R7.57 per $1.00 from R10.45 per $1.00 in the prior
year six month period. While such appreciation negatively impacted
Telkom's international interconnection revenues and the translation
of Vodacom's revenues from international operations, the
appreciation of the Rand resulted in savings in foreign denominated
operating and capital expenditure and contributed to the
improvement in operating margins. Although the strong Rand
positively contributed to operating profit, it negatively impacted
net reported earnings as a result of the R561 million loss on the
net fair value and exchange losses of financial instruments. Group
operating revenue Group operating revenue increased 9.8% (September
30, 2002: 10.9%) to R20,110 million (September 30, 2002: R18,316
million) in the six months ended September 30, 2003. Fixed-line
operating revenue, after inter-segmental eliminations, increased
5.5% (September 30, 2002: 6.5%) primarily due to solid growth in
data services and increased traffic revenue. Mobile operating
revenue, after inter-segmental eliminations, increased 25.2%
(September 30, 2002: 29.9%) primarily due to customer growth. Group
operating expenses Group operating expenses increased 2.3%
(September 30, 2002: 8.0%) to R15,860 million (September 30, 2002:
R15,505 million) in the six months ended September 30, 2003 due to
increased operating expenses in the mobile segment. This was
partially offset by a 2.5% decrease (September 30, 2002: 3.5%
increase) in fixed-line operating expenses primarily due to reduced
payments to operators, employee expenses and operating leases,
partially offset by an increase in depreciation. The increase in
mobile operating expenses of 16.4% (September 30, 2002: 27.7%) was
primarily due to increased competition resulting in increased
incentive costs and expenses to support customer growth. Mobile
payments to other operators also increased as a result of the
increased outgoing traffic and the higher volume growth of more
expensive outgoing traffic terminating on other mobile networks
relative to traffic terminating on the lower cost fixed-line
network. Investment income Investment income consists of interest
received on trade receivables, short-term investments and bank
accounts. Investment income increased 71.1% (September 30, 2002:
50.3% decrease) to R260 million (September 30, 2002: R152 million)
largely as a result of higher interest received due to surplus cash
balances. Finance charges Finance charges include interest paid on
local and foreign borrowings, amortised discounts on bonds and
commercial paper bills, fair value gains and losses on financial
instruments and foreign exchange gains and losses. Finance charges
increased 5.2% (September 30, 2002: 3.6% decrease) to R1,871
million (September 30, 2002: R1,779 million) due to a 52.9%
increase in group net fair value and exchange losses on financial
instruments of R561 million (September 30, 2002: R367 million),
partially offset by a 7.2% decrease (September 30, 2002: 0.6%
decrease) in interest expense to R1,310 million (September 30,
2002: R1,412 million). The decrease in interest expense was
primarily due to lower balances on local loans. Taxation
Consolidated tax expenses increased 104.6% (September 30, 2002:
121.4%) to R933 million (September 30, 2002: R456 million) in the
six months ended September 30, 2003. The consolidated effective tax
rate for the six months ended September 30, 2003 was 35.4%
(September 30, 2002: 38.5%). The lower effective tax rate in the
six months ended September 30, 2003 was primarily due to a higher
proportion of non-deductible expenses in the prior period. The
effective tax rate is higher than the statutory tax rate of 30%
partly due to Secondary Tax on Companies (STC) payable on dividends
declared by Vodacom and Telkom Directory Services. Net profit and
earnings per share Net profit increased 158.2% (September 30, 2002:
73.6%) to R1,663 million (September 30, 2002: R644 million) in the
six months ended September 30, 2003. Group basic earnings per share
increased 158.2% (September 30, 2002: 73.6%) to 298.5 cents
(September 30, 2002: 115.6 cents) and group headline earnings per
share increased 171.1% (September 30, 2002: 76.5%) to 335.9 cents
(September 30, 2002: 123.9 cents). Group cash flow Cash flows from
operating activities increased 66.7% (September 30, 2002: 4.9%) to
R5,771 million (September 30, 2002: R3,462 million) primarily due
to increased operational cash flows and decreased interest paid.
Cash flows utilised in investing activities decreased 22.8%
(September 30, 2002: 32.8% decrease) to R1,893 million (September
30, 2002: R2,453 million) primarily due to the reduction in group
capital expenditure. Funding sources Solid operating performance
across the Group combined with strict cost discipline has resulted
in a strengthened balance sheet. Net debt, after financial assets
and liabilities, decreased 21.1% to R17,018 million (September 30,
2002: R21,558 million). The balance sheet at September 30, 2003
strengthened, resulting in a net debt to equity ratio of 85.1% from
123.4% at September 30, 2002. Interest bearing debt decreased 23.9%
to R17,540 million (September 30, 2002: R23,050 million) in the six
months ended September 30, 2003. In the six months ended September
30, 2003, loans repaid and the increase in net financial assets
exceeded loans raised by R3,810 million. The Group's repayments in
the six months ended September 30, 2003, included a repayment of
R4,311 million of the Telkom TL03 local bond, which was partially
financed by the issuing of commercial paper bills amounting to R800
million. Dividends The Telkom board of directors has declared a
once-off interim dividend of 90.0 cents per share, payable on
December 29, 2003. The board aims to pay a progressively increasing
dividend annually. The level of dividend will be based upon a
number of factors, including the assessment of financial results,
the group's debt level, interest coverage and future expectations,
including internal cash flows. Auditors' review report The joint
auditors Ernst & Young and KPMG Inc have reviewed the interim
condensed consolidated financial statements. Their unqualified
review report is available for inspection at the company's
registered office. Outlook Going forward, the Telkom Group believes
it is well positioned to deliver shareholder returns by focusing on
remaining competitive and ensuring increased operational
efficiencies and productivity. Customer retention and growth will
remain a key priority for the group. The strength of the Group's
integrated business ensures that we can respond effectively to
volatile macro-economic conditions and tap into exciting
opportunities that exist in all markets, especially the rest of the
African continent. NE Mtshotshisa SE Nxasana Non-executive chairman
Chief executive officer Operational data Year ended March 31, 6
months ended September 30, 2003 2002 2003 % Fixed-line Fixed access
lines (thousands) 4,844 4,895 4,812 (1.7) Revenue per fixed access
line (ZAR) 4,989 2,456 2,575 4.8 Total fixed-line traffic (millions
of minutes) 32,868 16,441 16,635 1.2 Internet customers 98,690
75,317 111,364 47.9 Managed data network sites 7,729 6,636 7,979
20.2 Full-time, fixed-line employees (excluding TDS and Swiftnet)
35,361 38,009 33,828 (11.0) Fixed lines per fixed-line employee 137
129 142 10.1 Mobile Total customers (thousands) 8,647 7,670 9,592
25.5 South Africa Customers (thousands) 7,874 7,130 8,522 19.5
Churn (%) 30.4 30.7 39.1 27.4 Average monthly revenue per customer
(ZAR) 183 181 179 (1.1) Number of employees 3,904 3,845 3,844 --
Number of customers per employee 2,017 1,854 2,217 19.6 Other
African countries Customers (thousands) 773 540 1,070 98.1
Condensed consolidated interim income statement for the six months
ended September 30, 2003 Audited Reviewed Reviewed March 31,
September 30, September 30, 2003 2002 2003 Notes Rm Rm Rm Operating
revenue 2 37,600 18,316 20,110 Other income 234 47 87 Operating
expenses Employee expenses 7,208 3,707 3,646 Payments to other
operators 6,185 3,105 2,967 Selling, general and administrative
expenses 7,888 3,842 4,366 Services rendered 2,541 1,108 1,122
Operating leases 1,205 684 500 Depreciation and amortisation 6,293
3,106 3,346 Operating profit 6,514 2,811 4,250 Investment income
424 152 260 Profit before finance charges 6,938 2,963 4,510 Finance
charges 4,154 1,779 1,871 Profit before tax 2,784 1,184 2,639
Taxation 1,049 456 933 Profit after tax 1,735 728 1,706 Minority
interests 105 84 43 Net profit for the year/period 1,630 644 1,663
Basic and diluted earnings per share (cents) 5 292.6 115.6 298.5
Headline earnings per share (cents) 5 314.0 123.9 335.9 Condensed
consolidated interim balance sheet at September 30, 2003 Audited
Reviewed Reviewed March 31, September 30, September 30, 2003 2002
2003 Notes Rm Rm Rm Assets Non-current assets 43,233 43,386 41,120
Property, plant and equipment 7 41,046 41,172 39,185 Intangible
assets 364 442 352 Investments 1,086 867 1,203 Deferred taxation 8
737 905 380 Current assets 9,921 11,195 9,887 Inventories 621 887
584 Trade and other receivables 6,110 6,163 6,312 Short-term
investment 26 -- 48 Income tax receivable 276 237 -- Other
financial assets 1,771 2,823 1,234 Cash and cash equivalents 9
1,117 1,085 1,709 Total assets 53,154 54,581 51,007 Equity and
liabilities Capital and reserves 18,348 17,475 19,987 Share capital
and premium 10 8,293 8,293 8,293 Non-distributable reserves (11)
112 38 Retained earnings 10,066 9,070 11,656 Minority interests 194
214 207 Non-current liabilities 20,504 21,340 17,112 Interest
bearing debt 11 16,346 17,097 12,857 Finance leases 1,107 1,047
1,124 Deferred taxation 8 497 523 641 Provisions 2,554 2,673 2,490
Current liabilities 14,108 15,552 13,701 Trade and other payables
5,229 6,025 4,630 Current portion of interest bearing debt 11 4,677
5,953 4,683 Current portion of finance leases 7 5 10 Deferred
income 1,030 838 1,083 Income tax payable 177 76 159 Other
financial liabilities 567 -- 475 Current portion of provisions
2,141 1,291 1,849 Credit facilities utilised 9 280 1,364 812 Total
equity and liabilities 53,154 54,581 51,007 Condensed consolidated
interim statement of changes in equity for the six months ended
September 30, 2003 Audited Reviewed Reviewed March 31, September
30, September 30, 2003 2002 2003 Rm Rm Rm Balance at April 1 16,832
16,832 18,348 Net profit for the year/period 1,630 644 1,663 Fair
value adjustment on investments (37) (22) 7 Foreign currency
reserve (121) (23) (31) Share issue expenses 44 44 -- Balance at
March 31/ September 30 18,348 17,475 19,987 Condensed consolidated
interim cash flow statement for the six months ended September 30,
2003 Audited Reviewed Reviewed March 31, September 30, September
30, 2003 2002 2003 Note Rm Rm Rm Operating activities 9,748 3,462
5,771 Cash receipts from customers 37,494 18,021 19,896 Cash paid
to suppliers and employees (25,431) (13,980) (13,640) Cash
generated from operations 12,063 4,041 6,256 Investment income 384
152 259 Finance charges paid (2,776) (1,168) (549) Dividends paid
(25) -- (26) Taxation refunded/(paid) 102 437 (169) Investing
activities (5,731) (2,453) (1,893) Expenditure to maintain
operations Proceeds on disposal of investments, property, plant and
equipment 193 2 9 Proceeds on disposal of subsidiaries and joint
ventures 16 -- -- Additions to property, plant and equipment
(5,671) (2,346) (1,763) Additions to intangible assets -- -- (54)
Additions to other investments (269) (109) (85) Financing
activities (3,026) (1,178) (3,810) Listing costs (154) -- -- Loans
raised 9,117 7,599 1,619 Loans repaid (11,526) (8,614) (5,077)
Finance lease raised 5 2 -- Increase in net financial assets (468)
(165) (352) Net increase/(decrease) in cash and cash equivalents
991 (169) 68 Net cash and cash equivalents at beginning of the year
(98) (98) 837 Effect of foreign exchange rate differences (56) (12)
(8) Net cash and cash equivalents at end of the year/period 9 837
(279) 897 Notes to the condensed consolidated interim financial
statements for the six months ended September 30, 2003 1. Basis of
preparation and accounting policies The condensed consolidated
interim financial statements have been prepared in accordance with
IAS 34 (Interim Financial Reporting) and comply with the South
African Companies Act, 1973. The accounting policies of the Group
applied in the presentation of the interim financial statements for
the six month period ended September 30, 2003 are consistent with
those applied in the financial statements for the year ended March
31, 2003. The preparation of the condensed consolidated interim
financial statements requires Telkom's management to make estimates
and assumptions that may affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the condensed consolidated interim financial
statements, and reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
The results of the interim period are not necessarily indicative of
the results for the entire year. Audited Reviewed Reviewed March
31, September 30, September 30, 2003 2002 2003 Rm Rm Rm 2.
Operating revenue 37,600 18,316 20,110 Fixed line 29,199 14,355
15,151 Mobile 8,401 3,961 4,959 Fixed line 29,199 14,355 15,151
Subscriptions, connections and other usage 4,595 2,239 2,466
Traffic 18,001 8,911 9,221 Domestic (local and long distance) 9,178
4,510 4,907 Fixed to mobile 7,539 3,770 3,658 International
(outgoing) 1,284 631 656 Interconnection 1,598 825 647 Data 4,265
1,996 2,351 Directories and other 740 384 466 3. Restructuring
expenses (included in employee expenses) 244 169 120 The Group
recognises the cost of restructuring charges associated with
management's plan to right skill and align the size of its
workforce to a comparable level for world-class telecommunication
companies. The total number of employees affected by the
restructuring is 694 (September 30, 2002: 498 and a further 1,193
notified, March 31, 2003: 2,124). These employees include operating
personnel, product development and corporate staff. 4. Impairment
and write-off of property, plant and equipment (included in
selling, general and administrative expenses) 205 16 259 During the
period, the Group raised an impairment provision of R149m on an
earth station. This asset was developed to route traffic between
the Public Switch Telecommunication Network ("PSTN") of Telkom and
the Satellite Access Node ("SAN") of a satellite company. The
satellite company has not met its current outstanding financial
obligations to Telkom and management is of the opinion that no
future payments will be received. Management has assessed the asset
and it appears unlikely that there will be future economic benefits
flowing to the Company. Additionally the Group incurred property,
plant and equipment write-offs, as these assets are no longer in
service. 5. Earnings per share Basic and diluted earnings per share
The calculation of earnings per share is based on net profit for
the period/year of R1,663m (September 30, 2002: R644m, March 31,
2003: R1,630m) and ordinary shares in issue of 557,031,819
(September 30, 2002: 557,031,819, March 31, 2003: 557,031,819).
Headline earnings per share The calculation of headline earnings
per share is based on headline earnings of R1,871m (September 30,
2002: R690m, March 31, 2003: R1,749m) and 557,031,819 (September
30, 2002: 557,031,819, March 31, 2003: 557,031,819) ordinary shares
issued. Audited Reviewed Reviewed March 31, September 30, September
30, 2003 2002 2003 Rm Rm Rm Reconciliation between earnings and
headline earnings: Earnings as reported 1,630 644 1,663
Adjustments: Net profit on disposal of investments, property, plant
and equipment (104) (7) (9) Property, plant and equipment
impairment and write-offs 189 -- 259 Goodwill amortisation 73 36 35
Goodwill impairment 16 16 -- Tax and outside shareholder effects
(55) 1 (77) Headline earnings 1,749 690 1,871 Basic and diluted
earnings per share (cents) 292.6 115.6 298.5 Headline earnings per
share (cents) 314.0 123.9 335.9 6. Net asset value per share
(cents) 3,293.9 3,137.2 3,588.1 The calculation of net asset value
per share is based on net assets of R19,987m (September 30, 2002:
R17,475m, March 31, 2003: R18,348m) and 557,031,819 (September 30,
2002: 557,031,819 March 31, 2003: 557,031,819) issued shares. 7.
Property, plant and equipment During the period the Group acquired
property, plant and equipment of R1,763m. A major portion of this
expenditure relates to network modernisation. 8. Deferred taxation
240 382 (261) Deferred tax assets 737 905 380 Deferred tax
liabilities (497) (523) (641) The higher taxable income in the
current period resulted in the Group reducing its tax losses, thus
utilising a portion of the deferred tax asset. 9. Net cash and cash
equivalents 837 (279) 897 Cash and bank balances 916 1,085 648
Short-term deposits 201 -- 1,061 Cash shown as current assets 1,117
1,085 1,709 Credit facilities utilised (280) (1,364) (812) Undrawn
borrowing facilities General banking facilities 3,018 2,200 2,468
The general banking facilities are unsecured, bear interest at a
rate linked to prime, have no specific maturity date and are
subject to annual review. The facilities are in place to ensure
liquidity. Borrowing capacity The directors may exercise all of
Telkom's powers to borrow money and to mortgage or encumber
Telkom's property or any part thereof and to issue debentures,
whether secured or unsecured, whether outright or as security for
debt, liability or obligation of Telkom or of any third party. For
this purpose the borrowing powers of the directors are unlimited.
10. Number of shares in issue 557,031,817 (September 30, 2002:
557,031,819; March 31, 2003: 557,031,817) ordinary shares of R10
each. 1 (September 30, 2002: Nil, March 31, 2003: 1) Class A
ordinary share of R10 1 (September 30, 2002: Nil; March 31, 2003:
1) Class B ordinary share of R10 11. Interest bearing debt
(excluding finance leases) Current portion of interest bearing debt
4,677 5,953 4,683 Local debt 4,527 5,892 4,356 Foreign debt 150 61
327 Long-term portion of interest bearing debt 16,346 17,097 12,857
Local debt 11,473 11,011 8,438 Foreign debt 4,873 6,086 4,419
Movement in borrowings for the six months ended September 30, 2003
Facility Vodacom Congo (RDC) obtained revolving credit facilities
totalling R134m (Group share: R67m). Repayments The TL03 locally
registered bond with a nominal value of R4,311m at March 31, 2003
was redeemed on September 30, 2003. The redemption was financed by
cash flows from operations and the issuing of R800m (nominal value)
of commercial paper bills. A total of R48m was repaid by Vodacom
Tanzania Limited and Vodacom Congo (RDC) s.p.r.l relating to the
extended credit facilities. Refinancing of current portion of
interest-bearing debt. The refinancing of R4,683m of the current
portion of interest bearing debt will depend on the market
circumstances at the time of repayment. Management believes that
sufficient funding facilities will be available at the date of
refinancing. Audited Reviewed Reviewed March 31, September 30,
September 30, 2003 2002 2003 Rm Rm Rm 12. Commitments Capital
commitments authorised 5,929 6,670 4,665 Fixed line 4,977 4,901
3,152 Mobile 952 1,769 1,513 Commitments against authorised capital
expenditure 435 2,793 1,130 Fixed line 104 1,852 227 Mobile 331 941
903 Authorised capital expenditure not yet committed 5,494 3,877
3,535 Fixed line 4,873 3,049 2,925 Mobile 621 828 610 Management
expects these commitments to be financed from internally generated
cash and other borrowings. Audited Reviewed Reviewed March 31,
September 30, September 30, 2003 2002 2003 Rm Rm Rm 13.
Contingencies Contingent liabilities Third parties 161 29 98
Guarantee of employee housing loans 192 175 184 Third parties These
amounts represent sundry disputes with third parties that are not
individually significant and that the Group does not intend to
settle. Guarantee of employee housing loans Telkom guarantees to
settle a certain portion of employees' housing loans. The amount
guaranteed differs depending on factors such as employment period
and salary rates. When an employee leaves the employment of Telkom,
any housing debt guaranteed by Telkom is settled before any pension
payment can be made to the employee. Supplier dispute Expenditure
of R594m was incurred up to March 31, 2002 for the development and
installation of an integrated end-to-end customer assurance and
activation system to be supplied by Telcordia. In the 2001
financial year, the agreement with Telcordia was terminated and in
that year, the Company wrote off R119m of this investment in the
fixed-line business. Following an assessment of the viability of
the project, the balance of the Telcordia assets were written off
in the 2002 financial year. During March 2001, the dispute was
taken to arbitration, where Telcordia was seeking approximately
US$130m plus interest at a rate of 15,50% per year for money
outstanding and damages. In September 2002, a partial ruling was
issued by the arbitrator in favour of Telcordia. On November 5,
2002, Telkom brought an application in the High Court in South
Africa to review the partial award. The hearing of the review
application commenced on August 11, 2003 and is presently ongoing.
Telcordia also petitioned the United States District Court for the
District of Columbia to confirm the partial ruling, which petition
Telkom has successfully resisted. Telcordia, however, have since
filed a notice to appeal. The arbitration proceeding and the amount
of Telkom's liability are not expected to be finalised until
December 2003. Telkom had provided US$47m (March 31, 2003: US$44m)
for its estimate of probable liabilities, which include interest
and legal fees at September 30, 2003. Site restoration costs The
Group has an obligation to incur site restoration costs. No sites
have been identified that would require material restoration to be
performed in the foreseeable future. The Group exposure is 50% of
the following item: Vodacom Congo (RDC) s.p.r.l The Vodacom Group
has a 51% equity interest in Vodacom Congo (RDC) s.p.r.l.,
("Vodacom Congo"), which commenced business on December 11, 2001.
This investment is governed by a shareholders' agreement, which
provides the other shareholder with certain protective and
participating rights and therefore, in terms of IAS 31: "Accounting
for interest in Joint Ventures", Vodacom Congo may not be
consolidated as a subsidiary as it is considered to be a joint
venture resulting in it being proportionally consolidated in the
condensed consolidated interim financial statements for the six
months ended September 30, 2003 and 2002 and for the year ended
March 31, 2003. Vodacom, in terms of the shareholders' agreement,
is ultimately responsible for the funding of the operations of
Vodacom Congo. The shareholders' agreement also gives Vodacom the
right to appoint management and the majority of the Board of the
Company. Vodacom also has a management agreement to manage the
company on a day-to-day basis. Currently Vodacom Congo is incurring
losses, which are expected to continue in the short term. The 49%
portion attributable to the other joint venture partner in respect
of the liabilities and losses as at September 30, 2003 and 2002 and
March 31, 2003 were as follows: Audited Reviewed Reviewed March 31,
September 30, September 30, 2003 2002 2003 Rm Rm Rm Net accumulated
loss (186) (87) (294) Total liabilities (522) (384) (783) Total
assets 658 714 848 Preference shares (368) (368) (368) Negative
working capital ratio At each of the financial periods ended
September 30, 2003, September 30, 2002 and for the year ended March
31, 2003 the Group had a negative working capital ratio. A negative
working capital ratio arises when current liabilities are greater
than the current assets. Current liabilities, including the
short-term portion of long-term debt, are intended to be financed
from operating cash flows, new borrowings and borrowings available
under existing credit facilities. Audited Reviewed Reviewed March
31, September 30, September 30, 2003 2002 2003 Rm Rm Rm 14. Segment
information The intercompany transactions are reflected as net and
are thus eliminated against segment results Business segment
Consolidated revenue 37,600 18,316 20,110 Fixed line 29,635 14,563
15,372 Mobile 9,890 4,720 5,647 Elimination (1,925) (967) (909)
Consolidated operating profit 6,514 2,811 4,250 Fixed line 4,348
1,894 3,025 Mobile 2,166 920 1,225 Elimination -- (3) --
Consolidated investment income 424 152 260 Fixed line 730 183 541
Mobile 36 8 30 Elimination (342) (39) (311) Consolidated finance
charges 4,154 1,779 1,871 Fixed line 3,758 1,660 1,703 Mobile 438
158 179 Elimination (42) (39) (11) Consolidated taxation 1,049 456
933 Fixed line 449 194 547 Mobile 600 262 386 Other segment
information Capital expenditure for property, plant and equipment
5,712 2,346 1,763 Fixed line 4,013 1,487 1,199 Mobile 1,699 859 564
Audited Reviewed Reviewed March 31, September 30, September 30,
2003 2002 2003 Rm Rm Rm 15. Related parties With joint venture:
Vodacom Group (Proprietary) Limited Related party balances Trade
receivable 35 41 41 Trade payable (253) (272) (248) Related party
transactions Income (436) (208) (221) Expenses 1,489 759 688 Audit
fees - IPO related fees 14 -- -- IPO costs 25 -- -- Interest
received (42) (20) (11) Audited Reviewed Reviewed March 31,
September 30, September 30, 2003 2002 2003 Rm Rm Rm 15. Related
parties With shareholder: Thintana Communications LLC Management
fees 273 154 104 With government: Revenue (1,606) (888) (925) Trade
receivable 193 134 223 With employees: Other receivable 126 170 112
With affiliate of director: Ms Nomazizi Mtshotshisa, Chairman of
the Board of directors at September 30, 2003 and is director of
Beslyn Investments, a company that has a contract to supply Telkom
with protective clothing to the value of R4m for the period ended
September 30, 2003. Mr Tlhalefang Sekano is a director of the Board
of directors at September 30, 2003 and is chairman of Letlapa
Security and a director of Telesafe Security. Letlapa Security has
an interest in Telesafe Security, a security company that provides
physical security services at Telkom premises to the value of R17m
for the period ended September 30, 2003. 16. Comparative figures
Certain comparative figures for September 30, 2002 have been
restated in accordance with the March 31, 2003 financial statements
classification and presentation. 17. Subsequent events Swiftnet
(Proprietary) Limited On October 20, 2003 Telkom invited bids from
empowerment groups to purchase a 30% stake in Swiftnet
(Proprietary) Limited, its wholly-owned subsidiary. Restructuring
As part of Telkom's restructuring plan, 280 employees accepted
voluntary severance packages, at a cost of R33m. The management
plan to right skill and align the size of the workforce was only
authorised by management and the union on October 10, 2003. Vodacom
Mozambique S.A.R.L Vodacom Mozambique S.A.R.L was issued its GSM
licence on August 23, 2003. The licence being the only asset of the
company, was capitalised on date of acquisition. Although the
company was registered on August 14, 2002 no share capital has been
issued to date as the shareholder's agreement is still in the
process of being finalised. Vodacom International Limited will
subsequent to the finalisation of the shareholder's agreement have
a controlling interest in the company. The company has not formally
started with operational activities at September 30, 2003, but is
expected to be operational by December 2003. Service providers
Vodacom Group (Proprietary) Limited has mad offers to acquire
Vodacom customers from its independent service providers. Certain
of these offers have been accepted pending the fulfillment of
various suspensive conditions, including the approval from the
Competition Commission in terms of the Competition Act of 89, 1998.
Econet Wireless Nigeria Limited ("EWN") Vodacom International
Limited was invited by EWN to acquire a controlling equity interest
in the company earlier this year. Vodacom responded to the
invitation by the EWN board by making an offer subject to a
successful financial and legal due diligence. The EWN board and
shareholders accepted this offer. Vodacom is currently engaged in
financial and legal due diligence before the transaction can
proceed. This due diligence work is not as yet complete. Should
this due diligence reveal any financial or legal obstacle in
pursuing the proposed transaction, Vodacom's position will be
re-evaluated. Dividends The Telkom board of directors has declared
a once-off interim dividend of 90.0 cents per share, payable on
December 29, 2003. The board aims to pay a progressively increasing
dividend annually. The level of dividend will be based upon a
number of factors, including the assessment of financial results,
the group's debt level, interest coverage and future expectations,
including internal cash flows. Other matters The directors are not
aware of any other matter or circumstance since September 30, 2003,
not otherwise dealt with in the condensed consolidated interim
financial statements, which significantly affects the financial
position of the Group and the results of its operations. Company
registered office Telkom SA Limited 1991/005476/06 Telkom Towers
North 152 Proes Street Pretoria, 0002 South Africa Private Bag X881
Pretoria, 0001 Board of Directors NE Mtshotshisa (Chairman) SE
Nxasana (CEO) SM McKenzie (COO)* CK Tan (CSO)# JP Klug* Tan Sri
Dato'Ir Md Radzi Mansor# RP Menell MP Moyo TA Sekano CL Valkin TG
Vilakazi VV Mashale (Company Secretary) * American # Malaysian
Sponsor UBS Securities South Africa (Proprietary) Limited
http://www.telkom.co.za/ Special note regarding forward-looking
statements All statements contained herein, as well as oral
statements that may be made by us or by officers, directors or
employees acting on behalf of the Telkom Group, that are not
statements of historical fact constitute "forward- looking
statements" within the meaning of the US Private Securities
Litigation Reform Act of 1995, specifically Section 21E of the U.S.
Securities Exchange Act of 1934, as amended. Such forward-looking
statements involve known and unknown risks, uncertainties and other
factors that could cause our actual results to be materially
different from historical results or from any future results
expressed or implied by such forward-looking statements. Among the
factors that could cause our actual results or outcomes to differ
materially from our expectations are those risks identified under
the caption "Risk Factors" contained in item 3 of Telkom's most
recent annual report on Form 20-F filed with the U.S. Securities
Exchange Commission (SEC) and our other filings with the SEC,
available on Telkom's website at http://www.telkom.co.za/ir,
including, but not limited to, increased competition in the South
African fixed-line and mobile communications markets; developments
in the regulatory environment; Telkom's ability to reduce
expenditure, customer non-payments, theft and bad debt, the outcome
of arbitration or litigation proceedings with Telcordia
Technologies Incorporated and others; general economic, political,
social and legal conditions in South Africa and in other countries
where Vodacom invests; fluctuations in the value of the Rand and
inflation rates, our ability to retain key personnel; and other
matters not yet known to us or not currently considered material by
us. You should not place undue reliance on these forward-looking
statements. All written and oral forward-looking statements,
attributable to us, or persons acting on our behalf, are qualified
in their entirety by these cautionary statements. Moreover, unless
we are required by law to update these statements, we will not
necessarily update any of these statements after the date hereof
either to conform them to actual results or to changes in our
expectations. DATASOURCE: Telkom SA Limited CONTACT: Belinda
Williams, Investor Relations of Telkom SA Limited, +27-12-311-5720,
or Web site: http://www.telkom.co.za/
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